Information Technology Reference
In-Depth Information
order to induce rapid substitution by principally
the heavy users (especially those of its rivals) from
costly, unchargeable dial-up internet access to
relatively less costly, chargeable and, importantly,
'Kiwi Share'-exempt ADSL. Furthermore, even
though the firm faced different costs of installa-
tion in different parts of the country, universal
nationwide tariffs prevailed (Howell, 2003).
Moreover, in order to induce substitution from
dial-up as quickly as possible, Telecom offered
ADSL under two-part tariffs. Howell (2008) shows
that, as flat-rate tariffs for legacy technologies
result in substitution to the frontier occurring at
higher individual valuations of connection and us-
age volumes than under an optimal two-part tariff,
earlier substitution could be induced by pricing
ADSL connection below cost and subsidising it
from either ADSL usage or prices above cost from
another product in a bundle.
Under Telecom's offers, ADSL could be
purchased only if the consumer also purchased a
Telecom dial-up voice telephony account (con-
temporaneously, other infrastructure providers
- notably Saturn - were offering broadband and
voice telephony in a pure bundle), although ISP
services could continue to be purchased from
third parties. A high volume internet user substi-
tuting from dial-up to ADSL would be moving
all internet usage to the new network (i.e. mas-
sively reducing consumption on the PSTN), but
under 'free local calling', still paid exactly the
same monthly fee for a very much lower volume
of usage on the voice network. In a 'bundle' of
voice telephony and ADSL, voice telephony pay-
ments above cost could subsidise ADSL charged
below cost. If the PSTN internet usage was also
incurred to an ISP aligned to a network other than
Telecom's, then not only were PSTN internet us-
age costs avoided, but the costly ICA obligation
imposed by the consumer's ISP choice was also
eliminated. Telecom could thus afford to discount
ADSL connection charges below cost to counter
its rivals' strategic ICA arbitrage, simply because
the counterfactual was a substantial loss in any
case. Evidence that Telecom's ADSL connection
prices charged were below cost comes from Covec
(2004). International benchmarking of TSLRIC
prices in similar markets reveals that Telecom's
entry-level ADSL price for access with only a
minimal usage bundle of 600 Mb/month was lower
than prevailing regulated monthly bitstream access
prices in most comparable regimes at that time.
However, due to the high value of the 'connec-
tion gift' from bundling dial-up internet with voice
telephony and the comparatively low valuation
of the internet usage of most consumers, rapid
substitution to ASDL did not occur. Indeed, as
heavy internet users faced positive connection
and usage prices under the two-part ADSL tariffs
compared to zero connection and usage under
dial-up access using a free ISP account, and most
of the usage was low-valued, dial-up usage per
account continued to grow exponentially (Figures
2 and Figure 3). Rather, it was the high-valuing,
low-using internet consumers who were most
likely to substitute (Howell, 2008a). Whilst this
reduced some pressure on the PSTN it did not
address the fundamental problem of huge cash
losses due to asymmetric allocation of the high
dial-up internet users and the perverse incentives
operating under the ICA and 'free local calling'
obligations.
Telecom's Response #2: '0867'
Given the inability to substantially stem the cash
flows via technological substitution, by September
1999, Telecom was forced to adopt its second re-
sponse: petitioning the Minister to alter the prices
charged under the “Kiwi Share' agreement. The
proposal was to charge residential consumers 2c
per minute (the ICA liability) for calls in excess of
10 hours per month per account made to ISPs not
connected to a separate Telecom dial-up internet
PSTN network (IPNET).
The response came to be known as '0867' after
the calling prefix of IPNET accounts. As well as
securing its financial viability, Telecom claimed
Search WWH ::
Custom Search