Wednesday, November 21, 2012

Scarcity-based business models may elicit government intervention

Government intervention in the broadband market conflicts with free markets. It arises from fears of market failure as a result of:

  • Ineffective duopoly i.e. oligopoly and too little competition.
  • Underinvestment by the incumbent, the cable company, and challengers.
  • Scarcity-based business model at both the incumbent and (if any) the local cable company.
About scarcity vs. abundance as the foundation of the business:
                         Scarcity            Abundance
Revenue driver           price               volume
Bits are like            wood, water         electrons
Bandwidth                throttle            maximize
Business focus           connectivity        VAS
Business model           usage-/speed-based  one proposition
Market                   saturated           growing
Innovation               none                maximize
Vertical integration     yes                 no
Infra-based competition  yes                 no
Structural separation    no                  national infra
Marketing, propositions  maximize            minimize
Customer focus           increase spending   increase satisfaction
Business model           subs, transactions  ads, transactions
Customer data            full                growing
It appears that telcos, cablecos and ISPs traditionally belong to the Scarcity group, whereas Amazon and Google are in the Abundance group. Netflix, Facebook and Apple seem to be moving from left to right. Microsoft and Nokia may be moving in the opposite direction.

If the governement believes there is market failure, or that Abundance is a better foundation for economic growth than Scarcity, then it has several options to intervene and contribute to broadband performance and coverage:
  • Limit the effort to bringing broadband to rural areas where xDSL doens't work and cable is absent. But then, it could be left to the market to provide LTE services, or even satellite-based broadband.
  • Facilitate all market participants by reducing red tape, providing loans, becoming an anchor tenant, etc.
  • Participate at market terms to create a third infrastructure (FTTx). But do not expect existing players to simply quit competing and become service providers on your FTTx network.
  • Regulate in such a way that competition truly increases. For example:
  1. forbid the incumbent to consolidate the market, or even do any takeovers at all.
  2. force structural separation upon the incumbent (see New Zealand). But raising wholesale prices is clearly a way of helping just the incumbent, and foregoing the interests of its wholesale customers.
  3. nationalise (see Australia, NBN).

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