Lessons from the AU model

Tom Vest tvest at eyeconomics.com
Tue Jan 22 17:57:51 UTC 2008



On Jan 22, 2008, at 3:01 AM, Mark Newton wrote:

>
> On 22/01/2008, at 3:59 PM, Tom Vest wrote:
>
>>> 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.
>
> Faith-based network rollouts.  Neat :-)

Just faith in the "rationality" of a system with lots of independent  
feedback loops. If your faith has conflicting tenets, e.g., it  
compels you to believe that banks will demand, and you will be able  
to credibly promise, bubble-era returns on gross facilities  
investments, then I think we can chalk the rest up to religious  
differences and call it a day ;-)

>> Sounds like change is afoot however; I wonder how closer to flat- 
>> rate AU will come after one or two new cables are completed... ?
>
> My guess?  There'll continue to be industry-wide acceptance of
> the notion that a limit you never reach and don't care about
> is indistinguishable from no limit at all, and quotas will
> continue to steadily rise, stimulated by the lowering of
> the costs of supply, so that more and more people will never
> reach them and never care about them.

Occasional rhetorical indulgences notwithstanding, I'm a pragmatist;  
an ever-rising upper limit that 99% of the population never ever  
notices is not much of a limit. However I've rarely (actually, before  
now, *never*) heard the AU/NZ situation described thusly.... I must  
be spending too much time with the wrong 2% I guess. And I've yet to  
hear how one will be credibly define or sustainably (and legally)  
maintain such escalating limits.

> _Most_ people couldn't care less about whether their monthly
> limit is 100 Gbytes or 150 Gbytes.  But there are a small number of
> people who will be unhappy with any number smaller than 6 Tbytes,
> which is roughly the amount you can download on a 24 Mbit/sec
> ADSL2+ access tail if you run it flat-out 24x7 for a whole month.
>
> If new cable systems lower the cost of getting across the Pacific
> by a factor of 2, then 24 Mbit/sec of transpacific for that customer
> will _still_ cost us about $3000 per month, so you won't see us
> flocking to service those sorts of customers.

You don't know what the "cost" is today; you only know the price.
The implications left as an exercise for the reader...

> There is simply no way that any provider in this marketplace is  
> going to offer
> to service any customers on those terms.  To get Australian
> providers to sell "unlimited" access you'd need the price of
> crossing the Pacific to drop by two orders of magnitude.

...

> Despite the best efforts of some people to run their broadband
> access at line rate, residential broadband is very much a
> "CIR + burst" kind of service.  All of our customers can burst
> to line rate (they're paying for it, so they should be able to
> get it).  None of our customers can burst at line rate 24x7 for
> a month without paying for it.  You can work out the CIR by
> dividing the number of bits in the quota by the number of
> seconds in a month.
>
>> 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.
>
> I don't doubt that at all, and the USA has certainly done very
> well out of it.
>
> But how sustainable is it in the long term?  You guys are
> about to have some serious economic challenges that are
> going to affect us too, but nowhere near as much as they'll
> affect you.  I don't doubt that a difference in Internet
> access pricing policies has benefited your economy, that much
> is completely obvious.

ok.

> But if you're going to get all
> macro and holistic on me

(actually that's my job)

> all of a sudden, are you prepared to
> assert that the benefit it has brought to your economy
> outweighs the other consequences that your ways of doing
> business have been creating?

I wouldn't attempt to justify anything (and folks that know me will  
attest that they often hear something like the opposite), but even if  
I did, even for purely rhetorical amusement, I would start by  
pointing out that flat-rate access doesn't have any relationship to  
anything else you might be obliquely alluding to here. Being macro  
doesn't imply or necessitate being a dope ;-)

> Because from where I'm sitting, it looks like the native
> innovators are in India at the moment,

Hard to argue with that. Since "constructive" innovation is a gross  
numbers game (e.g., education * addressable population), demographics  
ultimately drives a lot of dynamics -- once other bottlenecks are  
relieved.

> and the global L2/L3 topology that's been built over the last five  
> years has been
> centering itself on Singapore, Hong Kong and Tokyo,

No question, and that recent trend shift has contributed a lot toward  
reducing asymmetries in inter- and intra-regional capacity between  
Asia and ROTW.

> and most of the high-growth parts of the US economy have been based
> on unsustainable debt rather than actual, existing money,
> and despite your claims of high growth my standard of living
> in Australia is at least as good as yours.  So don't be too
> hasty to tell me all about the benefits of doing business in
> the American way.  Not yet, anyway. :-)

Sigh. Am I going to have to secure Canadian or Swiss citizenship in  
order to be able to have a straight conversation about flat-rate  
access? For the purposes of any future discussions of this subject,  
let's just stipulate that I'm talking about Japanese flat-rate, or  
Korean flat rate... will that help to keep us on point?

>>> 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.
>
> That's exactly what my water utility is claiming.  Australia
> is in the worst drought in recorded history, and all the
> water utilities are saying their rates are going to rise
> so that they can afford to build desalination plants and feed
> them with electricity.
>
> I'm tellin' ya, man, the parallels to this discussion are
> eerie :-)

Is the actual current/sustainable supply of water delivery a trade  
secret, so that rational analysis is impossible and debates about it  
are interminable?
Will the cost and capacity of the installed base and new  
desalinization plants be forever subject to NDA?
Will the requested rate increases reflect an unknown markup or be  
transparently tied to the fully loaded cost of (expanded) service  
delivery amortized over some realistic time horizon?
Will that full load have to include a large financing premium based  
not on risk but simply on someone's ambition to get a piece of (all  
of) the water action in perpetuity?

There are many parallels I agree. Not so many on the critical points  
however.

>>> 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.
>
> The metered plan will be reasonable, as dictated by all the
> competitive pressures you keep banging on about.
>
> With multiple vendors of metered Internet access, the vendor
> offering the best deal will get the customers.
>
> "Best" varies according to the eye of the beholder.  Some prefer
> high reliability, zero effective contention, on-net content sources,
> titanium-plated CPE, clueful support, and hot and cold running
> network engineers.  Some prefer it cheap-and-cheerful, and will
> prefer the provider that costs the least amount per month regardless
> of the quality.
>
> Some shop at Target, some shop on Rodeo drive.  Some buy Ladas,
> some buy BMWs.  You get what you pay for.

But how you pay for it matters. If your BMW comes with a meter that  
"noticeably" increments every km you traverse, and your monthly car  
payment varies solely based on usage, then maybe a lot more people  
will "have" a BMW, but a lot fewer are going to be on the road at any  
given time. If your whole economy is built around that psychology,  
then you're likely to have a lot fewer people doing things that  
assume that drivers are an "addressable" market. More important  
still, if the rate of innovation, not only in cars but everything  
else, is somehow tied to the sum of all good and bad experiences on  
the road, then you're all-BMW economy is going to perpetually lag  
behind neighboring markets that provide Ladas on a largely unmetered  
basis.

All I'm saying is that as bottlenecks are eliminated and the cost of  
supporting Aussie's globally diverse traffic exchange proclivities  
falls, it'll probably get harder and harder to justify "noticeable"  
caps or metered pricing models, or any kind of pricing model that  
seem to defy those trends. That's likely to happen at every level of  
the market, whether or not you're selling BMWs or Trabants. At least  
that's what triggered the shift in Japan, in the UK, and yes in the  
US too.

>> 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?
>
> You make it sound like this stuff is hard and unworkable.
>
> Quotas and prices are adjusted according to competitive pressure.
> In 2000, Telstra was offering 3 Gbyte per month caps and we were
> offering 4.5 Gbyte per month.  Now the industry norm is more like
> 40 - 60 Gbytes.  I'm sure that in another 2 years it'll be 150 -
> 200 Gbytes.  Competitive pressure is every bit as powerful in a
> metered marketplace as it is in a non-metered one, and to pretend
> that the alternative to the current US status quo somehow involves
> the end of business as we know it is just crazy talk.

Okay I concede that point; competition within markets with only  
metered service options can be just as or even more vigorous then  
competition within unmetered markets. But competition between metered  
and unmetered markets tends to reward the latter, and competition  
within mixed markets tends to reward the latter. Moreover, to  
whatever degree that metering reduces usage, and usage is related to  
innovation, the unmetered markets are likely to grow and evolve faster.

Maybe flat-rate access is "objectively" unsustainable in some  
markets, regardless of what (potentially self-interested) proponents  
claim. Maybe it is sustainable, even in the "long run", despite what  
(potentially self-interested) critics claim. One thing is certain: to  
date, only a handful of companies (Internet, wireless voice, or POTS)  
have *ever* stepped up to any flat-rate service voluntarily. The vast  
majority of flat-rate providers in business today were just as  
skeptical, and just as implacably opposed to the idea, right up to  
the point that competition forced them (and permitted us) to discover  
that they were wrong. At least that's what happened in Japan, in the  
UK, and yes in the US and many other places too.

> In Canada, which has much lower transit costs than ,au, the benchmark
> quota is presently about 100 Gbytes.  How many broadband customers
> in the USA would actually have a problem with that as a limit?
>
> Here's a question for you:
>
> Power is metered.  Water is metered.  Gas is metered.  Heating
> oil is metered.

The pricing model for each is justified by the scarcity of the  
underlying finite natural resources.
The prices themselves, and any increases, are sustained by in fact  
that the underlying cost components are usually transparent to  
interested third parties.

> Even cable-TV is packaged so that you pay more
> if you want to use more channels...

Yes, and if I want to buy two books at the bookstore, I have to pay  
for each one separately.
Premium cable channel prices are sustained by access to otherwise  
inaccessible content, nothing more.

> ... what economic fundamentals exist to suggest that Internet
> access should be the _only_ domestic utility that's delivered to
> households unmetered?

My driveway is not metered. The street in front of me is not metered.
If someone can convincingly, empirically demonstrate how incremental  
usage of my driveway and the adjacent road -- e.g., how many  
passengers I'm carrying, how many bags of purchased goods, maybe the  
value of the goods in those bags, etc. -- imposes sufficient real  
incremental burden on the system to justify usage-based pricing, then  
I'll be glad to do my part -- or maybe I'll start looking for a  
neighborhood with a different accounting regime. Until then, I'm  
going to look to those other places, and remember past champions of  
driveway metering, and keep my hands in my pockets...

Peace,

TV



>   - 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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