Finally, NBN Co agree to talk with me

Today I met with Matthew Lobb (NBN Co Senior Advisor, Industry Engagement) and Jamie Chard (NBN Co Architect) at the NBN Co Sydney office. Fundamentally I wanted to discuss the concerns that I had been raising since February this year around their planned Point of Interconnect (PoI) models and their planned QoS implementation.

Almost the entire hour and a half available was spent addressing the concerns I had raised regarding their planned PoI model and how it could damage competition and harm local communities. Regular readers will be familiar with these concerns, as I’ve raised them before in my initial feedback to their industry engagement and also in my feedback to their summary feedback. For those of you who are not, a quick summary of what I briefed Matthew and Jamie on is:

Both NBN Co and the KPMG/McKinsey Implementation Study have made the poor assumption that the Point of Interconnect (PoI) model must be implemented as a mutually exclusive one, especially for regional and rural areas. This means that areas that have no “contestable backhaul” will not permit local interconnect. Their justification for this position is based on an operating principle they defined, “leveling the playing field” which was derived from the Australian Government’s own “improved competition” objective.

What is meant by a “level playing field”?

The term “level playing field” is more colloquial than technical. However, what’s worse is it has been used in numerous contexts since its inception, each with their own different interpretations ranging from handicaps, subsidies and taxes all the way through to equal opportunities, fair rules and open access policies. It is unfortunate that the term lacks a formal definition and is so heavily and semantically loaded; because it admittedly sounds noble and good. And I suspect that it is because of this, that it has been used widely when discussing the NBN, albeit at times with a very inappropriate interpretation.

So how does a simple interpretation possibly affect the health and performance of a competitive market? Well, there have been several recent studies aimed at examining exactly the impact on competitive markets that the application of policies and incentives based on differing interpretations of “levelling the playing field” can have. Many of these studies concluded that if the resulting policies are aimed at ensuring “equal opportunity”, “fair access” and the removal of any “discriminatory practices” then often a “open, fair, healthy and competitive marketplace” evolves. Thus delivering the benefits of increased consumer welfare and increased output efficiency. However, if the resulting policies are aimed at “leveling the outcomes”, by “flattening prices”, either removing or masking the ability for market players to differentiate from one another and/or to leverage strategic advantage, then the end result is actually a loss of healthy competition (see references below). Thus failing to deliver increased output efficiency and improved social welfare. This is the interpretation currently adopted by NBN Co and the Implementation Study and this highlights just how dangerous it can be to apply the loose concept of “levelling a playing field” without fully understanding the implications such actions or decisions based on particular interpretations may have on the evolution of a truly competitive market.
To support my argument I referred to the following sources:

“Equal rules or equal opportunities? Demystifying level playing field”, Marja Appelman, Joeri Gorter, Mark Lijesen, Sandar Onderstal and Richard Venniker, CPB Document, No 34, October 2003.

“The myth of the level playing field: Knowledge, affect & repetition in public debate”, Jeremy N. Sheff, St. Johns University, 2009.

“The myth of the level playing field”, Sam Bostaph, The Future of Freedom Foundation, 2005.

“Economic effects of ‘leveling the playing field’ in international trade”, Alan V. Deardorff, The Journal of International Trade & Economic Development, Vol 19, Issue 1, March 2010 pp9–32.

Now, to fix this, you simply make the focus of any policy actions towards ensuring an “open, fair, healthy and competitive marketplace” rather than on colloquial interpretations which aim to remove opportunities for players to compete and differentiate.

After this, I went on to discuss my preferred alternative to their mandated approach, which is both simpler and better. That being; to offer both PoIs concurrently. This option is further enhanced if you also leverage my recommendations for addressing the backhaul monopoly situation as well. I argued that such choices are vitally important to support innovation through a healthy and competitive marketplace, which really is the only type of market that we know works.

How do you promote innovation”?

Innovation is fostered by enabling choice and control. Because of this, NBN Co should never take any unnecessary actions to exclude or prejudice other market players. Rather, they need to ensure that they allow the market to have choices and control over those choices. Then each player can build their business model around various (hopefully innovative) choices that they can make when acquiring customer connectivity. I explained that if you restrict choice and flexibility, then of course you restrict innovation and hence competition outcomes. I also provided them with evidence that backed up this position, such as:

Jeffry Phillips, VP OVO discussing Andy Cohen’s book “Follow the other
Hand”, note that “Evaluating a new product or service based on the choice
it offers and control it provides helps improve the success of a new idea.
These factors reduce the risk of adopting the innovation by offering more
choice or simplifying choice, and by offering greater control over the solution.”

Scott D. Anthony, Erik A. Roth & Clayton M. Christensen “The Policymaker’s Dilemma: The Impact of Government Intervention on Innovation in the Telecommunications Industry”, 2002, define one of their key and basic assumptions as “Truly free and fair competitive markets are the best mechanism to encourage and facilitate the process of innovation. These markets provide innovators with the least inhibited access to necessary resources (e.g., capital, raw materials and talent) and the most potential to reach target customers. Additionally, we believe that market incentives for innovators to pursue new growth opportunities are strongest in a competitive market. In fact, we believe the likelihood of disruption, the most dramatic form of innovation, increases substantially within competitive markets.”

Alan Fels, ACCC contribution to OECD “ABUSE OF DOMINANCE AND MONOPOLISATION” (OCDE/GD(96)131) notes a number of mechanisms used in Australia to identify anti-competitive and hence anti-innovative behaviour including testing “whether the conduct adversely affects consumers of the goods or services in terms of price, quality, availability, choice or convenience and whether it has impaired competition in an unnecessarily restrictive way”.

I explained that the position taken by NBN Co to restrict PoI locations to a single fixed location, was unnecessarily damaging. There is no real commercial or technical justification for limiting the choice of PoI in this manner. I emphasised that offering product modularity and choice benefits natural market dynamics, whilst having marginal impact on systems complexity and minor impact on node complexity (where the benefits gained by NBN Co in deploying a simplified cabinet configuration that avoids interconnect is not counter-balanced by the potential damage it causes to the general marketplace).

And in closing I recommended that NBN Co change to offer a regulated, uniformally priced PoI service, completely uncoupled, at every Fibre Access Node (FAN) via a co-located Ethernet Aggregation Switch (EAS). In addition, if the primary FAN PoI does not have “contestable backhaul” (meaning 3 or more independent backhaul providers), then NBN Co should additionally be required to offer a bundled service, which would include a variable backhaul component and would be delivered as a PoI at the geographically nearest Fibre Service Area (FSA) FAN that is considered to have “contestable backhaul”. I noted that such an approach dovetails nicely into both the Access Provider of Last Resort and Connectivity Provider of Last Resort USO requirement (although it still does not address the complete USO, as more is necessary: namely an additional backhaul and a network service component).

Closing off:
At this point we ran out of time. That was ok though, as I had no intention of freely consulting for the much more complex QoS models anyway. Interestingly, Jamie indicated that my arguments were persuasive and that NBN Co would now run off and do some further analysis to see if my arguments really do hold up.

Great I thought, so of course I asked: “how can I engage more directly with NBN Co to help identify and resolve these sorts of issues earlier and address my concerns around their QoS design”?

The reply: “thank you, we value your input and we’ve take your arguments on board, we know you’ve got some good ideas now, so we’ll just keep an eye on your blog and we’ll call you if there’s anything we want clarified”.

My reply: “I would prefer a more direct engagement and involvement, as the current engagement is not very efficient. I wait for you to publish an opinion and then I submit a detailed response…”.

The closing reply: “thank you, but we’ve got everything under control and don’t really require your assistance”!

Later that day I think to myself, “Wow–most businesses consider risk reducing investments as good investments, evidently not this one…”