Those who follow developments in the Australian internet industry will be aware that many internet service providers and their customers are currently suffering the effects of another 'Telstra price squeeze' in geographic areas of Australia where Telstra holds a monopoly on ADSL broadband services supply.
However, those outside of the internet service provider industry may be understandably unclear on what this is, what it means, and why it matters.
Where this is mentioned, it can be frequently misunderstood by consumers to mean that providers are just ‘crying poor’ or ‘not trying hard enough’ – that it's nothing but an exercise in sour grapes.
It is none of those things.
I’ll try to shed some light, here, on what it does mean.
What is a 'price squeeze?
The genesis of these ‘squeezes’ is typically (as in this case) a decision by a vertically integrated monopoly telecommunications provider (Telstra) to lower its retail ADSL2+ pricing substantially.
Earlier in 2010, Telstra BigPond decided to reduce pricing nationally on ADSL2+ services to a substantial extent.
These reductions sacrificed both Telstra’s income (and its EBITDA) for ADSL2+ services by amounts of around $30 per month in typical cases, and ranged up to even greater reductions on high-end plans.
These changes in BigPond retail pricing were made in response to an extended period during which BigPond was suffering a substantial net outflow of ADSL2+ customers to better offerings from its competitors.
So far, so good! Price reductions are good for consumers, at face value.
However, the real problem here has occurred as a downstream consequence; Telstra Wholesale has failed to appropriately adjust the relevant wholesale access costs for access to ‘ADSL2+ ports and aggregation’, that it charges telecommunications companies (such as Internode) for wholesale ADSL2+ service access in monopoly geographic areas.
The resulting pressure (squeeze) on provider margins places them at an unfair disadvantage in the geographic market areas where the only ADSL2+ infrastructure that exists is that owned by Telstra.
This, in turn, results in a worsening of choice for consumers in those non-competitive areas (which we believe constitute as much as half of the entire Australian population).
By just doing nothing substantial (at the wholesale level), Telstra has reduced competition. This is a subtle but highly effective (and very common) tactic for a market monopoly to use. Inaction creates no overt outcry because ‘nothing happened’.
However, in reality, something major has happened – but it's been done in a subtle manner, through an effective piece of misdirection. Telstra created the price squeeze by the simple mechanism of doing practically nothing in a specific part of their business (wholesale) in concert with their retail price shifts.
The most financially effective tactic for a monopoly to exercise in general (because it is hardest to act against efficiently) is the combination of delay, inaction, and denial, in wholesale access pricing.
This delay begins with a tendency to, in public, profess surprise and a lack of understanding that there is any real problem, peppered with the odd pieces of misdirection related to quoting pricing for other, unrelated, wholesale services as if they are the solution – when they are not.
The longer this unfair situation can be maintained, before justice is done, the greater the financial and market gain advantages for the monopoly.
A price squeeze creates an invidious choice for competitors, who are (naturally) motivated to want to offer services on a consistent basis to all of their market – but who are no longer able to do so.
On the one hand, they can decide to lose money hand over fist to retain their customers in monopoly areas (and risk becoming a memorial to Compass Airlines by repeating their history).
On the other hand, they can charge a retail price in these monopoly areas that is based on their (unfairly high relative, to BigPond) wholesale input costs.
In doing so, they naturally risk the loss of substantial parts of their customer base by having it ‘siphoned’ into 24 month contracts with Telstra – the very same entity maintaining the unfairly high wholesale pricing!
It is not much of a choice, and the losers here are ultimately consumers, whose choice of broadband ADSL2+ services at an equitable retail price in monopoly areas is unfairly impacted by the squeeze in wholesale pricing that creates a reduction in competitive retail choices.
Examination of market pricing at this time makes it clear that competitors are generally choosing the second option, and are now offering differential pricing to the market.
This means, specifically, that they are offering higher pricing – above that of BigPond – outside of competitive areas, contrasted with far more competitive pricing and offers than BigPond in competitive geographic areas.
It's worth noting, in passing, that in examining the market, it is very important not to confuse the ‘competitive terrain’ offers of retailers with the offers available in monopoly areas. The understandable tendency is for retailers to advertise only their best pricing, not withstanding that it is not available in monopoly areas.
It is important to appreciate that Telstra has form with this kind of tactic, most recently in 2004, when an extremely similar situation developed and was worked through by the ACCC and the industry.
The ACCC took action in 2004 under the Trade Practices Act, including the issuing of a 'Part A Competition Notice'. This notice, and the related ACCC investigations ultimately led to Telstra acknowledging the price squeeze and modifying its wholesale access pricing to restore fair and equitable industry competition to the market.
A very approachable summary of the 2004 price squeeze can be downloaded here as a PowerPoint presentation.
Back to 2010, and Internode (and other retail providers including iiNet) have raised fresh complaints with the ACCC (and, of course, directly with Telstra) about this repeat of the same conduct seen in 2004.
This is an ideal time for Telstra to use the price squeeze to regain market share and to siphon customers into its retail ranks, ahead of the building of the NBN.
It is also important not to confuse this situation with a slanging match over which competitive providers have built more of their own ADSL2+ DSLAM deployments. The unfair conduct by Telstra is the conduct that is occurring in the market areas where it is not economically feasible for any competitor to construct ADSL2+ deployments at all (and where none exist as a result).
Below are the consequences of the ADSL2+ services realm now being split into two distinct marketplaces:
1) In geographic locations where consumers have access to competitive ADSL2+ provider infrastructure, there are a variety of service choices available (including from Internode) that are far better value than the revised BigPond plans. Competition is present, and consumers win.
2) Where consumers only have access to ADSL2+ services via Telstra owned port infrastructure, this price squeeze is a severe and constraining factor that denies them access to competitive alternative services at competitive pricing.
In effect, until the price squeeze is resolved, consumers in those ‘have not’ regions have had the last price reduction they’ll ever have. Meanwhile, competitive regions will see continued progressive value improvements into the future, as a natural function of a normally competitive marketplace.
Right now, we're in an interim period where various things are happening at once:
– The ACCC is working through our complaint (and the complaints of other industry providers). This is a detailed and complex evidence gathering process, due to the ACCC being required to give Telstra every avenue of reasonable doubt. However, the precedent from 2004 is very clear and we reasonably expect (and we urge) the ACCC to take comparable action this time.
– As a part of our formal complaint, we (and others) are also arguing to the ACCC that access to these services should be 'Declared'. Declaration is a competition enhancement process under the Trade Practices Act that (if adopted) would allow the ACCC to make binding determinations on price and non-price aspects of these wholesale services more directly than can otherwise be done.
– The market is continuing to 'negotiate' diligently and in good faith with Telstra Wholesale (despite the relatively artificial nature of such 'negotiation' in a monopoly market).
Like all previous price squeezes, justice will ultimately be done.
The fact that Telstra is apparently not prepared to resolve this situation without being compelled to do so underscores precisely the reason why the laws concerned here matter so much.
This situation also underscores that a key and critical requirement for the future National Broadband Network, in whatever form it takes, is that there is an ironclad legal requirement that the NBN Company must only be a wholesale provider – that it must not directly offer retail services to consumers.
This price squeeze (and the fact that it isn’t the first time), serves to demonstrate that any vertically integrated entity will ultimately decide to disadvantage its own wholesale customers to advantage itself – any time it can get away with it – and often despite the provisions of the Trade Practices Act that should function to protect against that outcome.
As a result, it is clear that the only permanent solution to prevent this form of issue occurring again and again is the structural separation of Telstra.
It remains very disappointing that one major side of politics has failed in its promise to force this outcome, and the other side of politics claims (despite this obvious evidence to the contrary) that this separation is not even necessary because the current system ‘works’.
No, it doesn’t. The current system is badly broken. And consumers are the losers.
This is abstracted from a longer blog posting from the author here.
Simon Hackett is one of Australia’s best-known technology entrepreneurs and managing director of national broadband trailblazer Internode. http://www.businessspectator.com.au/bs.nsf/Article/Telstras-price-squeeze-must-end-pd20100930-9RUA5?opendocument&src=rss