Lessons from the AU model

Tue Jan 22 05:29:53 UTC 2008

On Jan 21, 2008, at 9:53 PM, Mark Newton wrote:

> On 22/01/2008, at 10:21 AM, Tom Vest wrote:
>
>> On Jan 21, 2008, at 6:10 PM, Mark Newton wrote:
>>>
>>> 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?
>
> No, I'm saying that if another infrastructure provider launched
> itself onto the marketplace, that'd immediately inspire the
> incumbent who is presently using scarcity as a justification
> for high prices to light another fiber pair.

Actually, what I think you said, this time, is that new capacity  
investment, when it takes the form of competition, can affect prices.
Which goes without saying. But the same thing can happen without new  
capex, e.g., if a new entrant can purchase (otherwise unutilized)  
wholesale capacity and multiplex/resell, either at a lower price  
point or with other value adds, e.g., customer service, etc. It's the  
competition, not the new investment, that drives the price train...  
unless of course you outlaw resale or make it technically impossible.

> It's a bit more complicated than that, but arguing that supply
> has no effect on price is overly simplistic when there are
> monopolistic barriers preventing new sources of supply.
>
>> 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?
>
> Whichever one of those comes out to the largest number.

But the problem is, you never know which one will come out to the  
larger number until the proverbial "long run".
In some countries, those holding the capacity are betting that (zero  
to very few sales) + (very high prices) + (freedom from internal and  
external competition) will deliver the big number. Others are betting  
that many small slices of a much bigger pie will deliver the big number.
Who's to say, today, which one will be right in the end?
I bet I can guess which one you'd rather live in however.

> Eventually the asset will reach its capacity -- we can't keep
> upgrading things forever.  Submarine cable systems also have
> a useful working life, so even if they haven't reached capacity
> they'll run out of legs eventually anyway (the ones installed
> during the dot-com boom are approaching their half-life)
>
> When the cable is full or EOL'ed its owner should have earned
> enough to build a new one at current market rates.

I believe that someone will be able to "build" (i.e., finance) more,  
when/where more is required.  Whether that's the most recent  
inheritors of the old/distressed assets or someone completely new  
remains to be seen.

> So if they don't have a billion or so dollars stored away  
> somewhere, they're
> selling below replacement value.

With very few exceptions there's no "they"; the old "they" is gone,  
the new "they" didn't take over until fairly recently, didn't  
bankroll the original construction, and isn't bearing the financing  
costs of that construction.

>> Once you get acquainted with the power of that ^n, you'll believe ;-)
>> Unfortunately, your location gives you few opportunities to  
>> familiarize yourself.
>
> Well, no, we have footprint in Australia, the USA and Japan at
> the moment.
>
> We'd have built out to Europe by now if not for the fact that
> global IP transit is being sold cheaper than transatlantic
> transmission, so what's the point of building a POP across the
> pond?  Now, given that transatlantic transmission is already
> artificially cheap due to the acquisition of distressed assets
> in 2001, what does that tell you about IP transit pricing?

It's cheap alright; how much should it be?
As for transit < L2 pricing? That tells me that someone has a traffic  
imbalance problem, and you are the beneficiary; revel in your good  
fortune :-)

>>> 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).
>
> No, it won't be because people roll over for it, it'll be
> because carriers and service providers just get on with
> it and do it.

If one does it alone, in the presence of competition, they will be  
punished into oblivion.
If all do it at the same time, in the presence of rule of law, that  
will likely prompt an immediate anti-trust intervention.

> See my first post to this thread to see the progression which
> outlines why the introduction of metering by _one_ serious player
> in any given economy virtually forces every other player to
> switch to metering as well.

Funny, that's also exactly how flat-rate pricing went from  
unprecedented to unavoidable in big open markets like the US, Japan,  
UK, etc.
So the dynamic you're describing doesn't explain much -- except maybe  
that for some regional markets, outcomes may be completely contingent  
on what "one serious player" decides to do.

> Do you think Australian ISPs haven't tried to offer US-style
> flat-rate services?  Of course they have.  And they get destroyed
> in the marketplace.

Look, the system is extremely well, um, arranged in your home market.  
Maybe now you have competitive metro p2p, competitive access,  
multiple peering points and abundant T2 peering. Regardless, you live  
in an English-speaking country with a cosmopolitan user base, and an  
absolutely inescapable international bottleneck. It's no surprise  
that, to date, flat-rate has punished AU ISPs.

Sounds like change is afoot however; I wonder how closer to flat-rate  
AU will come after one or two new cables are completed... ?

> Here's the thing that metering gives you:  it stratifies the
> marketplace.  It gives you two classes of customer.
>
> One class is customers who know they can live painlessly within
> the boundaries of whatever quotas you're offering.  They don't
> complain, they just pay their flat monthly bill every month
> and get on with their lives.
>
> The other class is customers who do so much P2P that the
> imposition of quotas is a painful and unwelcome experience.
> They whinge and bitch loudly about how awful their ISP is,
> and migrate en-masse towards whichever ISPs are providing
> "unlimited" services.  The only people who truly care about
> "unlimited" are the ones who know they can't live within any
> limits.
>
> That means "unlimited" ISPs almost exclusively attract the
> most voracious, least profitable, noisiest, most difficult
> to support, loudest complaining customers.  And the metered
> ISPs cater for normal folks who aren't like that.
>
> That's the dynamic some of you are missing which makes
> quotas inevitable.  If one moderately large player adopts
> it, the rest of you are going to have to adopt it too.

Here's another dynamic you missed. The coexistence of flat-rate and  
metered access creates two tiers of regional markets: the flat rate  
ones that generate lots of content and service innovations, attract  
lots of talent and FDI, and over time come to occupy an increasingly  
central position in the evolving global L2/L3 topology -- and the  
ones that don't, whose native innovators and content providers prefer  
to ship out or offshore production to the former. Metered access  
exacts a price at the national level.

>> 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;
>
> Where I come from household water is already metered, so I'm
> not sure what you're talking about :-)

Agreed, but I almost never hear my water vendor claiming that my  
rates need to be increased so they can cross-subsidize a new,  
separate national plumbing platform.

>> 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...
>
> A sensible provider will set quotas large enough that
> 98% of their customers will never hit any limits.
>
> The only people they'll piss off will be the 2% of customers
> they don't want in the first place.
>
> Hardly fertile ground for a revolution.

That almost sounds unobjectionable, I'll grant you -- at least in  
currently unmetered, high demand markets; everywhere else the  
bandwidth demand for any/every customer segment is nothing more than  
an artifact of whatever metered pricing plan is currently in place.  
So the reasonableness of the bandwidth cap level is itself contingent  
on the reasonableness of the metered plan.

But even assuming you manage to define a "reasonable" cap, how will  
you defend it against competitors, and how will you determine when &  
how to adjust it (presumably upwards) as the basket of "typical" user  
content and services gets beefier -- or will that simply tip more and  
more people into some premium user category?

Some of us would rather fight than switch (to an enterprise account) ;-)

Cheers,

TV

>    - mark
>
> --
> Mark Newton                               Email:   
> newton at internode.com.au (
> 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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