Lessons from the AU model

Tom Vest tvest at eyeconomics.com
Tue Jan 22 02:58:38 UTC 2008



On Jan 21, 2008, at 8:20 PM, Roderick Beck wrote:

> Tom,
>
> With all due respect, what are you trying to say in simple, clear  
> English?
>
> It is plain wrong to claim the DWDM can explain today's prices on  
> the Atlantic

Is it? Sorry, how do you explain it then? An unanticipated/ 
undiscounted DWDM-driven windfall in salable supply (1), plus  
competition (2), plus financial distress (3), plus "innovative"  
transactions (4) are my prime suspects; the fact that every increment  
of private line capacity sold or otherwise transferred is fungible  
and can be further multiplexed just accelerates the (2-4) dynamic. I  
believe that the same thing -- (2) leading to price collapse, leading  
to (3) -- would have happened even if there been only two TA cables,  
assuming of course that (2) still applied -- maybe even if there were  
only one cable with enough upgradeable fiber pairs. Sure,  
"overinvestment" played some marginal role, but each new facilities  
platform added a multiple to the available supply,

1x, 2x... 8x...

whereas DWDM advances that really kicked in only after gen1  
entepreneurial cables were already planned if not in the water, added/ 
continues to add exponents

(1x)^4, (2x)^6... (8x)^n?

> and that DWDM allows providers to make sufficient ROI..

I didn't say that; I did say that I don't know how to define, much  
less calculate, "sufficient" ROI.
Sufficient for what? When is "sufficient" ever sufficient, assuming  
you can extract more?

If I can build one house, and rent it, manage it, and and maintain it  
at an overall return that will enable me to subsidize 100% of the  
purchase of another identical lot and identical materials and labor  
to build a second house, then maybe I'll decide that that's not  
really sufficient, e.g., because people demand bigger houses today,  
or maybe I think I  could squeeze harder and get enough for three  
houses, or maybe four... Which one is "sufficient"? What if I've  
already got a lot of empty houses, but the market for housing won't  
deliver prices that satisfy my preferred sufficiency test?

I have to believe that the financial authorities (public and private)  
will recognize these new, previously undiscounted developments, and  
find a way to integrate this new, previously unrecognized abundance  
into the broader economy -- e.g., by bankrolling future capacity  
builds (when there is real demand) even though their builders can't  
promise and won't deliver bubble-era returns. I have to believe it  
because I'm not cynical or paranoid enough to buy into any worldview  
that would lead to other assumptions. I might be proven wrong -- but  
if I do I'd have to start wondering about all sorted of things,   
e.g., the 200mpg combustion engine, etc...

TV

> About 70 percent of the operating costs of a TransAtlantic cable  
> are undersea maintenance and undersea maintenance costs are rising  
> (think fuel costs).

> You can spread those fixed costs over more waves as DWDM improves,  
> but it is not enough in general.
>

I was comparing initial build/launch capex to the incremental capex  
required for upgrades (granted these costs vary by platform/ 
technology generation).
I'm not surprised that a large/rising share of opex is O&M. The fuel  
component of O&M isn't incrementing in parallel with additional  
capacity sales, so why isn't expansion of the de facto sponsorship  
pool one way to offset the rising costs?

TV

>
> Sent wirelessly via BlackBerry from T-Mobile.
>
> -----Original Message-----
> From: Tom Vest <tvest at eyeconomics.com>
>
> Date: Mon, 21 Jan 2008 18:51:24
> To:Mark Newton <newton at internode.com.au>
> Cc:roderickbeck at tmo.blackberry.net,owner-nanog at merit.edu,"Geoff  
> Huston" <gih at apnic.net>,"Matthew Moyle-Croft"  
> <mmc at internode.com.au>,"Randy Bush" <randy at psg.com>,"Andy Davidson"  
> <andy at nosignal.org>,"Andrew Odlyzko"  
> <odlyzko at dtc.umn.edu>,nanog at merit.edu
> Subject: Re: Lessons from the AU model
>
>
>
>
> On Jan 21, 2008, at 6:10 PM, Mark Newton wrote:
>
>> 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.
>
> Hi Mark,
>
> So you're saying that if a cable owner/monopolist simply lit another
> fiber pair, that would cause them to reduce prices?
> This mistakes a contingent symptom or tactic or mechanism -- i.e.,
> the intentionally misleading public explanation ("we're sold out") --
> with the real cause/strategy/motives behind "artificially" high
> prices...
>
>> 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.
>
>
> This makes perfect sense for resources that are not subject to
> "multiplexing effects" -- esp. unanticipated (undiscounted)
> multiplexing effects.
> Put it this way: how would you define (much less calculate)
> "replacement cost" for an asset whose financing was predicated on a
> useful of capacity of (x), but which, with fractional additional
> investment relative to the original outlay, can be leveraged to
> deliver (x)^4-n capacity -- with n yet to be determined? Must every
> increment of the now vastly larger resource be priced as it would
> have been assuming the "original" max cap? How much must the
> "replacement cost" replace? The original (x) capacity? The as-yet
> indeterminate (x)^n capacity? The originally anticipated/full
> scarcity-based/monopoly-backed profits?
>
>> 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.
>
> Once you get acquainted with the power of that ^n, you'll believe ;-)
> Unfortunately, your location gives you few opportunities to
> familiarize yourself.
>
>> 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 :-)
>
> If fine-grained metered pricing comes to the rest of the world, it'll
> be because people roll over for it (you guys weren't given a choice).
> If/when that happens, I'll be lobbying my local gov to turn over the
> water infrastructure to me so I can replace it with
> household Evian vending machines; and I'd recommend you all get in on
> the ground floor in the air market ASAP.
> Better be quick though, because the revolution will be just around
> the corner...
>
> TV




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