Lessons from the AU model

Mark Newton newton at internode.com.au
Mon Jan 21 23:10:13 UTC 2008



On 21/01/2008, at 10:49 PM, Tom Vest wrote:

> In the absence of competition (and esp. in the presence of risk of  
> empowering competitive entrants), supply has no general/necessary  
> effect on prices at all.
> So excess capacity of a product that is completely monopolized (or  
> priced by cartel fiat, ala OPEC or SC) is largely irrelevant.

It goes a bit deeper than that when the monopoly can compound the
problem my artificially constraining capacity by underspending on
infrastructure (e.g., only lighting one pair on a multi-pair cable)

So infrastructure spending can (and does) affect the price.  We
get that every day in .au (Transmission on the monopoly route
between Melbourne and Hobart costs 3 times more than transmission
between Sydney and LA;  and other potential cable operators have
always known that the monopoly has an excess of supply hidden away
somewhere which they can roll out at bargain basement prices if
a competitor ever arrives in the market)

> [ housing ]
> Come to think of it, our sector has been struggling with its own  
> roughly similar terms-of-exchange crisis since about 2004-2005...  
> arguably driven by very similar prior circumstances as well... worth  
> investigating a bit further perhaps...

I think the dominant factor that the American internet sector has
been grappling with goes back further than that.  It has its origins
in the dot-com boom, when lots of people who didn't have any real
money rolled out enormous infrastructure buildouts.  When they
inevitably went broke their infrastructure was bought at cents in
the dollar, enabling the current generation of Internet companies
to behave as if the infrastructure they're using was a lot cheaper
than it really is.

So hardly anyone has been selling below cost, but almost everyone
has been selling below replacement cost.  So everyone can extract
profits for years, making out like bandits as they grow in to the
excess capacity that was installed between 1999 and 2001, and they
won't have a day of reckoning until they run out of capacity and
find that they haven't been earning enough from their networks to
service the debt they're going to need to take out to perform the
next round of infrastructure upgrades.

Example:  You cannot seriously expect me to believe that the price
of transatlantic connectivity actually reflects the cost of laying
cables across the Atlantic.  It defies common sense that a Gig-E
tail from NYC to London is priced within an order of magnitude
of a Gig-E tail from NYC to Boston.

Metered charging systems are, to me, evidence of a realization that
the business model underlying much of the Internet's last five years
is unsustainable.  You guys might think they're a novel and
unwelcome arrival at the moment, but give it a few years and we'll
see what happens :-)

   - mark

--
Mark Newton                               Email:  newton at internode.com.au 
  (W)
Network Engineer                          Email:   
newton at atdot.dotat.org  (H)
Internode Systems Pty Ltd                 Desk:   +61-8-82282999
"Network Man" - Anagram of "Mark Newton"  Mobile: +61-416-202-223








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