Structural Separation Models and the Provision of ‘Dark Fibre’ for Broadband Networks: The Case of CityLink

Fibre broadband networks are widely presumed to become the dominant form of fixed-line broadband access. However, the spectre of fibre firms gaining market power, such has been evidenced in legacy copper-based telecommunications networks, has led some policy-makers to suggest imposing separation mandates (either functional or structural) on the owners of fibre networks yet to be built, in order to militate against the creation of a new set of firms with market power. Whilst conceptually separation of the „dark fibre? data transportation core from network intelligence and retail functions echoes the computer technology-centric view of the internet as a „dumb core? and an „intelligent fringe?, and replicates the separation mandates currently proposed as a means of preventing integrated legacy copper-based providers from foreclosing retail competition, the ensuing structures likely exacerbate the chilling effect of access regulation on network investment observed in most markets where it has been applied. The chilling effects arise because of an investment horizon mismatch (hold-up) between infrastructure operators with large fixed and sunk costs, and retailers (and arguably even end consumers) with freedom to switch between retailers and network infrastructures. The usual resolution to such problems requires customers to make a credible commitment to purchase services via relationship-specific investments or contractual commitments. Whereas access regulation precludes the contractual resolution of the hold-up problem, separation mandates preclude their resolution by consumer-owners vertically integrating upsteam into elements of infrastructure ownership. Consequently, it appears unlikely that the level of investment in separated fibre networks providing dark fibre connections will be optimal. Indeed, under competitive circumstances and high levels of demand uncertainty, there may be no private sector investment forthcoming for dark fibre infrastructures. By examining the business model of CityLink, a firm that since 1995 has been successfully supplying dark fibre in a highly competitive broadband market segment, it is confirmed that long-term financial viability of dark fibre-producing firms is feasible when utilising a mix of both contractual and asset ownership mechanisms that bind end consumers into credible commitments sufficient to justify the firm?s deployment of new network infrastructure capacity. The institutional arrangements that led to the development of this firm?s successful business model draw their inspiration more from the flexible and collaborative commercial interaction of the information technology community rather than the adversarial and prescriptive regulatory environment of the telecommunications industry. It is concluded that if policy-makers wish to encourage the creation of a truly „dark fibre-based? fixed line broadband environment, then in the initial stages of network deployment at least, arrangements similar to those of CityLink are more likely to induce sufficient and timely private sector investments than the rigid and rigorous separation and access regulation arrangements common in the recent history of the telecommunications industry.

The Brand is the Bundle Strategies for the Mobile Ecosystem

The current mobile ecosystem is best understood in terms of a monopolistic competition model, characterised by heterogeneous producers providing a range of differentiated products for consumers with heterogeneous preferences. Product differentiation offers producers some market power, ultimately constrained by imperfect substitutes from rivals and the threat of market entry. To achieve their goals, consumers require a mixture of products from the network, handset and application domains. Reduced search and other transaction costs are a demand-side benefit of product bundling. Producers in this market have high fixed costs and low marginal costs. High fixed costs discourage entry, which increases the market power of producers. Low marginal costs and uncorrelated customer preferences across products for individual consumers encourage producers to expand their sales using supply-side bundling. Thus there are strong supply and demand side benefits from product bundling. We argue that producers will compete in terms of differentiated bundles combining network, handset and application features, with branding as the essential strategy for bundle differentiation. Successful business strategies will require direct access to customers and information about their specific preferences. For illustration, we look at the currently apparent strategies of Google, Apple and Nokia. The mobile ecosystem is complex but not unique. Strong parallels can be drawn between the mobile ecosystem and the television ecosystem. Google appears to be following a "free to air" strategy and Apple a "pay TV" strategy in bundle differentiation. Television manufacturers are largely undifferentiated and have little market power: this may be the fate of handset manufacturers and network operators who are comparatively powerless to withstand the evolutionary development of the mobile ecosystem.Business ecosystem, platform, monopolistic competition, product bundling, heterogeneous demand, business strategies, mobile telephony, mobile applications, branding, price discrimination.

Productivity Questions for Public Sector Fast Fibre Network Financiers

Fast internet access is widely considered to be a productivity-enhancing factor. However, despite promises of substantial gains from its deployment, the evidence from recent empirical studies suggests that the productivity gains may not be as large as originally hypothesised. If substantiated, these findings suggest that current government plans to apply significant sums to bring forward the deployment of fast fibre networks (e.g. in both Australia and New Zealand) may not generate returns to the extent anticipated by their sponsors. Drawing upon the original ‘computer productivity paradox’ literature, this paper develops a critical questioning framework to assist policy-makers in identifying the salient productivity issues to be addressed when making the decision to apply scarce public resources to faster broadband network deployment. Using multiple literatures, the framework highlights the nuanced and highly complex ways in which broadband network speed may affect productivity, both positively and negatively. Policy-makers need to be satisfied that, on balance, government-funded investments in faster networks will likely generate the anticipated net benefits, given the significant uncertainties that are identified.Internet, broadband, productivity, public investment

An Institutional Economics Analysis of Regulatory Institutions in the Telecommunications Sector

This paper takes as a starting point for developing deeper understandings the assumption that both regulatory bodies and the sectors in which they operate are institutions. The body of literature about the operation of institutions provides a means of understanding the actors arrangements rules and culture values and norms that shape the ICTS sector. With this understanding it is then possible to analyse using the same frameworks how these same forces act upon and shape the regulatory institutions and ultimately how the regulatory institutions themselves contribute to shaping the wider ICTS sector in which they operate. The order of the paper is as follows: Section 1 describes the institutional economics conceptualisation of institutions and a specific model of interactions in complex institutional systems proposed by Koppenjan and Groeneweld (2005). Section two then applies this model to explore structures entities and interactions within the ICTS sector generally and those interactions specifically associated with the evolution and functioning of regulatory institutions. Finally section three takes the sector-specific application of the model from section two and applies it in the specific circumstances of the ICTS sector and regulatory change in the European Union in order to draw insights that may contribute to explaining why the attempts to build a common telecommunications market in the European Union have failed to deliver the desired outcomes despite substantial alterations to the regulatory institutions designed to bring them about

Broadband Uptake and Infrastructure Regulation: Evidence from the OECD Countries

Policy organizations such as the OECD and the EU have placed much emphasis on the role of local loop unbundling as a regulatory tool in stimulating the rollout and uptake of broadband technologies and consequently promoting the accrual of economic benefits from electronic commerce. However there is mounting evidence that local loop unbundling has been less successful in promoting broadband rollout and uptake than competition both between duplicate networks of the same technology and between competing technology platforms. OECD evidence of cross-country broadband rollout and uptake supports this contention. Cable modem access and uptake generally exceed that of DSL even in countries practicing local loop unbundling and incountries where no such policy is in force DSL uptake significantly exceeds cable modem uptake. This paper argues that content availability and a cost-benefit trade-off supported by bundled products combining access and content has stimulated demand for the cable product thereby creating competitive pressure on DSL offerings. While local loop unbundling posits faster response to this competitive pressure the OECD data provide little evidence to suggest that the primary driver is infrastructure availability. Rather the evidence implies that application cost-benefit tradeoffs are the primary drivers of broadband uptake. The paper further argues that overall low levels of broadband uptake reflect a fundamental lack of current applications utilising the high speed and high capacity of broadband to meet functional substitution requirements of users in such a way that the benefits of adopting broadband technologies to support information exchange exceed the increased costs. Unless such cost-effective functional substitution user applications are available then the optimal time to invest in broadband for both users and infrastructure providers will be delayed in order to exploit lower costs better technology and the holding cost of interest. Policies that promote infrastructure availability in isolation from the demand-driven applications that utilise this capacity run the risk of encouraging inefficient investment decisions

Strategic Interaction Under Asymmetric Regulation: the 'Kiwi Share' in New Zealand Telecommunications

Regulation binds incumbent firms to a different set of obligations from their entrant-competitors thereby creating an asymmetric set of options from which the firms may select the strategies under which they will interact. Whilst most regulatory obligations are specified in law some take the form of contractual agreements. New Zealand's 'Kiwi Share' obligations bind the incumbent to a set of retail tariff structures and levels that have both restricted the incumbent's choices and opened up a range of new strategic opportunities for its rivals that have had a significant effect upon the development of the New Zealand industry. This paper examines the specific consequences of the asymmetric tariff obligations and ensuing strategic interaction amongst sector participants on sector development - namely the effect of universal service retail prices and the allocation of the ensuing costs on the sector's ongoing regulatory agenda; the role of a 'free local calling' obligation on the evolution of New Zealand's broadband market; and the consequent application of further asymmetric legislative obligations on the incumbent to address apparent "problems" for which the asymmetric tariffs and rivals' strategic choices provide more credible explanations than the incumbent's exertion of its dominant position

Structural Separation and Technological Diffusion

Vertical separation of upstream network operations from downstream retail activities, as the most extreme form of access regulation,has long been considered a legitimate regulatory remedy against use of market powerin upstream infrastructure markets to engage inprice-and non-price discrimination to foreclose competition in downstream retail markets. However, the remedy is increasingly being mandated for new networks, sometimes before any investment has been made.This paper uses theories of General Purpose Technologies and regulatory economics to consider how vertical separation–compared to both access regulation and no regulation-poses challenges to the ability to maximise scale economies at the early stage of a network life-cycle. This suggests greater caution in its use at this stage compared to middle and mature phases of the life-cycle. The theories are examined via case studies of two markets where vertical separation has been mandated for Fibre-to-the-Home networks–Australia and New Zealand–and one where ithas not–the Netherlands. The case studies suggest that mandatory separation imposes additional constraints on the network owner’s ability to achieve scale economies arising from rapid uptake of a new network relative to access regulation when it fails to replicate amongst any retailers the vertically-integrated operator’s incentives to engage in aggressive early-stage marketing. Analysisal so suggests that contractual limitations may have greater effect onthe ability to achieve scale economies than structural impositions and ownership limitation

Comments on the 'Crafar Farms Counterfactual'

A subsequent version of this paper was published in the New Zealand Law Journal [2012] NZLJ 108, April 2012. Also, The National Business Review published Bronwyn's update article after Justice Forrie Miller's decision on 20 April. Link: http://www.nbr.co.nz/article/unpacking-crafar-controversy-11722

The Role of Price Structure in Telecommunications Technology Diffusion

In most OECD countries dial up internet accounts have typically been offered under two-part tariffs where connection and usage are charged separately. By contrast broadband accounts are typically offered under flat-rate tariffs. As consumers purchase internet accounts based upon their combined valuations of each of the connection and usage components it would be expected that different broadband tariff structures would result in different rates of broadband diffusion. As broadband is the successor to dial-up internet technology the diffusion rate will also depend upon the dial-up tariff structure. Using theories of two-part tariffs bundling and price discrimination this paper examines the effect of both dial-up and broadband tariff structures on broadband diffusion. Specifically flat-rate broadband tariffs slow the rate of diffusion relative to an optimal two-part tariff. Flat-rate tariffs prevail as a strategic means of extracting rents from early adopters with high connection values but low usage valuations. Flat-rate dial-up tariffs slow the rate of substitution to broadband via two mechanisms: a larger "connection gift" from bundling with voice telephony and a larger "usage gift" from usage beyond the point of marginal cost. Relative to an optimal two-part dial-up tariff the marginal substituter from flat-rate dial-up to broadband has both a higher connection valuation and a larger usage volume. Conversely two-part dial-up tariffs where usage subsidises connection result in earlier substitution to broadband as both the connection valuation and usage volumes are lower

Competition and Regulation Policy in Antipodean Government-Funded UltraFast Fibre Broadband Markets

Both the Australian and New Zealand governments have committed to spend substantial sums in order to bring forward the nationwide deployment of ultra-fast fibre-to-the-home (FTTH) broadband networks. With deployment proceeding apace, two significant questions have arisen regarding the economic, commercial and political rationale for the Australian and New Zealand governments‟ decisions. The first is why the respective governments are assuming a central role in the design, financing, deployment and (in Australia‟s case) operation of a nationwide network of a specific technology type, given that such intervention is at significant variance with both recent international industry policy and practice advocated by international agencies such as the OECD and the ITU, and the recent policy and regulatory history in both countries. The second is how these new Government-funded networks will affect the nature of competitive interaction in the telecommunications (broadband) industry in their respective countries. This paper addresses these questions. First it traces the development of the Australian and New Zealand fibre investment policies in the context of international competition policy orthodoxy. It then examines the competition and regulation policies that will govern the insertion of the respective government-funded fibre networks into environments where both legacy policies and technological developments have shaped, and will continue to shape, the evolution of the respective telecommunications sectors. The analysis finds that political, rather than economic imperatives have dominated the government investment decision in both countries. The Australian investment has been accompanied by a comprehensive set of competition and regulation policies aligned with maximising the likelihood of fibre uptake, but both the up-front costs and political risks are high. The New Zealand initiative is lower-cost initially, but lacks clear over-arching competition and regulation policy objectives to guide sector development. The result is a fragmented regulatory regime and a range of contradictory and confusing incentives for all sector participants that will inevitably increase the economic costs of the project and lead to delays in fibre network uptake. Consequently, the Antipodean „experiments‟ in government funding of fibre networks are unlikely to offer good models of either policy or process for other jurisdictions