Re: Lessons from the AU model

[Tom Vest <tvest () eyeconomics com>]

On Jan 21, 2008, at 6:10 PM, Mark Newton wrote:

> On 21/01/2008, at 10:49 PM, Tom Vest wrote:
>
> > 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.
>
> It goes a bit deeper than that when the monopoly can compound the
> problem my artificially constraining capacity by underspending on
> infrastructure (e.g., only lighting one pair on a multi-pair cable)
>
> So infrastructure spending can (and does) affect the price.

Hi Mark,

So you're saying that if a cable owner/monopolist simply lit another  
fiber pair, that would cause them to reduce prices?
This mistakes a contingent symptom or tactic or mechanism -- i.e.,  
the intentionally misleading public explanation ("we're sold out") --  
with the real cause/strategy/motives behind "artificially" high  
prices...

> We get that every day in .au (Transmission on the monopoly route
> between Melbourne and Hobart costs 3 times more than transmission
> between Sydney and LA;  and other potential cable operators have
> always known that the monopoly has an excess of supply hidden away
> somewhere which they can roll out at bargain basement prices if
> a competitor ever arrives in the market)
>
> > [ housing ]
> > 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...
>
> I think the dominant factor that the American internet sector has
> been grappling with goes back further than that.  It has its origins
> in the dot-com boom, when lots of people who didn't have any real
> money rolled out enormous infrastructure buildouts.  When they
> inevitably went broke their infrastructure was bought at cents in
> the dollar, enabling the current generation of Internet companies
> to behave as if the infrastructure they're using was a lot cheaper
> than it really is.
>
> So hardly anyone has been selling below cost, but almost everyone
> has been selling below replacement cost.


This makes perfect sense for resources that are not subject to  
"multiplexing effects" -- esp. unanticipated (undiscounted)  
multiplexing effects.
Put it this way: how would you define (much less calculate)  
"replacement cost" for an asset whose financing was predicated on a  
useful of capacity of (x), but which, with fractional additional  
investment relative to the original outlay, can be leveraged to  
deliver (x)^4-n capacity -- with n yet to be determined? Must every  
increment of the now vastly larger resource be priced as it would  
have been assuming the "original" max cap? How much must the  
"replacement cost" replace? The original (x) capacity? The as-yet  
indeterminate (x)^n capacity? The originally anticipated/full  
scarcity-based/monopoly-backed profits?

> So everyone can extract profits for years, making out like bandits  
> as they grow in to the
> excess capacity that was installed between 1999 and 2001, and they
> won't have a day of reckoning until they run out of capacity and
> find that they haven't been earning enough from their networks to
> service the debt they're going to need to take out to perform the
> next round of infrastructure upgrades.
>
> Example:  You cannot seriously expect me to believe that the price
> of transatlantic connectivity actually reflects the cost of laying
> cables across the Atlantic.  It defies common sense that a Gig-E
> tail from NYC to London is priced within an order of magnitude
> of a Gig-E tail from NYC to Boston.

Once you get acquainted with the power of that ^n, you'll believe ;-)
Unfortunately, your location gives you few opportunities to  
familiarize yourself.

> Metered charging systems are, to me, evidence of a realization that
> the business model underlying much of the Internet's last five years
> is unsustainable.  You guys might think they're a novel and
> unwelcome arrival at the moment, but give it a few years and we'll
> see what happens :-)

If fine-grained metered pricing comes to the rest of the world, it'll  
be because people roll over for it (you guys weren't given a choice).
If/when that happens, I'll be lobbying my local gov to turn over the  
water infrastructure to me so I can replace it with
household Evian vending machines; and I'd recommend you all get in on  
the ground floor in the air market ASAP.
Better be quick though, because the revolution will be just around  
the corner...

TV