Monday, 10 March 2014

Why are big data users ripped off?

Last week the Commerce Commission came out with its latest benchmarking of mobile phone services in New Zealand compared with Australia and the rest of the OECD (here's the media release and here's a link to the full report).

It was well covered in the media, especially the good news that at the end of the mobile phone market where most of us live, things have got a lot better: "competition has been more intense in the low to
medium use and prepay segments of the market, with a clear trend in prices dropping compared to the OECD average in these market segments. This may have been due to these being the market segments where the third entrant, 2degrees, largely concentrated its attention" (p17).

Teligen, who compiled the report for the Commission, are being a bit cautious about what they're saying here: there's no "may" about it. It's way beyond doubt that the entry of a vigorous third competitor with its own infrastructure is responsible, and it shows again how silly calls are to limit the allegedly "inefficient" rollout of competing infrastructure. This was easily the best report card to date on the consumer-friendliness of any segment of the local telco markets.

The bad news was that mobile broadband, especially in any quantity (even 6 gig, which is still a wholly inadequate data allowance for any serious broadband use) is wickedly expensive...

...and for the larger 6 gig plan (1.5 gig was also benchmarked) is becoming even more expensive compared to the OECD average.

It's bad enough that largeish amounts of mobile data cost in New Zealand pretty much cost as much as they do in Mexico, which is universally regarded as a grotesquely uncompetitive telco market. But there's another aspect to what's going on that also bothers me, and that's the degree of price discrimination that is going on against heavier data users.

In the graph below I've shown the ratio of the cost of 6 mobile gig to the cost of 1.5 mobile gig across the countries that Teligen surveyed (it's a bit approximate, as I've used data that I eyeballed off the Teligen graphs, but it's pretty accurate and it certainly shows the overall pattern, even if the odd ratio for one country may be slightly off).

I'm prepared to believe, for the sake of argument, that provisioning the delivery of 6 gig incurs some extra cost (though even that is debatable, as telcos in the likes of Austria, Korea, Finland and Italy are prepared to sell you 6 gig for the price of 1.5, or very close to it). With telcos essentially using much the same technologies, and with a strong expectation of returns to scale on their deployed fixed assets, you'd expect to find most countries offering 6 gig, compared to 1.5 gig, at a similar sort of price, and one that is well short of four times the 1.5 gig price. And you do: the 6 gig price generally lies in a zone between 1.25 times the 1.5 gig price and 2.25 times the 1.5 gig price (maybe 2.5 times at a stretch).

But that leaves a bunch of outliers where it looks very unlikely that underlying costs have much to do with the 6 gig price - us and Mexico in particular, and perhaps Denmark and Spain as well.

What you are led to, again, is a strong pattern of price discrimination against the heavier data users. And I say "again" because this is exactly the same pattern that emerged from the Commission's benchmarking report last December on fixed line broadband.

As I commented back then, "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". And it now looks as if we have the same issue in mobile - the intensive users that you'd expect to be the generators of innovative products and services and externalities are getting priced out of existence.

Anyone got any constructive ideas why the telcos price like this?

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