Thursday, 8 August 2013

The price of your broadband (1)

There is a review underway on how telecommunications are regulated in New Zealand. By coincidence, it's something I know a bit about, having been involved in all the key initial regulatory decisions under the first two Telecommunications Commissioners, Douglas Webb and Ross Patterson.

A regulatory review may sound like an arcane economic topic, but it's a big deal in practice. What you pay for your current broadband (if like many people you get an 'ADSL' service through a fixed line across the copper wires to your home) and what you might pay for the snazzy new fibre network ('Ultra Fast Broadband') that's being rolled out across the country, are both in play. So are issues like forcibly turning off the copper-based service you are currently using, whether you'd like to keep subscribing to it or not.

And there's a bunch of other issues, too. Who should set those prices, anyway, and why is the government involved? And should the government be involved at all, since it has a big commercial investment in this new fibre network, and could be conflicted between seeing a decent commercial return on its investment (higher broadband prices) and good outcomes for consumers (sustainably low prices)?

In the next few posts I'm going to be looking at these issues. But as it's pretty much impossible for people who haven't been steeped in this stuff to understand the issues at play here without some some background info, I'm going to ease into it by giving some context.

The first thing people need to appreciate is that, if you're looking for a good outcome for consumers, the very best option is to have a range of competing suppliers deploying their own infrastructure and jostling for your business. There can be second-best outcomes, but the first best is a telecoms market that's just like the music market or the corner vegetable shop - lots of suppliers willing and able to give you the choice you're looking for. In thinking about the issues in play here, one important yardstick or touchstone has to be, is my choice expanding or contracting?

You might think this is a free-market ideologue speaking, but you don't have to take my word for it. Let me show you exactly how this plays out.

If you've felt that your mobile bill isn't as expensive as it used to be (if you're on account) or you're getting more value when you top up (on prepay), you're right.

Here's what's been happening to mobile calling prices.

And the reason would be?

"The entry of a third participant [2degrees, in 2009-10] has helped to significantly reduce mobile pricing in New Zealand, particularly in the prepay market, which makes up about two thirds of the mobile users in New Zealand", which comes from p41 of the discussion document that was put out as part of this policy review, and which in turn quoted the Commerce Commission's review of the state of the telco markets in 2012.

It wasn't completely the effect of a new competitor: there was also some regulation which cut the price mobile companies could charge for delivering a call to a customer on their network, and in which (ahem) I played a modest part. But research shows that of the overall price fall, 78% was due to the arrival of a new competitor, 13% due to regulation, and 9% due to proactive price cuts by incumbents to avoid further regulation.

All right, I made that up. But there's no denying that by far the biggest influence was the actual deployment of new infrastructure, as opposed to the mere threat of it. 'Contestability' (the idea that if I push my luck with excessive prices, I'll invite new entrants) may not have cut much ice with the then incumbents, especially as 2degrees had spent years froo-frooing around, before finally getting on with it. When it actually rolled out its gear, the landscape changed, and much for the better from a consumer's point of view.

And in passing, since there are still far too many people who think competition benefits the better off rather than Joe and Joan Bloggs, notice that comment about the benefits being particularly felt in the prepay market - that's the lower-spending, less well off end of the market.

Now, you might be thinking, none of this hits home to me. If you don't make many voice calls, and increasingly people aren't (mobile voice call minutes have been going down both in New Zealand and elsewhere), you might feel, so what? 

The 'so what' is that the benefits of choice from a new player taking the field are turning up in the alternatives to voice calls (data, texts) as well.

The discussion paper again (p42): "Mobile operators are continuing to try to encourage more voice use by providing larger buckets of ‘free’ minutes in competitively priced bundles, resulting in increased choice and value for money for end-users. For example, a new development in the prepay market in 2012 was the introduction of the $19 monthly prepay bundle by 2degrees, bundling a large amount of texts with a relatively generous amount of minutes and data".

First thought to bank - wherever we go next with the regulatory regime for telecoms, it ought to put significant weight on the incentives for new entry and effective competition.

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