Sorry for the lack of posts and updates to my econ blogs ranking in the past week, I was away at the EARIE conference for this year.
At the moment I live in Japan and my options for Internet access are many. At home I subscribe to a VDSL service that is basically provided by NTT but resold by another company. For around 4,000 yen per month I can buy a nominal line speed of 100Mbps, with no restrictions on usage, except that I can’t run a web server or things like that. My connection uses the regular phone line into my house, although I don’t actually subscribe to a phone service. As well as VDSL, there are ADSL services available from NTT and other providers, plus there are two or three cable TV companies that can provide Internet over their networks, and there are three 3G mobile networks that will provide (somewhat slower) access at reasonable cost. In short, there’s plenty of competition based on multiple physical networks. This is because the density of population makes it viable to build multiple access networks that can compete. In addition I think there is regulation that allows ADSL providers to piggy-back on NTT’s phone network into each house.
In contrast, I came from New Zealand where the population is low and not very dense. Cable TV basically doesn’t exist, and almost all houses have their phone line provided by Telecom, the New Zealand equivalent of NTT. It is possible to get an Internet connection using a 3G mobile network in many places, and there are some other providers for businesses in cities. But the market size and geography simply won’t support the level of infrastructure-based competition that exists in Japan.
One of the interesting challenges that New Zealand faces in this situation is promoting investment in new telecommunications technologies. The fastest available residential connections are basically ADSL running at speeds around 8Mbps or less. Next-generation services like VDSL at 100Mbps, as I have in Japan, require significant additional investment. Since it’s only viable to have a single fixed-line access network, the problem is how to get this investment without ending up with high monopoly prices.
In the past, New Zealand’s regulatory approach was one of ‘light-handed regulation’ in telecommunications. The basic idea was to leave the market be, and if it wasn’t working well, step in with regulated controls later. However, such an approach creates a problem for investment in new technologies. The problem is that such investments are risky at the outset, and it’s not exactly known whether they will be unprofitable, moderately profitable or very profitable. Furthermore, after the investment has taken place, it’s hard to tell whether high profits are simply a risky investment that paid off well, or the result of monopoly power.
In this scenario, if the regulator errs on the side of finding market power, he will tend to regulate prices down and reduce profits in a high-profit outcome. From the investor’s point of view, this reduces his returns in the case that his investment pays off nicely, and makes him less willing to undertake the investment. Put another way, this type of regulatory regime itself increases the risk of the investment, making it less likely. In a worst-case scenario the investment won’t be undertaken at all. That’s bad because even a service provided at a monopoly price is better than not having the service at all.
An alternative approach is to recognise the reality of the situation: The market won’t support extensive competition with multiple networks. Therefore, the need for regulation could be acknowledged at the outset, rather than leaving regulation as a backstop. This doesn’t mean that prices should necessarily be fixed by the government in advance. Rather, the terms of regulation could be specified in advance, to reduce the regulatory uncertainty of the investment. Such potential regulation should also acknowledge the risk involved with the investment at the beginning. After an investment has turned out to be successful, it is easy to underestimate the actual risk that was taken, but higher risk deserves a higher return if it pays off.
To me, it seems that this issue needs further investigation. In a dynamic situation of technological change, and in a small market where infrastructure-based competition is not viable, what is the optimal regulatory regime? Let the market work first and regulate later if necessary? Or specify some kind of regulatory position first? It would be interesting to see the exact factors that drive the choice of regime.
