Re: Lessons from the AU model

[Tom Vest <tvest () eyeconomics com>]

On Jan 21, 2008, at 6:50 AM, Roderick Beck wrote:

> I didn't find that very convincing. Overspending on infrastructure  
> does not force prices up or raise long term costs.
>
> Excess capacity leads to prices falling in telecom and every other  
> market.
>
> Basic economics.

Maybe we should go a little more basic still...
In the absence of competition (and esp. in the presence of risk of  
empowering competitive entrants), supply has no general/necessary  
effect on prices at all.
So excess capacity of a product that is completely monopolized (or  
priced by cartel fiat, ala OPEC or SC) is largely irrelevant.

On the other hand, in the specific case of Internet access (retail or  
wholesale level), prices have a huge impact on demand -- that's  
called "price elasticity".
Given the absence of any mechanism to reveal "natural" prices or  
"actual" demand, how does one know whether/how much "excess capacity"  
there is anyway?

> I'm sure the Americans are experiencing excess capacity right now  
> in housing ... :)

American construction / real estate investors and speculators are  
certainly experiencing excess capacity in the most extreme way, but  
that's because the fully loaded price of housing has gone up a great  
deal (and/or, the actual price point is finally being discovered/ 
revealed) -- at least for the credit-challenged market segment that  
was the primary engine of demand behind the recent boom. For them  
especially, lending terms have deteriorated tremendously. Now general  
interest rates are falling again, but credit requirements are  
tightening so much that, for many in that group, credit will not be  
available "at any price".

If that seems counterintuitive, think Japan between c. 1993-2005:  
huge "excess capacity" in real estate, inflation-adjusted interest  
rates at zero or below, and yet (or perhaps "as a consequence") no  
one buys, because the banks refuse to lend...

Come to think of it, our sector has been struggling with its own  
roughly similar terms-of-exchange crisis since about 2004-2005...  
arguably driven by very similar prior circumstances as well... worth  
investigating a bit further perhaps...

TV

> Sent wirelessly via BlackBerry from T-Mobile.
>
> -----Original Message-----
> From: Tom Vest <tvest () eyeconomics com>
>
> Date: Mon, 21 Jan 2008 01:10:16
> To:Geoff Huston <gih () apnic net>
> Cc:Matthew Moyle-Croft <mmc () internode com au>, Randy Bush  
> <randy () psg com>,       Andy Davidson <andy () nosignal org>,        
> Andrew Odlyzko <odlyzko () dtc umn edu>, nanog () merit edu
> Subject: Re: Lessons from the AU model
>
>
>
>
>
> On Jan 20, 2008, at 11:14 PM, Geoff Huston wrote:
>
> > Matthew Moyle-Croft wrote:
> > > > Southern Cross cost some US $1B to construct about a decade ago
> > > RFS was Nov 2001.  They full paid the debt from a US$1.3B cost of
> > > construction in Oct 2005.
> > > (see http://www.southerncrosscables.com/public/News/newsdetail.cfm?
> > > StoryID=14)
> > > So, they're making some VERY decent money out of the duopoly with
> > > AJC.
> >
> > Yes, that exercise managed to weather the slump in prices a couple
> > of years back when supply far exceeded demand, and then exploit
> > their excellent technical position when demand picked up and
> > translate that position into good revenue streams that appear to be
> > well above initial construction and ongoing operational costs.
> >
> > I don't believe AJC has had a similar story, but others may know
> > more here.
> >
> > > Hence why Telstra's building their OWN cable to Hawaii.   It's
> > > cheaper to build than buy!
> >
> > My comment is that its generally more complicated than that, and
> > from a sufficiently distanced view overspending on infrastructure
> > forces up prices as much as underspending. The only real revenue
> > stream to fund this infrastructure comes from this pool of 24M folk
> > living at the bum end of the Pacific Ocean. Paying for a large
> > number of underutilized cable projects does have a higher total
> > recurrent cost than would be the case of there were efficient
> > sharing of a smaller number of cable projects, and ultimately its
> > consumers who fund this inefficiency in supply. So sometimes
> > competition provides natural incentives for cost efficient
> > investments, that ultimately benefit consumers, and sometimes
> > competition gets it wrong and over-invests because the actors
> > cannot resolve their individual requirements in ways that result in
> > efficient sharing of common venture infrastructure investments, and
> > in such cases the consumer ends up paying for the inefficiency in
> > infrastructure investment. So sometimes it is cheaper to lease than
> > construct, and sometimes its not.
>
> For anyone who has the opportunity and inclination to truly
> monopolize an isolated market, the "best" price to sell critical
> inputs to a potential competitor is certainly (infinity) -- and if
> the input is fungible, then *everyone* is a potential competitor.
> Sure your market grows less/more slowly, and your near-term revenues
> are lower -- but you have an untroubled eternity of guaranteed
> revenue/profit to console you.  Building new facilities, even
> terrifically expensive and completely redundant ones, will cost less
> than (infinity) -- so of course this makes perfect (if utterly crazy)
> sense.
>
> (and yes, since oceans are not the only features that impose large
> multipliers on facilities construction costs, this is still a fairly
> common situation in the world)
>
> However, it's not just "consumers" who are paying the price; it's
> also every other producer in the economy. So if the bottleneck
> exploiter is not generating as much or more jobs, innovations,
> private investments, taxes, and other returns to the general economy,
> compared to the amount that were foregone (never created) by every
> other productive endeavor in the market, then it's the economy as a
> whole, present and future, that's paying the price.
>
> > Here endth the Nanog lesson in economics from me ( :-) )
> >
> > My only point in entering this thread was to make the observations
> > that the lessons from the AU model may not be very generic - small
> > isolated communities often have a unique set of constraints for
> > investments in communications systems and that often results in
> > different industry structures, different relationships between the
> > actors and often results in different pricing structures in the
> > consumer market. I'm not sure that I'd be confident in generalizing
> > this particular history into anything more generic that would apply
> > to other communities in other parts of the world.
>
> (My anti-fatalist rant)
>
> This all seems pretty straightforward -- except of course that you,
> we, and presumably the A-Cs and other fairly observant people can
> make similar observations, and perhaps even arrive at similar/shared
> conclusions. Given that, and the potentially extreme/enduring costs
> (i.e., for everyone but the bottleneck exploiter) borne by everyone
> who happens to get stuck in the wrong kind of market, shouldn't we
> look for other, more practical lesson(s) as well?
>
> TV