Many readers may not be aware, but behind the noise and drama of the NBN in the daily mainstream media headlines, the ACCC is quietly running a wide ranging Market Study on the telecommunications sector .
The study commenced in 2016 and is likely to be finalised in 2018. It is now coming to the pointy end with a draft paper expected from the ACCC over the next few months. So I thought I would see what has transpired over the last 12 months in anticipation of what could be next.
Industry participants have contributed to this study by written submissions and attending an ACCC hosted stakeholder forum in July 2017.
I was intrigued to see some of the positions being put forward by NBN Co for the ACCC to accept. No wonder the rest of the industry, the industry NBN Co relies on as customers for its wholesale services, is sounding more and more annoyed about a future dominated by NBN Co.
Here is what I was surprised to find.
Is NBN Co a monopoly with a substantial degree of market power?
NBN Co apparently thinks not.
To quote directly :
“nbn faces direct competition from existing network operators that are extending and upgrading their networks with the fixed line footprint and from new entrants. In new developments, nbn faces competition for the market (ie. contestability) for the build and operation of superfast broadband networks.
[NBN Co] faces direct competition from a range of other networks (including fixed and fixed wireless) which provide a degree of competitive constraint. As a result, in many areas and facets of behaviour nbn would not be considered to have a substantial degree of market power.”
In particular NBN Co claims that mobile and fixed wireless broadband operators (of the latter in particular Superloop through its acquisition of BigAir) are competitors that will provide “competitive constraint”.
The message is clear. NBN Co says it is not able to act as a monopolist that will charge high prices and ignore customer demands. It has sufficient infrastructure competitors that will keep it in check and ensure it acts efficiently and effectively.
Given the recent publicity about high prices and customer service problems it seems the RSPs and end users should stop their complaining and just shop around for a better deal! I am not sure they would agree it is all so simple.
Are RSPs competing vigourously in downstream (ie. retail) markets?
Again NBN Co thinks not!
To quote NBN Co again :
“It is worth noting that despite claims of reduced margins there are no instances of failed firms or firms that are unprofitable. This suggests that existing downstream RSPs were previously earning economic rents and have capacity (at least in the short term) to absorb reduced margins.
The present market structure is suggestive of market power being held by the large RSPs and this current market structure is likely to be of material concern to new entrants and smaller RSPs, whose commercial operations could be adversely affected by the behaviour of the large RSPs.”
NBN Co also highlights that :
“Australia’s entire competitive backhaul infrastructure is controlled by vertically integrated firms which compete in downstream retail fixed line broadband markets. This market structure… raises the potential for margin squeeze, in which vertically integrated upstream firms with market power seek to earn abnormal profits by raising their upstream prices”.
In effect, NBN Co is saying that the shareholders of Telstra, Optus, TPG and Vocus should not be complaining about the NBN squeezing their margins (the cause of recent share price falls), rather these four “backhaul oligopolists” are raising prices to the detriment of new entrants and bolstering their profits through economic rents.
Does NBN Co need more degrees of freedom to operate?
Rather than being constrained by its non-discrimination obligations, NBN Co expresses a strong desire to “maximise demand via differential pricing and service offerings that best meet their customer needs”.
“Under the existing regulatory framework, different RSPs face different incentives and have varying abilities to duplicate and bypass the nbn network. To the extent that duplication of natural monopoly infrastructure may be privately profitably but socially inefficient, it is not in the long term interest of end-users that nbn be restricted, by its regulatory framework, from being able to respond to the threat of duplication of its network.
An efficient and commercially rational network operator needs to be able to price its services to create efficient build/buy decisions for relevant industry players. This is particularly important in nbn‘s case, where competing infrastructure is owned by vertically integrated operators who can leverage their presence in the retail market”
Clearly NBN Co is not satisfied with the regulatory interventions made by the ACCC after the advent of the Multi Technology Model that seeks to level the playing field between NBN Co and alternative infrastructure builders. It wants to be able to discount its pricing as well in certain areas and to certain RSPs in order to respond to the “threat of duplication of its network”.
But pricing is not the only lever on NBN Co wish list. It also wants to broaden its product portfolio.
“In this regard, there is simply no justification for ‘legacy’ thinking that contends that nbn should be precluded from competing with private investments, developing products other than last mile connectivity services or seeking the custom of parties other than traditional RSPs. As nbn faces direct competition and is required to operate as a commercial entity, nbn must be able to respond accordingly within appropriate regulatory settings.”
In the market for business services NBN Co says :
“[it] faces competition from vertically integrated unregulated service providers, [and] is placed at a significant disadvantage. This detracts from the long term interest of end-users and reduces social welfare in various respects, including that it :
- encourages potentially inefficient duplication of natural monopoly infrastructure; and
- dampens nbn‘s commercial incentives to invest in, and develop, business services.”
Inefficient duplication of natural monopoly infrastructure in the market for business services? This takes the cake! In most cases NBN Co is competing against existing well-established fibre infrastructure deployed by the private operators (Telstra, Optus, TPG and Vocus) over the last 20 years. NBN Co is actually the company doing the duplicating here!
NBN presumably wants the monopoly protection regulations the ACCC has implemented on its behalf in the residential and small business markets to be extended so that it can use these protections to change an efficient functioning market into one more suited to NBN Co’s wholesale market monopoly preferences.
To put it all together, it seems NBN Co is wanting the ACCC to accept the following :
- NBN Co does not have monopoly powers, rather it is constrained by competitive wholesale infrastructure providers.
- The larger RSPs have been rent seekers all along and they are now not suffering a margin squeeze but expanding their margins by raising the prices of wholesale backhaul services sold to smaller RSPs.
- NBN Co needs to be given more freedom to compete with the RSPs in terms of more products and discriminatory pricing against RSP infrastructure builders.
- RSPs with established networks servicing business customers directly should be regulated like NBN Co so that NBN Co can build its own duplicating infrastructure to compete more effectively with these established networks.
These are amazing positions to take in a submission to the ACCC on the industry’s future.
Clearly it seems to be a future with NBN Co at the centre of everything.