Patrolling a fine line

There is a growing disquiet - particularly in the US, but also elsewhere - that competition policy has got too soft on mergers, and has been permitting anti-competitive increases in market concentration. By coincidence the latest in ComCom's excellent series of telco market monitoring reports included some data on the international costs of mobile plans and broadband. It showed just how acute the problem has become in the US, which is well entrenched on the expensive right hand side of both graphs.

As Thomas Philippon said (pp5-6) in his recent book The Great Reversal: How America Gave Up on Free Markets, "In most advanced economies, consumers pay around [US]$35 for broadband internet connections. In the US, they pay almost double. How on earth did that happen? How did the US, where the internet was "invented" and where access was cheap in the 1990s, become such a laggard, overcharging households for a rather basic service?"

His answer, which feels right, is that incumbents' market power to charge more and/or give less has increased as some markets have become overconcentrated. "First, the entry rate of new businesses has declined. Businesses are now older and face fewer new competitors reach year. This has led to concentration from the bottom up", and he says that "lobbying and [new-entrant-unfriendly] regulations explain much of the decline in entry rates". "Second, agencies and judges have allowed more frequent mergers among large businesses. This has led to concentration from the top down. Together, they account for the rise in concentration that we have observed" (all from p96).

However true that may be, there is a risk that the backlash goes too far the other way and puts in jeopardy mergers that would make pro-competitive sense, despite the first-blush look of yet another increasingly concentrated market. While the latest big mergers won't make any of the "you've gone soft" critics happy, they look to have been the right call.

In the US, the example is the merger of the number three and number four mobile telcos, T-Mobile and Sprint. You might think, looking at the left hand panel in the graph above, that allowing further concentration in the already expensive US mobile market would be a difficult proposition to justify. And yet: the argument for it is that a bulked up three-plus-four will be a more effective competitor to the two big incumbents (AT&T and Verizon) than three and four separately would have been. There's a logic to that: it was raised, for example, in one of the first merger clearances I was involved in (Telstra/Clear in 2001) though in the end the merger was cleared along traditional ongoing competitive constraint from incumbents/new entrants lines. In the US, both the Federal Communication Commission and the Department of Justice were prepared to go along. Individual states weren't best pleased, but the last of the them standing, California, has also folded its hand after negotiating some state-specific goodies.

In Australia, it's similar. The ACCC had opposed the TPG-Vodafone merger: the ACCC reckoned that left to its own devices, TPG would have rolled out a fourth mobile network to compete with the big three (Telstra, Optus and Vodafone itself). The case in the end turned out to be less a contest of economic merger perspectives and more one of disputed facts. The court disagreed with the ACCC's view of the world: at [34] the judge said that "The Court has been left in no relevant uncertainty, after reviewing the evidence, as to the future of the retail mobile market which will not involve Mr Teoh [TPG's executive chairman and CEO] or TPG entering the Australian retail mobile market in the next five years" (full judgement here). Earlier this month the ACCC flagged away appealing.

Incidentally, as any of us who have to try and guess where competition litigation will go will agree, you have to tip your hat to Tony Boyd, the Chanticleer columnist at the Australian Financial Review, who in a (possibly paywalled) piece 'ACCC misreads mobile market' back in May 2019 absolutely nailed it: "ACCC chairman Rod Sims is headed for what is almost certainly an embarrassing defeat in court ... Rod Sims is kidding himself if he thinks the Australian Competition and Consumer Commission can win". He got it bang on: Justice Middleton could have saved himself most of his 899-paragraph judgement if he'd just copied and pasted Boyd's conclusion that "The problem with the assumption that TPG’s executive chairman David Teoh will spend billions of dollars building a new network is that it is completely without foundation".

So even against an appropriately heightened sense of scepticism about the merits of even further mergers, ones will still pop up there may be no loss of competition compared with the no-merger counterfactual (as in TPG-Vodafone) or there is the procompetitive emergence of a more effective post-merger competitor (T-Mobile-Sprint). Whether any of these arguments apply to the other behemoth out there - if it's survived the recent market havoc, the proposed merger of  the global number two and number three insurance brokers, Aon and Willis Towers Watson, to create a new number one - will remain to be seen. There look to be a good deal of potential back-office efficiencies, but whether they, and the claimed capability synergies, make up for the potential reduction in competition is debatable.

Finally, the latest ComCom telco report got me digging in the archive. Here are a couple of graphs from the very first telco monitoring report, published back in 2008.

Nor pretty at all back then, was it? The improvement since then, especially on the mobile side, has been enormous. And a lot of it goes to prove Philippon's points: for a good competitive outcome you can't beat new entry (particularly 2degrees) and entry-facilitating regulation (a whole swathe of things, from early 'ladder of investment' ideas like wholesale access through to mobile termination regulation and local loop unbundling).

Regulation done right

From overseas I've caught up with the news that the Telecommunications Commissioner Dr Stephen Gale has decided not to deregulate the market for national mobile roaming.

The current regime (summarising a bit) is that the incumbent mobile network operators (Spark, Vodafone, 2degrees) have to provide wholesale network access to any serious new entrants. That way the new entrant is able to offer a national service from day one: offering patchy network coverage would otherwise be a big turnoff to potential customers and realistically would all but nobble a new entrant's prospects.

National roaming is a 'specified' service, which in telco regulatory jargon means that it must be made available, but on commercial terms struck between an incumbent and an entrant. A more stringent form of regulation would be a 'designated' service, at a price set by the Telecommunications Commissioner.

I liked this decision from at least five perspectives.

One, it was correct.

Two, it was short (38 paragraphs). Maybe that was inherent in the relative simplicity of the issue under consideration. But in any event it was mercifully concise: well done.

Three, plain English, or at least as plain as as you can be when grappling with telco acronyms.

Four, an appropriate bit of "behave yourselves or else" ("We remain of the view that 2degrees’ commercial roaming arrangements with Vodafone were only secured against the threat of regulation. We consider that similar difficulties could potentially arise for a new entrant as have affected 2degrees"). Effective outcomes without actually reaching for bigger sticks: good one.

Five - and this is down to the overall design of the telco regulatory regime - there is a working mechanism where the Telco Commissioner has to regularly check whether regulation of 'specified' or 'designated' services is still needed. They have to be revisited no later than five years after they've been regulated. An excellent idea that stops the sector being littered with redundant rules.

Though you are immediately left with the thought: why isn't this done with regulation more generally?

Case in point - on the latest episode of The Block (no, I don't watch either) apparently two contestants "won't be able to market their property as a four-bedroom house for sale (or rent), because it  contravenes the Government's Housing Improvement Regulations 1947".

That makes regulatory sense. Let's face it, not much has changed since 1947.

The future of the telco regulatory regime

Late last week Simon Bridges, the Communications Minister, reappointed Stephen Gale for a three-year term as Telecommunications Commissioner. It's a good move: like his two predecessors, Douglas Webb and Ross Patterson, Stephen's capable, intelligent and congenial, and - belatedly - a bit of continuity could go a long way.

We've also got a clearer idea of the regulatory agenda Stephen will manage: earlier the Minister had announced the final decisions on reform of our current telco regulation regime and included a helpful Q&A thingie for the non-obsessed. True telco tragics can read the detailed Cabinet paper.

A lot of the agenda had been signalled from afar - you can follow the trail here - and there have been no major last minute surprises. We've known for a while, for example, that from 2020 Chorus and the other companies rolling out fibre networks will  be regulated as utilities, using the same sort of rate-of-return 'building blocks' regulation that has been applied to electricity lines businesses under Part 4 of the Commerce Act.

Can't say I'm enthralled by the form of regulation: it's a clunky and expensive 1950s process, and you'd think we'd have been better off with something off a more modern 'incentive regulation' menu. And as a side effect we're going to get another process where the Commission (as it currently does for Transpower) will need to approve new investments going into the regulated asset base.

I can see the rationale as an anti-gold-plating device, but government agencies choosing which private sector investment projects get the go-ahead is a bit on the medieval side for me, and is another argument for something more hands-off, with a greater role for Chorus (and others) wearing more of the downside but potentially keeping more of the winnings. But here we are. At least we won't have to reinvent the wheel as we've already given the Part 4 process a thorough going over in the courts, and if you're going to go the rate of return route, the Commission's way of going about it is as good as any.

But rate of return regulation aside, there's quite a lot to like in this policy package. There's a useful focus on rolling back regulation when it's no longer needed, most obviously deregulation of the Chorus copper network in areas where fibre has been rolled out, but also more generally. As an earlier 2016 Cabinet paper had said (reproduced in para 73 of Appendix 1 of this latest Cabinet paper)

Another important regulatory design principle is to provide for active deregulation where appropriate. I propose that the Commission be required to review whether any geographic area, service, asset or market should be deregulated prior to each regulatory reset. This would include looking at whether any competition has emerged for rural copper services such that they could be deregulated

Oddly, though, the current requirement  in s157AA to periodically revisit the Telco Act itself  has been dropped. I'm no fan of makework policy analysis, but I do wonder whether the package should have included an ongoing requirement to review the telco regime from time to time.

The two hot spots that Stephen Gale and his team will have to deal with are the wholesale mobile market, and the bunch of issues around service quality and customer complaints.

On the mobile side, there's no knock-out evidence that the wholesale mobile market isn't working as well as it might: the low level of 'MVNOs' (mobile virtual network operators, who stick their retail brand on a wholesale input they get from the big guys) is suggestive, but by no means definitive. If there are issues, the sticky points appear to be the efficacy or otherwise of colocation and roaming agreements, and the Commission is going to get a more streamlined process for more effective regulation if needs be. Currently colocation is a 'specified' service, which means that the non-price elements are set by the Commission, but it could be tightened up a notch to 'designated', which would also set the price.

The Minister said that he will "be writing to the Commission requesting that they undertake a study of the wholesale mobile market". Good. But that yet again underlines how stupid our current arrangements are on what the Commission can or cannot look at. The Telecommunications Commissioner (who is part of the Commission) must report annually on the state of the telco market. And the Minister (as he's just said he's going to) can also ask him to look at particular telco issues. But the rest of the Commission can't take a proactive look at anything else. The sooner this nonsense collapses under the weight of its own absurdity, the better.

The other hot spot is the sector's poor customer record, and that's something senior management in the industry should have thought harder about earlier on: when you have papers going to Cabinet pointing out that "The telecommunications sector generates more consumer complaints than any other sector in New Zealand", you're positively inviting the government to wade into your industry. As it has: the Commission will start reporting on the level of quality (yet another bizarre example of how it's allowed to look at some things but not others), will have the power to devise and impose codes of conduct, and will periodically review how the industry's own Telecommunications Disputes Resolution Scheme (TDRS) is travelling, with the explicit threat that it will be replaced by a new body if it doesn't hit the spot.

The Cabinet paper says (para 8) that "the current regulatory settings...are over-reliant on industry self-regulation". Maybe that's right in this case, and in any event self-regulation has been falling out of favour as a a consumer protection policy option. Personally I think it's the first option that should be on the table, not least because if there are problems, the onus for fixing them should lie on the problem-makers in the first instance. If that falls over, then of course tougher measures should follow, but we should try and make the light-touch options work first. Hopefully the TDRS will get the message.

Quite apart for doing a better job for their customers, I also think industry sectors ought to get their self-regulatory act together in their own enlightened self-interest. If, for example, the various parties in the electricity sector hadn't feuded among themselves over the shape of an industry-led Electricity Governance Board, they wouldn't have had the price control provisions of Part 4 of the Commerce Act and an Electricity Authority foisted on them.

It's only a minor detail in the whole package, but I was irritated by the flimsy rationale for hiding the increased costs the Commission would face from its new consumer roles. It can't be a huge or sensitive number - might be perhaps a couple of million dollars a year, chickenfeed in the greater fiscal scheme of things - but the dollar number has been redacted from the Cabinet paper.  The excuse is the section of the OIA that says hiding it is "necessary to..maintain the constitutional conventions for the time being which protect...the confidentiality of advice tendered by Ministers of the Crown and officials", which translates into "it's being kept secret because if we told you what we said it wouldn't be secret anymore". Give us a break: we ought to be able to see the cost of what's been proposed.

The state of telco play - 2017

We pay too much attention to bad stuff, so here's some good news that has come out of the Commerce Commission's latest annual report on the state of the telco markets (media release here, quick infographic here, whole thing here).

Speeds are up. Congestion is down. Value for money is better. Prices generally compare well with other countries. Competition is working. Investment is high, with a big slab of dollars going into the rollout of the Ultra-Fast Broadband (UFB) fibre project. And even though the telco team at the Commission don't say so in the report, I'd give them credit for helping to make this happen.

There are lots of ways to illustrate the good stuff: here's just one, on fixed line broadband, which speaks for itself.

As I said in my piece on last year's equivalent report, the Commission's comparison of our broadband download speeds with other countries' could be a bit better and doesn't sweep in some of the comparator countries you'd normally expect to see, but even on a wider set of comparators we're doing better than we were. If you go to the source Akamai document the Commission used, we now rank 34th globally for download speed - not enormously flash, but better than the 41st we scored a year earlier. And we're a little better against European country standards, where we would now tie for 19th rather than 21st. Room for improvement, as they say in the school reports, but as the UFB builds out and more people sign up for it, we've got good prospects of climbing the rankings a bit more.

The UFB trends in the report also spell out Sky TV's ongoing corporate nightmare: the rollout and adoption of a whole new way to deliver movie and sports event quantities of data. There are now 368,000 UFB connections, and growing like fury, and nearly half of households are on unlimited data plans, and the proportion is rising rapidly.

Have we got unfinished business? I speculated last year that maybe it is time to revisit our regulated mobile termination rate: it's still unrevisited, at a left-high-and-dry level by comparison to current overseas rates, for no obvious reason that I can see. And there's an ongoing issue with the high cost of mobile data downloads to data-only devices (see pp28-29 of the report).

The other bit of unfinished business is the ludicrous arrangement whereby the Telecommunications Commissioner is required to monitor the telco industry, and the Commerce Commission is forbidden to monitor any other industry. MBIE went through a whole process in 2015-16, in its targeted review of the Commerce Act, which included the option of fixing this nonsense. Ten months have gone by since the final cross-submissions (including mine) darkened MBIE's door.

Come on MBIE. This is getting embarrassing.

Mobile network mergers - what happens?

If you've got any interest in what happens when competition increases or decreases in an industry, you've got to read this excellent paper, "Evaluating Market Consolidation in Mobile Communications". Especially as it's not only important, but easily missable: I only came across it by accident thanks to this helpful post on The Irish Economy blog site, which referred me to this conference.

The three authors set out (as they say on p3) to "study the relationship between prices, investments, and market structure in the mobile telecommunications industry. We use an empirical approach by looking at the experience of thirty-three countries in the period 2002-2014. We collect what is, to our knowledge, the largest dataset employed to-date for works of this kind".

And you'll be pleased to know that, unusually, the data include New Zealand. While our official statistics have got better (and will get better still), across official and private sector data we can be short of what's available overseas, and I've lost count of the number of cross-country econometric studies where we don't feature. This time we do, though we don't get any country-specific mentions.

First, here's a rather amazing finding - what's happened to prices in the mobile market, with national prices converted into euros at PPP rates.

As the authors say (p10), my italics, "Overall prices steadily declined by almost 50% during this period, amounting to an average decline of 2.2% per quarter". Isn't that remarkable? And, in passing, doesn't it leave you wondering how, despite this massive technological progress and similar advances in the rest of the ICT sector, official measures of countries' productivity growth appear to show a slowdown.

But on to their main focus. "The dataset", they say (p3) "spans a time period long enough to capture changes in market structure (especially entry via licensing, and exit via mergers) that provide ideal variation in the data to assess how market structure impacts on prices and investments, holding other factors constant".

And what they find is pretty dramatic.

On prices, they find strong positive links between concentration and prices:

prices decrease by about 15.9% in markets with four operators compared with the comparison group of two or three operators (p17)

an increase in the HHI has a positive and significant impact on prices...an increase in the HHI by 10 percentage points (for example from 0.3 to 0.4)* would increase prices by 20.37%. Similarly, a 4-to-3 merger in a symmetric industry (raising the HHI by 8 percentage points from 0.25 to 0.33), would increase prices by 16.3%. This is an average effect based on the sample of all countries post-2005. While this effect is statistically significant, it has a relatively wide 90% confidence interval, between 7.9% and 24.7%...How important is this effect against the background of the general price drop of 47% over the same period of eight years? Given that the price trend is -2.2% per quarter, a hypothetical merger that increases the HHI by 10 percentage points is roughly equivalent to going back to the price level of about 8 or 9 quarters ago (p18)

On investment, they also find strong positive links with concentration:

An increase in the HHI by 10 percentage points raises investment per operator by 24.1% using the first instrument set... and by 27.9% using the second instrument set...In both cases, the effect is statistically significant at the 5% level. Perhaps more concretely, a 4-to-3 merger in a symmetric industry (raising the HHI by 8 percentage points) would raise investment per operator by about 19.3% (under the first instrument set) (p19)

They can also use their modelling to estimate the effects of some real world mergers, which is also highly interesting. Full details are in their Table 6: there are wideish confidence intervals, but in every case prices went up, but so did investment.

And that makes merger approvals very tricky indeed: their research

is the first time that the dual impact of market structure on prices and investments has been assessed and found to be very relevant in mobile communications, both from an economic and from a statistical point of view. Our findings are therefore of utmost importance for competition authorities, who face a trade-off when confronted with an average merger similar to one captured in our sample. Ceteris paribus, a merger will have static price effects to the detriment of consumers, but also dynamic benefits for consumers to the extent that investments enhance their demand for services (p29)

They say that efficiency arguments pointing to the possible pro-consumer benefits of higher investment get short shrift, at least in Europe:

In European merger control, merging parties face tough hurdles when putting forward an efficiency defence and, as such, it remains questionable whether efficiencies will ever play an important role in decisions under the EC Merger Regulation in any but the most exceptional cases. However, this is not to say that advisers should abandon enquiries about the rationale for mergers or any anticipated efficiency gains (p29)

But in jurisdictions where there's an more open mind - and I'd include New Zealand and Australia - I'd suggest these arguments are worth running with. Higher prices, but 5G or 6G or Umpteen G three years faster than you'd get it otherwise - that could be both correct and have some persuasive local resonance, given that we are already down the totem pole when it comes to global rollout of some goods and services.

If I were a regulator, I wouldn't necessarily be a sook for every "we need higher prices to fund good stuff" line: after all, what are the capital markets for? But on this evidence, there might be a stronger case than you might have previously thought.

*They use a HHI with a scale from 0 to 1 rather than the more familiar 0 to 10,000. So what they call an increase from 0.3 to 0.4 is what we'd usually describe as 3,000 to 4,000.

The details of SkyTV/Vodafone

Just before the Easter weekend the Commerce Commission published its written reasons for turning down the SkyTV/Vodafone merger. Like other competition tragics, I read it over the holiday - all 566 paragraphs of it.

Like everything that comes in the Commission's door these days, the Sky/Vodafone fell in that twilight zone where you can make a decent case for both sides. In the event, the Commission said No: the merged entity would be able, and incentivised, to offer Sky Sport based bundles of pay TV and broadband/telco services that other Internet Service Providers (ISPs) and telcos wouldn't be able to match. There would consequently be a real chance of a substantial lessening of competition (SLC) as Sport-less rivals were less able to compete.

Sky/Vodafone was especially problematic because it fell into two of the more difficult areas for regulators to assess - the alleged use of market power in one market to gain advantage in another, and allegedly exclusionary bundling. These are always going to be line ball calls: the ACCC for example stopped the Aussie supermarkets from giving out large petrol discount vouchers ("shopping dockets") to buy petrol from them, because they thought the supermarkets were using their market power in the grocery trade to drive the petrol stations out of the petrol game (I thought the ACCC could be wrong about that).

And anti-competitive bundling is just as tricky, not least because the economics is not settled (you lawyers at the back, stop sniggering). As the abstract from one review article said

While the [economics] literature has demonstrated the possibility that bundling can generate anticompetitive harm, it does not provide a reliable way to gauge whether the potential for harm would outweigh any demonstrable benefits from the practice. As a result, the widespread application of the antitrust laws to bundling by firms can generate significant error costs by erroneously condemning or deterring efficient business practices. In the future, economists should seek to expand their understanding of both the anticompetitive and procompetitive reasons firms engage in bundling.

So given all the inherent uncertainties, I think the Commission came to a reasonable conclusion. And I think it fits well with what regulators should do in fast-moving sectors, which (as I argued here) is take a conservative view (though it is not always obvious whether doing something or not doing something is the conservative course), don't give leg-ups to anything, and generally try to let events unfold, but deal with any anti-competitive rorts that survive the Schumpeterian storms.

What struck me most about the whole thing was, why did Sky and Vodafone go for a clearance ("there is no SLC") rather than an authorisation ("there is an SLC, but there are compensating benefits")?

Maybe they genuinely believed there would be no SLC; maybe they didn't want the relative hassle of an authorisation (typically longer and more expensive, and the associated conference process isn't everyone's cup of tea, either). But having gone that route, they were stone cold dead if the Commission found an SLC (or, strictly speaking, couldn't be satisfied that there wouldn't be an SLC). That can prove a difficult barrier to get over when, as here, it's a dynamic sector where anything might happen, and it only takes one plausible enough ("real chance") scenario where there might be an SLC for the Commission to throw its rider at the fence.

But with an authorisation, you're still alive with the second leg of your argument: there are SLC downsides, but more than compensating benefits. And there were benefits: as the Commission said, for example at [198], "consumers may be better off in the short term as the merged entity offers better bundles (including better prices) and rivals react with their own bundles (and lower prices)", or again at [226], "it is likely that the bundles offered by the merged entity would be lower priced and/or higher quality, with more additional features than those available without the merger, or compared to those available on a standalone basis".

The Commission may still have jibbed at an authorisation, because it clearly worried that any short term consumer benefits would be taken back when the Sky/Vodafone entity had seen off some of its competitors, but it would have been a better route to go. An argument along the lines, "clear short term benefits in the (semi-predictable) near to medium term, but uncertain detriments in the (much less predictable) medium to long term" was a real runner, particularly as the Commission said at [358] that it is "difficult to predict with any certainty what effects might occur in the medium to long term". A bird in the hand today, versus more heavily time-discounted and more uncertain detriments sometime in the future, could have snuck through.

Especially (if Sky and Vodafone are minded to appeal) as the Commission has taken a somewhat debatable view on how hard it would be for ISPs to get into the post-merger game. The evidence shows that there are heaps of them today, all giving it a go despite the much heavier firepower of the big guys. This suggests easy conditions for entry.

Of course, the Commission would respond, that was then, what about the post-merger world?  But I for one would be inclined to think that (for example) a determinedly "cheap and cheerful" barebones ISP (or several of them) could still keep the merged entity honest. I wouldn't rule out the possibility of some other innovative bundling by competitors, or other attractive add-ons. And I also had quite a bit of sympathy for the point that NERA made, quoted at [454]: "NERA advised that if consumers were attracted to the merged entity’s discounts, then they would equally revert back to other TSPs [telecommunications service providers] if those discounts were reversed. If so, the merged entity would not be able to exercise market power".

If there was anything else I'd quibble with, it was the Commission's view that content and the means of delivering the content are becoming more the same thing in consumers' eyes. For example it said at [170] that

As services become more converged, consumers are likely to start associating them as part of the same purchasing decision – the content and the method of delivery become more closely linked in the minds of consumers

and again at [386.4] where it said that

broadband and mobile services become more closely aligned with the delivery of content

Personally, I'd agree that delivery services are indeed converging, but I'd argue that they're becoming commoditised, and that content is increasingly standing alone, which is what the rest of 386.4 says:

the importance of content to competition in relevant telecommunications markets is also likely to increase

Who provides Game of Thrones, and over what infrastructure, is of the utmost indifference to me. They're not - for this sample of one - becoming all the one deal, wrapped up with the series itself. Rather, they've become markedly more separate. Though if you follow that logic further, you start to think dark thoughts about entities monopolising a market for premium sports content (the Commission found at [259] that there is one). There's a lot happening in the commercial and policy space around telecoms and convergence: I wonder if some regulation of 'fair access' to premium sports is lurking in the mix.

There's always one...

Earlier this week the Commerce Commission came out with the second of its reviews of the sorts of contracts you and I get asked to sign when we sign up for our utilities. The latest one is a review of the electricity retailers (media release, full report as pdf); in February the Commission had gone over the typical telco contracts (media release, full report as pdf).

The Fair Trading Act, and the new bits in it on unfair contract terms which triggered these reviews, aren't usually my thing: to be honest, I knew nothing about the new provisions before the Commission's Ben Hamlin took us through them at last weekend's CLPINZ workshop. But now that I've looked at these reviews, I was struck by an unusual pattern which emerged from the pair of them. Here is the distribution of the number of potentially unfair contract terms found in each sector, by company.

Which is why I've called this post, "There's always one...". Because there is: in both sectors there is one company that's gone way beyond the others when packing its contracts with consumer-unfriendly terms. Equally there's one at the other end of the scale (in electricity it's more like a closely-bunched group of three) with remarkably few of the small print gotchas.

A good slab of these contract terms were not objectively necessary - as the Commission said on both occasions, "In some instances the companies were able to provide information to the Commission to show that the term was necessary to protect the legitimate business interests of the company. In all other cases, the companies accepted the Commission view and have amended or agreed to amend the terms concerned" - so it looks as if these patterns are telling us more about companies' culture than anything else.

At the greener end, while it's possible that some companies haven't thought hard enough about all the things that might go wrong, it's plausible that we've got companies that are more consumer-focussed, perhaps out of conviction, perhaps because they reckon that consumers may be relatively flighty and will leave if pushed too hard. At the redder end, we've got - well, I'm not sure. It could be just hard-nosed business, shifting as much risk as possible onto someone else, possibly on a view that most customers are relatively sticky. It could be that the company is being run by the lawyers. Or it could be that a company views consumers as "them versus us".

So it'll be an interesting market experiment to see which approach works best over the next few years. If I was currently down the redder end, I think I'd be minded to change course: competition is a multi-dimensional beast, and in competitive markets I don't think I'd like to get into the fray lagging badly on non-price dimensions like contract fairness.

As an aside, if you'd like a fascinating example of corporate culture losing sight of the customer, try this excellent article from Bloomberg earlier this year, 'United's quest to be less awful'. I especially liked this anecdote:

On Nov. 19 the airline announced it was changing the coffee it serves on its planes and in its lounges from a brand called Fresh Brew to the Italian premium roaster Illy. It was welcome news to customers and to the flight crews used to fielding complaints. It was also a tacit admission that the choice of coffee after the merger, a decision that consumed thousands of man-hours, took nearly a year, and involved everyone from [then CEO] Smisek to the airline’s head chef to the flight attendants, hadn’t worked out.

Time to kill off an absurdity

Today the Commerce Commission said that it is starting a study of domestic telecom backhaul services (the connections that carry your internet traffic around New Zealand). They're doing it to

• understand how the market for domestic backhaul services has evolved in today’s telecommunications environment and what it may look like in the foreseeable future
• consider what, if any, changes may be required or are desirable to the regulatory framework to best promote competition for the long-term benefit of end-users

and among other things the Commission will be looking at "emerging competition issues (if any) that may require a regulatory response".

Excellent. It makes total sense for the Commission to be on top of what's happening in these important and fast-moving sectors, to be thinking about whether existing regulation is still needed or fit for purpose, and if there's a case for new or different regulation.

Irrespective of the regulation angle, it's also worthwhile that the Commission will be looking out for any competition problems. That's what you'd expect a competition authority to do. You'd be annoyed if it didn't. And it makes total sense that the Commission "must monitor competition" in telecoms (s9A(1)a of the Telecommunications Act), may fossick around in anything telco-related (s9A(1)b), and must publish its results (s9A(1)c).

But that's where the policy coherence ends. The Commission must monitor competition in telecoms. But it must not monitor competition anywhere else, because of a debatable decision of the Court of Appeal* in 1994 which hasn't been fixed since. The Commission back then had gone and looked at whether the telco regulation of its day (an information disclosure regime) was any good (it wasn't). Telecom challenged its right to have looked. And the presiding judge said

The basic difficulty with the argument put forward for the Commission...is that it would endow the Commission with the role of an ongoing and omniscient watchdog, policing the operation of the Commerce Act in all respects and reaching out to other statutory fields such as that of the disclosure regulations. It is not unnatural that something of that sort might be expected by someone not closely familiar with the Commerce Act, but it is not a view which survives scrutiny of the Act

If every man and his dog in their "not unnatural" naïveté would have expected the Commission to be able to look at competition around New Zealand - this under an Act, recall, which has as its purpose "to promote competition in markets" - but the Act, in the learned opinion of their Lordships of Appeal, doesn't actually allow the Commission to look at the state of competition, then the Act should have been smartly amended.

But of course it hasn't been, and here we are twenty years on, still footling about. MBIE, to be fair, has consulted on giving the Commission a "market studies" power: I hope we're finally getting closer to rationalising the absurdity of requiring competition to be monitored in one sector and forbidding it everywhere else.

*Sometimes called the 'Telecom "fishing" case', or more formally Commerce Commission v Telecom Corporation of New Zealand Ltd [1994], 2 NZLR 421 (CA)

The state of telco play, 2016

The Commerce Commission's latest annual report on the state of our telco markets came out last week. At the time I was too busy on other things to give it a good read - and if you're also up to your eyes, then there's a media release and a cheat sheet infographic to give you the gist - but I've now got round to it and, like the previous ones, it's well worth a look (my comments on earlier ones are here and here).

Before getting into some of the details, I'll just say - again - that we have a daft system for regulatory review of what's happening in our markets. The Telecommunications Commissioner, who is part of the Commerce Commission, is required to conduct and publish reports on what's going on in telco markets (under s9A of the Telecommunications Act 2010), but the Commerce Commission itself is forbidden to do it in any other markets (under the courts' reading of the Commerce Act). There are people in the bowels of MBIE looking at the discrepancy at the moment: let's hope they come down on the sensible side of the fence.

And there's a good example in this latest report on how proactive enquiries into the state of competition might work. The report was looking at market shares in the mobile market (p36):

We have noted 2degrees’ very small share of business market revenues in prior reports. We commissioned UMR to undertake a survey of the business mobile market in the latter half of 2015 to gain a better understanding of the market and check if there were any barriers to expansion. Overall, the survey revealed no evidence of anti‑competitive behaviour.

Excellent - the Telecommunications team found something odd that might have been an issue with competition, investigated it, and was able to blow the All Clear. Exactly what should be happening in every other sector of the economy.

This year's report is mostly a record of solid, ongoing progress in the sector, with greater uptake, faster speeds, decent levels of consumer choice, and somewhat lower prices (more obviously lower when quality-adjusted). Your interests may be different, but here are a few thoughts that occurred to me.

This is the graph showing how broadband download speeds have been improving.

All well and good, but the set of comparators looked a bit idiosyncratic. Where are the smaller OECD economies like Denmark or Ireland or Switzerland that we might normally want to match ourselves against? And why Malaysia, of all places? So I went to the original Akamai report these numbers came from, and I was able to find a table of download speeds for a wide range of Asia-Pacific countries (including us), and also a table of European speeds.

By Asian standards, we're doing pretty well, especially when you consider that some of the very densely urbanised countries like Korea, Hong Kong and Singapore must be a good deal easier to serve, compared to us having to trench our way up the Cobb Valley. But by European standards, we're not such hot stuff, even when compared with long, skinny, thinly populated places like Norway and Sweden which must have similarly challenging geographies.

If we were a European country, we'd rank only 21st on that table (behind Poland, ahead of France). And globally we rank 41st in the Akamai universe - not so flash. We'd expect to be somewhere in the top 20 on most other economic measures (the other day we came 16th in the latest World Competitiveness Rankings, for example). So by all means let's be happy that speeds have improved, but also let's be aware that we are (for whatever reason) still well behind the sorts of speeds our kids on OE can get (unless they're in Australia).

There was also a fascinating chart showing the extent of pent-up demand in New Zealand for decent online content, after years of limited choice, long delays, and high prices. The little arrow on the chart shows the immediate and ongoing surge in data consumption when Netflix arrived. I can only begin to imagine the existential angst in the strategic planning units of our telco and media companies: some current business models can't hold.

Finally, on the regulatory front, the report noted (p30) that

The wholesale cost of terminating a phone call on a mobile network is called the mobile termination rate and is regulated in nearly all countries. We last reviewed the mobile termination rate on 5 May 2011, and the last regulated reduction prescribed in that determination was to 3.56cpm (excluding GST) on 1 April 2014. The ACCC last year set the mobile termination rate for Australia at A1.7cpm, and as at July 2015 the weighted average for Europe was 1.22 eurocents per minute.

There is no obvious reason why our mobile termination rates should be well in excess of those overseas - at current exchange rates, roughly twice Australia's, and roughly 75% higher than Europe's. The technologies are the same, and on some opex costs we should be cheaper (our wage bills are lower, for example). I'm no great fan of extra regulation, and still less of extra price control regulation, but if the subtext of "We last reviewed the mobile termination rate five years ago" is "And, you know, it's about time we had another look", I reckon the Telecommunications Commissioner is on the right track.

The future of telco regulation

No doubt you've seen all the coverage of the government's high level decisions on regulation of the telco sector from 2020 onwards (if not, the media release is here, the once-over-lightly summary is here and if you want to mainline the hard stuff go here).

It's a good set of decisions, though a lot of detail is yet to come, and there'll be another round of consultation on options. The big (and expected) decision is that both fibre and copper based internet services will be regulated as utilities, in much the same way as electricity lines businesses are today. That changes the way copper based internet is priced today, and properly so - as I argued here, the 'TSLRIC' model for pricing copper was good for one purpose (enabling efficient competitors to get into the game) but not adequate for regulating a copper provider's above-normal profits.

The media reaction is all over the new 'utility' model. But there's one part of the decisions that hasn't been picked up much, and here it is:

However, there is also the option for a more light-handed ‘backstop’ regime. The threat of regulation combined with requirements to release financial and cost information could work as an effective incentive to keep prices at reasonable levels. While this isn't the Government’s preferred approach at this time, we will be interested in discussion on this point. 

I think this is an option that should be explored further. I'm not sure that an information disclosure plus hidden knuckleduster regime would cut it on its own - it might, and maybe existing practice could be strengthened, but the precedents to date aren't great - but there very badly needs to be some intermediate, simpler, faster, less complex and less expensive alternative to the 'building block' model of utility regulation that's being proposed.

The regulatory regime would be much better if, for example, there was an 'RPI minus X' option somewhere along the way - where suppliers are allowed to raise their prices by the Retail Price Index (this is UK terminology originally, so that would be our Consumer Price Index), less some amount 'X', a plausible enough guess at what sort of productivity and efficiency gains the supplier can wring out of the business.

There's nothing inherently wrong with the 'building block' approach. Arguably, it gets closer to a supplier's 'true' costs and profits than anything else. Applied fairly and consistently, it can form a good basis for an effective regulatory compact between regulator and regulatee, and can protect consumers from profiteering. But as anyone who's had anything to do with the process knows, it's a beast of a thing to construct and maintain (or even understand, in its thornier thickets). If we end up there, we end up there, but we should really put some serious effort into intermediate or alternative options - particularly as, at some point, we as a four and a half million people economy ought to start using more "cheap and cheerful" policy regimes, rather than the industrial strength superstructures a US or a UK can afford.

A final comment: the government is keen on keeping competition up to the mark in the mobile market, and is thinking about things like mandating the price competitors pay to access incumbents' mobile towers. And it said

We will consult further on encouraging sharing of infrastructure, and making sure the Commerce Commission has the tools it needs to investigate the market.

I'm hoping the last bit of that sentence means that the government is finally getting its head around the desirability of the Commerce Commission being able to have a proactive look at the state of competition in any given market - a "market studies" power, in the jargon. I've been banging away at this for ages - my latest efforts are here and here - as have others (notably our Productivity Commission). Hopefully this latest telco exercise has finally nailed the absurdity of the country's competition watchdog not having the legal authority to do a key element of its job.

No appeal? Good

I've been catching up with stuff that's happened over the summer holidays, and I have to say I was quite encouraged when I found out that Chorus has decided not to appeal against the Commerce Commission's decisions on copper broadband pricing and on backdating the regulated price.

Chorus's statement on January 28 said that "the Chorus Board has elected not to appeal the decision, despite disagreeing with some key elements such as the lack of backdating. While we are aware that some investors feel there may be merit in further testing aspects of the determination in court, it is the strong view of the Board and Management that the best long-term value for our shareholders and customers will be achieved through the industry focussing on bringing New Zealand better broadband".

Well said. Even if there is also something of a Mexican standoff going on - "we won't appeal against some aspects of the decisions if everyone else holds off, too" (my words, not theirs) - the general idea is bang on the button. There has been a deal of opportunistic regulatory and litigatory rent-seeking in the telco, and other, sectors over the years, and it is good to see someone turning their back on it and getting on with running the whelk stall.

More companies could usefully realise the true extent to which regulation and litigation are a distraction from their core lines of business. The direct costs of management and board time, and of lawyers and economic experts, are only a fraction of the true cost of diversion of focus from longer-term performance. In my experience, across various governance roles, that item on the agenda about the regulator or the court case takes on an entirely disproportionate importance. The corporate ego gets overinvested in winning: business strategy and longer-term performance are the inevitable losers.

Chorus may well have come to another correct conclusion that others could learn from: if you play the regulatory game too hard for too long, it will bite you (as I've argued before). We might eventually have had sector-specific regulation in any event, but there's little doubt that Telecom (as was), and various parties in the electricity business, pulled their current sectoral regulatory regimes onto their own heads through their bloodyminded intransigence.

I'm perfectly happy to accept that focussing on the business was the primary motivation for Chorus flagging away any appeals.  But if in the background Chorus also reasoned that pushing their luck on backdating - they might have scooped a pot of some $140 million - on top of a halfway decent outcome on the price, would have been a bad strategic move, given that the whole regime of telco regulation is currently under review, then they made a good call.

Did we ask the right question?

Normally I'd take time out early on, to explain some of the telco/regulation jargon, but as I suspect virtually everyone likely to read this post already knows what UCLL, UBA, WACC and TSLRIC are, I'm going to plunge right in.

Unless there is some diehard with a large legal budget to burn, last month's final decision by the Commerce Commission setting the wholesale price of copper-based broadband at $41.19 brings the curtain down on a long, complex and contentious process.

I'm not going to spend much time revisiting the details of the Commission's decision, other than to note that in an exercise like this one, with so many moving parts, there is inevitably going to be room for even reasonable people to disagree.  In their place, I might well have gone a different way on aspects of WACC, for example, or taken a different position on the challenge of digging trenches through New Zealand's allegedly idiosyncratic topography, but so what: overall it was a reasoned, careful piece of work.

The end result looks to have ended up in the right area, and I say “area” advisedly: there is no single “true” point-estimate answer to these sorts of questions. You only have to glance at Figure X1 of the decision, for example, to see how second thoughts on various component bits can have significant impacts on the final price. I was comforted in particular, as I thought it was a realistic result, by the Commission's calculation (in paras X34-5) that its price on a “like for like” basis came out lower, at $31.60, than the entry-level UFB price of $37.50. And no, I don't want comments from conspiracy nutters who think the Commission was steering its decision to within cooee of the UFB price.

But let's step back from the specifics and consider some broader picture issues.

For me, the big one was the task the Commission was constrained to do. By law, it had to set a forward-looking TSLRIC price, and it did. But that task answers the question, “what would be the cost to use a shiny new whizzbang broadband network rolled out efficiently today”, not the question, “is Chorus ripping off my broadband provider, and, at one remove, me?”. Or as the Commission summarised it

E109 … our task is to set a price according to TSLRIC which we and submitters agree is best set relative to the forward-looking efficient costs of the hypothetical efficient operator, rather than the past costs of the regulated entity.

E110 Putting that another way, we do not consider that concepts such as “windfall gains” or “windfall losses” are particularly relevant. A price determined according to TSLRIC does not attempt to regulate the incumbent’s revenues such that it earns a normal return on its actual investments. Rather, it attempts to set a forward-looking price based on modern technology and irrespective of the incumbent’s past investment decisions.

The Commission is completely correct in saying that its hands were tied, and that any financial impact on Chorus was beside the point. And I know that TSLRIC is a good price to use if (for example) your main issue of interest is whether retail broadband providers (or others) are given a fair go at getting into the wholesale broadband business for themselves. And that's an important point if you believe that consumers are best served in the long run by competing suppliers deploying a choice of infrastructures.

But I'm still not convinced that the Commission was asked the right question in the first place. There was a good consumer case for an alternative approach, the one the Commission described in the extract quoted above as an “attempt to regulate the incumbent’s revenues such that it earns a normal return on its actual investments”, and which is standard in many regulatory proceedings.

Consumers, for example, are wearing the cost of a hypothetical brand new network. It's as if the government had decided to regulate the price of cars, and as part of the exercise decreed that only the latest new models in the showroom would be made available. Many of us, however, would prefer to get our cars from Honest John's Japanese import yard. Instead, we're being asked to pay the depreciation costs of a brand new car, and we've lost the option of paying a lower price for an already depreciated second-hand one.

So yes, I'm still concerned that the inherent design of the regulatory regime had the capacity to deliver windfall gains to Chorus (at consumers' expense) or windfall losses (at Chorus's expense). The whizzbang modern technology element probably counts against Chorus if it is still using some earlier generation gear, as does the efficiently deployed element, if it is still carrying inefficiencies from its dominant incumbent Telecom days. But the depreciation aspect is a clear bonus for Chorus: the price is based on a brand new network, with its deployer entitled to a reasonable rate of return on the whole amount invested. Chorus, on the other hand, has already recovered some proportion of its investment, through depreciation, and should only receive a reasonable rate of return on the funds still invested. To that extent Honest John is being paid the new car price.

There's another aspect that also leaves me wondering if the TSLRIC question was the right one to ask.

Earlier, the Commission had provisionally set the broadband price on an international benchmarking basis. It's an approach which I hope survives the current review of telco regulation, as I remain convinced that it can in many circumstances provide a decent enough approximation of what the New Zealand price ought to be. But it didn't work on this occasion: the Commission was (again) constrained, and could look only at the overseas prices in countries that also costed broadband on a TSLRIC basis. And the answer to that quest was – Sweden.

Understandably, various parties weren't happy that New Zealand prices were going to be set on the basis of an overseas sample of one, we moved smartly into the final pricing process that concluded last month, and the initial benchmarking exercise became moot. But it still leaves a big question unanswered: how come there are only two countries in the developed world that are setting broadband prices this way?

I know, there will be times when there are just a few enlightened countries ahead of the pack, and most everyone else is doing it wrong. I'm not sure, though, that this is one of those times. While we're in the mood to have a rethink of our telco regulation regime, why don't we ask ourselves if we can live with mainstream overseas practice – especially if the alternative is fractious, protracted, complicated, and expensive.

What's happening in the telco sector

Earlier this week the Commerce Commission came out with its latest Annual Telecommunications Monitoring Report (pdf), and very interesting reading it was, too (as was last year's, as I commented here). In passing, it's daft that the Commission is obliged to report on the state of competition in the telco markets, while it is not allowed to publish proactive reports on the state of competition in the rest of the economy. If you're interested in the whole 'who can report on the state of competition' and 'market studies' issue, I'll be talking about it at this year's New Zealand Association of Economists annual conference - full programme here.

Back to the report. Lot of things to like by way of positive developments in the sector, though there is still quite a flavour of the deadweight legacy cost of the copper network, and the Commission's likely reduction of the copper price next month will be a positive move. In particular among the positives, consumers are mostly getting better value for mobile services: as the two graphs below show, mobile bundles are competitive by international standards, and prices have been falling.

But there are some oddities even on the mobile side. When you see the table and graph below you have to ask, why the very expensive prices by international standards for slugs of mobile data, and why aren't they falling, too?

I don't have any good rationale for this and neither does the Commission: on static prices, it comments (p33) that "This suggests there is a lack of demand for and/or competition to supply mobile broadband data when it is not part a bundle of mobile phone services, particularly when it is a relatively large amount of data". Don't know about lack of demand - you'd think there are plenty of people running around these days with lots of uses for their tablet-style devices - and you'd think mobile companies would compete harder for this upmarket business. Odd.

Apart from the prices, usage, revenue and investment sort of stuff, the report has heaps of other interesting stuff. For example, did you know this (below) about the percentage of our students who are taking computer science courses?

There was one pair of graphs which I had some difficulty with. I'd like to believe this one, which shows we're right at the head of the international pack for the proportion of businesses selling over the internet...

...but I can't square it with this one...

...which says that only 11% of small businesses make sales over the net. If (conservatively) you say 80% of all businesses are small businesses, you can't get to the national 47-48% figure of the first graph.

Never mind: this is still an excellent resource. As well as all the obvious stuff, it's also got a very useful chronology of events in the sector over the period January 2014 to March 2015: if, like me, you have to go away and look up things like the sequence of draft copper loop pricing decisions, it's all there in one convenient spot. 

There has to be a better way. And there is

I'm convinced there's a better way to get a good fix on some of our more contentious, and important, regulated telecoms prices. Let's deal to some jargon first, and then we'll get properly underway.

If you've got broadband, you get it from an Internet Service Provider (your ISP). And chances are it arrives over the copper wire phone line to your house. You could be on wireless broadband, or you might have signed up for the flashy new fibre network that's being rolled out, but most of us are still on the old copper based system. It's owned by Chorus, and your ISP pays Chorus for the use of that copper line from your house to the nearest telephone exchange. That service is known as the Unbundled Copper Local Loop, or UCLL. ISPs can put their own equipment in the exchange and take the feed from there, or they can rent some gear from Chorus instead of providing their own: that's the Unbundled Bitstream Access service, or UBA.

And finally - and this is where things come closer to your wallet - you've likely noticed that your ISP has said it'll be raising its price to you by $4 a month or so, because the Commerce Commission, which regulates the copper line UCLL price, is in the process of raising it from $23.52 a month (its first stab at the right price to charge) to $28.42 a month (its estimate after going through a full cost modelling exercise).

There's a consultation process going on before the Commission's proposed UCLL goes final (all you can eat here). As part of that process, Spark has come up with this graph, which shows how the Commission's proposed price compares with the price charged for the same service in a range of other developed countries.

You may have seen this already - the Herald's technology columnist, Chris Barton ran with it in a recent article, "Something rotten in our Commerce Commission", where among other things he concluded that "by a curious combination [of] free market ideology and caving to political pressure, it's [i.e. the Commission is] promoting monopoly power and a haughty "let them [the end-users] eat cake"." No doubt the Commissioners sacrifice children to the Great Werewolf, too.

In any event the graph does give you pause for thought about various aspects of how telco prices are set by regulation. My main point: I think there's greater room for using information on overseas prices as a guide to setting our own.

We do it a bit, at the moment: that "first stab" the Commission had at setting the price was required, under our Telecommunications Act, to be set by "benchmarking" against prices overseas. Unfortunately the benchmarking was tightly circumscribed in the Act, and had to be "Benchmarking against prices for similar services in comparable countries that use a forward-looking cost-based pricing method".

You can understand the logic. You wouldn't want prices to be set here solely on the basis of countries that weren't at all like us (eg a highly dense conurbation like Hong Kong), hence the "comparable" test, and you wouldn't want prices to be imported into New Zealand that had all been plucked out of the air on some cockamamie basis. And that's a real risk: regulatory proceedings can easily get captured by one vested interest or another. Money politics can see incumbents' prices set on too-favourable terms; populist politics can set prices that don't cover incumbents' costs. So you can see why the legislation saw fit to use prices only if they were set in a particular way.

Trouble is, you can take intellectual purity too far. After filtering according to the Act,  the latest benchmarking exercise, for the UBA service, ended up with only Denmark and Sweden to look at, which left everyone feeling a bit uneasy. I doubt if even the framers of the Act would have liked a benchmarking process that featured only two smallish Scandinavian countries.

So why don't we take a different tack? Why don't we go the Spark route, and look at the whole range of prices overseas? It would make sense to keep some element of comparability, so we might want to restrict it to say the OECD countries, but even that would leave us with a largeish group of 33. Some prices may well be off, and unfairly tilted towards suppliers or consumers, but on average you'd be inclined to think that the truth will appear somewhere in the middle. You might worry that New Zealand has got some special features that make it impracticable to compare with the average overseas experience: people like to raise the "long and stringy" argument, for example (though you'd think places like Norway and Sweden are much the same). All I can say is that I've seen a lot of folks argue both sides of the "New Zealand is unique" case, and I still don't see a knock-out case for our conditions being completely idiosyncratic.

Regular readers - God bless both of you - will know that I've banged on before (for example here and here) about using benchmarking more extensively in our price regulation, and I'd like to see our revised telco regime, when it eventually materialises, reaching more often for the regulatory equivalent of Number 8 fencing wire. It may be low tech, but it's admirably cheap and serviceable.

Move along, folks

So here's where we've got to with the wholesale price of internet services.

Internet service providers (ISPs) used to buy access to Chorus's copper lines and electronics for $44.95 a month.

This price was too high and insupportable, and everyone knew it (including Chorus, if it's being honest).

And sure enough it's just been lowered by the Commerce Commission, to $38.39.

Good outcome? You'd think so.

But.

Chorus isn't happy. It didn't want it lowered, or at least by not that much.

ISPs aren't happy. They wanted it lowered to closer to $34.44 (the Commission's estimate of the same price overseas).

TUANZ says the ongoing uncertainty over the price is "disappointing".

Could everyone get a grip, please?

Chorus should be happy. It wasn't knocked back all the way to $34.44.

ISPs should be happy. They're getting a too-high price fixed for them - maybe not pushed as low as they'd like, but hey, this is where the technical experts say it really should be.

The government should be happy. Copper prices aren't undermining uptake of the new fibre network the government is subsidising as much as they might have.

Consumers, and TUANZ, should be happy. They've had the reduction in the price already passed through to them in better value broadband plans (if you believe the ISPs), but in any event it should reach them one way or another.

So there are two ways forward.

One is take to the mattresses in another round of rent-seeking from the regulatory process - submissions, counter-submissions, legal challenges, appeals, smoke, mirrors, subterfuge and artifice, enriching only the lawyers and the specialist economists in a negative-sum game.

And the other is to acknowledge a deal that more or less works for everyone, and get the hell on with doing what the various parties are supposed to be doing, which is making money for themselves by providing a better service for us, the consumers.

I wonder which will happen?

KISS

This morning the Commerce Commission released the wholesale price Chorus is allowed to charge to Internet service providers (ISPs), and which therefore is the core component of the retail prices those ISPs charge you for your fixed line broadband.

It's made up of two parts, the first being the bit for the cost of the copper line from your place to a Chorus switch (the 'local loop' or UCLL) and the second ('UBA') being the cost of the fancy electronics that Chorus can (optionally) provide to ISPs to save them having to use their own. The local loop bit will be $28.22 a month and the UBA bit will be $10.17 a month, making a total of $38.39. This compared with the previous price allowed, of $44.98.

These prices are based on explicit, detailed and complex modelling of the costs involved, and are intended to replace the interim hold-the-fort prices that the Commission had previously set, based on the cost of the same services overseas in countries who do things much the same way as we do. This 'benchmarking' exercise had set a local loop price of $23.52 and a UBA price of $10.92, making a total of $34.44.

There are all sorts of issues involved here, big and small, affecting everything from the profitability of  Chorus through to uptake of the country's shiny new ultra fast fibre network. And they directly affect you, too: already some ISPs are saying that the drop in the wholesale price (from $44.98 to $38.39) had already been passed on to you, so you won't be getting any further joy out of it.
In any event, I'd like to pick on one small aspect of the process, even though it's largely moot now, and it's about those interim 'benchmarked' prices.

I think they did a good job of providing a quick, cheap and reasonably accurate initial estimate of the eventual wholesale price. They were pretty much spot-on when it came to the UBA part ($10.92 versus $10.17), which is remarkable given that everyone was agreed that the benchmarking process had only a couple of countries overseas to use as sighting shots. And they weren't far off when it came to the local loop component, either ($23.52 versus $28.22) - especially when you consider that the fully modelled cost estimate involves a whole swathe of judgement calls made by the Commission and its modellers, and is not a glimpse into some eternal truth held in the mind of an omniscient Being.

So I'd take two lessons away from this, both involving the KISS principle.

The first is that over the next couple of years we're going to be taking a close look at the shape of our telco regulatory regime, and I'd like to suggest that we keep the cheap and cheerful benchmarking process. It's relatively fast - a particularly important consideration in fast moving markets like ICT - it's relatively transparent, it's understandable, it's relatively cheap, and it's accurate within some rough-and-ready-justice tolerance. I'd go further, and make it harder for parties to invoke the full cost modelling approach, which introduces layers of cost, delay and complexity, and all for a gain in 'accuracy' that (because of multiple modelling options) may be more illusory than real. And in general I'd like to see the 'good enough' option chosen over the one that keeps consultancies on three continents in business.

The second is that we need to think harder about the increasing complexity and cost of regulation across all sectors, and not just the telco business. I agree with Eric Crampton of the NZ Initiative, when he said on Interest.co.nz that "Too much of New Zealand’s regulatory apparatus would suit a country of forty million rather than the one we have". He's got his own examples: one I came across recently was the Commerce Commission's needing to sign off a $3 million increase in capex spending on a little Transpower project in South Canterbury. The process will take five months from start to finish, and has already spawned a 54 page initial draft decision.

That's a bit of an extreme example, and I should make it clear that it's not the Commerce Commission's fault: it's been lumbered with this ludicrously over-engineered regulatory regime. And I should add that from next April the Commission won't have to get out of bed for anything under $20 million - which is, of course, where the threshold for its involvement should have been in the first place (if not higher again). And I'd have to note that bloodymindedness on the part of Transpower and its customers drew this intrusive regime on their own heads, and a bit of enlightened give and take could have avoided the whole mess.

But it's there now, and it's holding up the sector, and its cousins in other sectors are also increasingly clunky and costly. It's time for more people in the policy analyst community to do what the MD of one company I know used to do: hold up the sign that says, "Does it make the boat go faster?"

We need more cables

Earlier this month the World Economic Forum came out with the 2014-15 edition of its Global Competitiveness Report (you can find a link to downloading it here). It got a bit of media attention at the time, mostly on somewhat invidious chauvinist grounds - we moved up a notch, and the Aussies moved down one.

Other than that, the detail didn't get much of an outing over the mainstream media fences, and that's a shame, because the report is full of interesting comparisons, which make for suggestive diagnostic policy tools. Here, for example, is what our business community rates as the main problematic factors for doing business.

This is an interesting diagnosis, especially as it's not the sort of clichéd grumbling you might expect from a business group. In fact, these surveys seem to be pretty accurate around the world. The equivalent French survey, for example, came up with this - quite a different set, and one that looks absolutely on the money.

Coming back to the 'Inadequate supply of infrastructure' theme, here's something that I found disconcerting.

By way of background, the Report covers three groups of things for each country - the essentials; things that make the country work better ("efficiency enhancers"); and things that enable you to compete in the deep end of the international swimming pool ("innovation and sophistication factors"). Those "efficiency enhancers" are made up of six "pillars", one of which is "technological readiness", and which in turn has seven components. Here's how we stack up (score and relative world ranking).

We scrub up reasonably well on technological readiness overall. Indeed, two of them (9.02 and 9.07) count as relative advantages for us, as we do better on those criteria (11th and 14th internationally) than we do on our overall competitiveness (17th). 

But there's one big exception, 9.06: the size of our physical internet connections to the rest of the world let us down badly. And if you want to see how badly, here are the countries most like us on the criterion of available international internet bandwidth*.

From the point of view of sophisticated economic development, this is not the sort of company we should be keeping.

So my thought is, the sooner someone can lay pipe in competition with Southern Cross, the better.

*Note A fair amount of the Report's data is based on subjective 1 - 7 sorts of scales. Not this bit. The definition (from p543 of the Report) is "International Internet bandwidth is the sum of capacity of all Internet exchanges offering international bandwidth measured in kilobits per second (kb/s)" and the source is International Telecommunication Union, World Telecommunication/ICT Indicators 2014 (June 2014 edition)