Friday, 27 December 2013

Phone line rentals are still too high

Just before Christmas the Commerce Commission came out with its latest report (carried out for them by Teligen) which benchmarks retail prices for fixed line phone and broadband services against the rest of the OECD (here's the media release and here's the full report). There'll be a similar one on retail mobile prices in February 2014.

There are so many interesting results in this report that it's hard to know where to start. Why don't we start with a good outcome, from p16 of the report (especially as the telco folks at the Commission likely regard this survey as in some sense a report card on outcomes from their work).

For various reasons the Commission's reports don't allow tracking of how prices of comparable products have evolved over time, but there is one that appeared in both the 2011 report and this latest one, and it's the price of a 60GB broadband plan, either bundled with voice calling or standalone ('naked'), and it's shown below.

In both cases prices have fallen (-14% for bundled, -41% for naked) though the naked result is somewhat misleading as it is typically available as a product only when you're an on-account mobile customer.

It's hard to keep going with the good things, though, as the rest of the report leaves you with two disquieting thoughts - the extent to which we are still being ripped off by high copper line rentals, and the heavyhanded price discrimination against power broadband users (who want a lot of data at high speed).

The line rental issue shows up implicitly and explicitly. Here, for example, is how New Zealand rates on voice-only fixed line products. I know, few households these days buy standalone voice, but (as the report shows) typically buy a bundled broadband and voice package. And yes, in our household too the bulk of the voice calls we get are cold-call marketers, robot diallers and wrong numbers ("Anecdotal evidence indicates that many households now make very little use of their home phone for conventional voice calls", report, p17). But the Teligen voice data still throw light on the issue of relative line rental costs: here's a service where the line rental is most of everything. The table below shows four levels of phone calling: typical New Zealand usage is somewhere between the 60 call and 140 call baskets.

We're being stiffed. The value on offer is dire by OECD standards. And don't be misled by the apparently good outcome vis-a-vis Australia for the bigger call baskets: that's only because "Australia is also a poor performer" (p18).

And why is this? In Teligen's words, "The poor ranking is largely driven by the high monthly line rental charged in New Zealand, which in turn has largely been driven by the TSO price cap, which allowed line rental to increase by the CPI every year" (p18). The good news is that in Teligen's view "competition from alternative voices services such as mobile is now constraining the price of the fixed-line voice service", and copper line owners are no longer able to keep ratcheting up the rental. But you are still left with the strong impression that there is a good deal of legacy fat in the copper line rental charges. And it corroborates the Commission's other benchmarking work, which has shown that the cost of access to the local copper and its electronics is too high.

This next table is arguably the key result in the report - how we compare for the typical bundled voice/broadband package that NZ consumers use.

Relative to the value on offer elsewhere in the developed world, it's not great for any package, and it gets worse the bigger the package you want. "Some of this differential", Teligen say (p12) "could be attributable to price discrimination by retailers to recover the relatively high wholesale costs of providing a voice plus broadband retail service. Only the wholesale price of unbundled lines is currently cost based".

I'm left with three thoughts about this result.

One, obviously, is that we need more cost-based pricing rather than the legacy write-your-own-rental prices we are still paying - ideally brought about by infrastructural competition, but if not, then by the kind of regulatory cost-modelling the Commission does.

Two, the degree of price discrimination.  We know that price discrimination is not a problem in itself. It can be good, neutral, or bad from an efficiency or equity point of view. And higher-spec products often go for higher prices, for obvious reasons. And yet: in the earlier days of broadband, it seemed to me that Telecom was trickling out broadband as slowly as it could, minimising the pace of its capital spend and soaking the most desperate-to-have-it users (monopolists limit quantity as well as raising prices). So I'm agnostic, to say the least, about whether this price discrimination is more of the same exercise of market power, or an efficient way of recovering costs.

Three, the pattern of price discrimination. If the providers of copper and fibre based broadband are going to hit the heaviest users of big fast broadband really hard, then you can kiss goodbye to the "build it and they will come" dreams attached to the UFB network. Build it, price it like this, and they'll walk away. And how many of the benefits of UFB are predicated on precisely this group of intensive users?

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