When Regulation goes too far

It’s common debate when in discussion about Telstra, that they claim regulations prevent Telstra running a business the way they wanted to.

But, when you dig into these deeper then getting your toes wet, you generally find that the regulations are designed to protect consumers from any activity deemed to prevent competition entering the market. Competition must be able to be anyone capable with the financial backing, etc, to get into the action, and market itself (so it can’t just be old Joe down the road claiming he wants to wholesale services to him and his neighbour over the road).

So, what I then think about is, where is the line drawn between, regulating so competition can enter the market, and regulating, to a point where Telstra is at a significant disadvantage (and the competitor has too much of an advantage).

Regulations are designed to allow efficient companies to get off the ground and fly straight, and should be able to compete alongside Telstra. This should realistically work, because the competitor would have a ‘smaller’ advantage, in that they aren’t taking 30 minutes to get a hold of, or they have someone answering the phone, and not employing a computer to do that, some people WANT that, others just want the cheapest price.

Regulations protect the competitor from being locked out of the market, such as, let’s say a competitor wanted to sell a DSL service to a customer, the competitor needs access to the copper line into the customer premises, and a DSLAM port, as deploying those in this day and age is uneconomical, and expensive.

It’d cost a lot to dig a ditch from the customer house, through to your office perhaps, so that you can supply the customer a service, as there is already a copper line running from that customer.

So, Telstra already has copper there, and it has been deemed unreasonable for competitors to roll out duplicate copper networks. Regulations ensure competitors can get access to that copper wire from Telstra, at fair and reasonable prices.

The price paid by competitors for access to  a complete line, where Telstra provides no service, is around $14.40 Р$17.70. On that same line, if the customer had a basic home service, Telstra would only be getting $19.95, so the reduce price is somewhat (but not entirely) reflective of the additional costs of providing what Telstra would otherwise be providing.

Essentially, a near written law on wholesale products is the wholesale price must be cheaper than the retail price. The reason for this is because the wholesale price is lower, as the purchaser of the wholesale service generally has additional costs in preparing the service for customer use, and staff costs, business costs to cover.

The essential idea in resale based competition is that the prices should come out somewhat close together, and companies compete on service, or lowest price, for the consumer.

In facilities based competition, it’s very similar to resale, however, the prices can vary, just as the products can.

Regulation is going too far, when regulation tries to make it very easy for competitors to simply resell a service rather than invest and supply their own services on their own infrastructure.

It is indeed in the national interest to increase facilities based competition, as the nation as a whole benefits in many ways from it. Facilities based competition needs to be attractive to the competitors who are proposing to compete, that is, they must find it cheaper to use their own infrastructure, to make a bigger profit, then would be possible off resale based access.

Recently, it was raised that the backhaul from Telstra exchanges to capital cities in many regional and rural areas is accessible only via Telstra, so they do indeed have a monopoly on some routes of backhaul from some areas.

Competition of the resale sort isn’t affected at all by any issue with that, as the products are sold with backhaul billed differently, the backhaul is billed at an aggregate price, regardless of where the data comes from.

On the flip side, when you place your own equipment in exchanges, you must arrange your own backhaul for getting that data back to where it counts (literally), that is your ISP datacentre, so that the customer on the line can access the internet for example.

That backhaul is in question, costing 20 times more than where competition exists.

I’m conflicted here in my thoughts however.

Part of me thinks, it should be regulated, access over that backhaul should be metro comparable as possible. It’s disadvantageous, and goes against one Telstra hypocritical comment about competitors leeching off Telstra, and should get their own, then they whinge about duplication.

The backhaul in some sense needs to be as cheap as possible, so might deserve being declared and tight price controls placed on it.

The other part however thinks, well, the price is that high, maybe someone can bring another cable through, and use that to supply services at less then the 20 times higher rate that Telstra would want.

The counter argument here is, the moment that expensive cable is put in place, then, Telstra drop price to near the same level, defying the point of putting the cable in place anyway (and making it near impossible to recover the cost of the cable deployment).

So, it’s a very conflicting situation. The price needs to be high enough for competitors to see that investing is a smart move, but then, they can’t invest blindly, without customers, and they can’t invest without certainty that Telstra won’t cut them out of the market by dropping price (the only reason the cable will be installed).

The demand is an issue so to speak for cable investment, if there were plenty of demand for fibre backhaul in an area, installing it would be easy enough as locking prospect demand into long term contracts to get the return on the cable.

The supply then becomes an issue, because supply can’t be supplied without demand.

So, the backhaul certainly probably should come down, to near reasonable levels, so that investment still looks attractive if demand starts to spike and competitors don’t get lazy, but not too expensive, that it affects investment in DSLAM installation.

The regulation goes too far, when it is best for a competitor to simply resell then invest.

Enjoy!

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