Like what you've read?

On Line Opinion is the only Australian site where you get all sides of the story. We don't
charge, but we need your support. Here’s how you can help.

  • Advertise

    We have a monthly audience of 70,000 and advertising packages from $200 a month.

  • Volunteer

    We always need commissioning editors and sub-editors.

  • Contribute

    Got something to say? Submit an essay.


 The National Forum   Donate   Your Account   On Line Opinion   Forum   Blogs   Polling   About   
On Line Opinion logo ON LINE OPINION - Australia's e-journal of social and political debate

Subscribe!
Subscribe





On Line Opinion is a not-for-profit publication and relies on the generosity of its sponsors, editors and contributors. If you would like to help, contact us.
___________

Syndicate
RSS/XML


RSS 2.0

Telcos reciprocate and market is a net winner

By Nicholas Gruen - posted Tuesday, 20 November 2012


Economists usually hate monopoly. But one of last century's most flamboyant economists - Austrian finance minister turned Harvard professor, Joseph Schumpeter - thought it indispensable to economic progress.

Here's his argument: Companies innovate to capture some fleeting market power with innovation until their competitors catch up. But they can't innovate without funding research and development. And doing that requires them to use what monopoly or market power they have by raising prices above production costs.

In economists' models, ''perfect competition'' involves a multitude of companies disciplining each other so all are forced to take the price at which any are prepared to sell - the cost of production. But Schumpeter argued that this wasn't just an unearthly ideal type that can never exist (in economists' models, perfect competitors all exist in a timeless steady state with identical skills, technology and expectations). He argued that, even if it were possible it wasn't desirable, because perfect competitors are so busy competing they have no margin to fund innovation.

Advertisement

If Schumpeter showed us the upside of monopoly, there is (alas), a mighty downside. Even if they've won their position from past innovation, even if they're competing against others, large incumbent companies often become conservative and lazy.

Where fixed R&D costs are high enough - in pharmaceutical innovation for instance - perhaps we still can't do without large monopolistic companies. But for a few decades now we've been running an experiment between two uses of our telecommunications infrastructure: The telephone network in which a few large companies are what economists call ''monopolistic competitors'', and the internet, which offers a close approximation to perfect competition. And the results are compelling - and fascinating.

The global phone network and the internet are both built around the need of service providers in the system - a telco such as Telstra or an ISP such as iiNet - to sell their customers access to others on the global network. They typically agree to reciprocal handling of others' incoming traffic in exchange for others' handling their outgoing traffic. But even though phone network technology is largely digital, its whole architecture reflects its ''analog'' history.

Just as Alexander Graham Bell built it, the phone network must make connections between phones before a call takes place. No connection, no call. And if you're a service provider seeking access to all the world's telephone connections, you'll be negotiating access with some large, tough, global telcos with huge networks to which you need access. Even the legal fees to negotiate and write the contract won't be cheap. And that's before any fees are agreed on.

In that world, as digital technology slashes costs, it takes years for monopolistic competitors to pass it on. With long-distance calls and text now much cheaper in most telco packages, the new frontier is outgoing international calls and the still astronomical cost of international roaming - calling on your Australian mobile in overseas markets.

The internet is a different world in which the cost of voice and text and international ''roaming'' have all collapsed to pretty much zero. Digital from the start, it works by routing ''data packets'': Each is ''addressed'' and makes its own opportunistic way through the net depending on network conditions.

Advertisement

So although the internet is built from the same reciprocal service agreements between service providers, if someone won't negotiate reasonably, other options are always available. And, since no one's indispensable, few are tempted to negotiate unreasonably.

And so, miraculously, all those transaction costs between service providers negotiating reciprocal access to each others' services collapse.

As OECD researchers reported recently, 99.5 per cent of reciprocal access agreements occur informally without written contracts. Paradoxically, as competition becomes more intense or ''perfect'', it becomes indistinguishable from perfect co-operation - a neat trick demonstrated in economists' models a century ago.

What's this mean for efficiency and productivity? If internet transit prices were stated in an equivalent voice-per-minute rate, they'd be less than a millionth of a cent per minute - one hundred thousandth of typical voice rates.

And as transaction costs have collapsed in cyberspace, new possibilities, new social and economic formations have burgeoned. It's an extraordinary world in which anyone - including (crucially) any innovator - can access the network without requiring the permission of monopolistic gatekeepers - as one must with telephone or TV networks, for instance. So any one of the 2 billion people now connected to the net can collaborate with any other.

We already know of the power of Google, Wikipedia, Twitter and open-source software such as Linux. But that's just the beginning. Healthcare, education, even finance will be revolutionised, though the rate at which it happens will still depend on the extent to which the monopolistic gatekeepers impede the progress of the innovators, the visionaries and the barbarians at the gates.

  1. Pages:
  2. Page 1
  3. All

This article was first published in The Age on November 14, 2012.



Discuss in our Forums

See what other readers are saying about this article!

Click here to read & post comments.

Share this:
bookmark with del.icio.us Del.icio.usdigg thisseed newsvineSeed Newsvinereddit this reddit thisStumbleUpon StumbleUponsubmit to propellerkwoff it

About the Author

Dr Nicholas Gruen is CEO of Lateral Economics and Chairman of Peach Refund Mortgage Broker. He is working on a book entitled Reimagining Economic Reform.

Other articles by this Author

All articles by Nicholas Gruen

Creative Commons LicenseThis work is licensed under a Creative Commons License.

Photo of Nicholas Gruen
Article Tools
Comment Comments
Print Printable version
Subscribe Subscribe
Email Email a friend
Advertisement

About Us Search Discuss Feedback Legals Privacy