Strategic Interaction under Asymmetric Regulation - Adoption, Usage, and Global Impact of Broadband Technologies - page 38

the likely legislative response to telecom's failure
to meet targets would be imposition of full LLU.
As securing full LLU was the rivals' overriding
objective, Telecom's success would prevent the
objective from being realised (in the event of the
government taking legislative action even though
Telecom met the targets, government integrity and
political credibility would suffer, so Telecom's
success would likely rule out LLU in the short to
medium term horizon). By sacrificing short term
market share, longer-term the benefits of gaining
regulated access to Telecom's infrastructure were
more likely to be secured.
Moreover, even if the political legislation threat
did not exist, simple economics militated against
Telecom's rivals actively marketing bitstream
broadband accounts to existing dial-up internet
customers. As Figure 3 shows, New Zealand
broadband purchase almost exclusively occurs
as a consequence of existing dial-up internet
users substituting to broadband once a threshold
of usage is reached Telecom's rivals had slightly
more than 50% of the dial-up internet market in
2003 (Howell, 2003). The most popular Telecom
broadband product was the entry level connection
and low data cap bundle retailing at $29.95 per
month, resold by competitors under a regulated
wholesale agreement based on retail price minus
a discount. Howell (2003) indicates that average
monthly megabyte consumption was low, even
for those consumers buying large usage bundles.
As Miravete (2003) suggests consumers are quite
adept at picking the most cost-effective two-part
tariff for their usage, it was not surprising that most
New Zealand broadband consumers purchased
the low-cost, entry level products with low data
caps (Howell, 2008a).
The national regulated bitstream access price
was set at $27.87 per month for the best available
service on the line 25 - that is, of equivalent speed
to the service Telecom was offering its own cus-
tomers. Due to Telecom's 1999 decision to price
ADSL under two-part tariffs and (likely) discount
connection below cost to induce substitution, (and

as average per-account consumption levels of
substituting New Zealand users were low - How-
ell, 2003), the margins available to competitors
under the bitstream offers were so small that they
would likely be worse off by encouraging their
existing dial-up customers to substitute to ADSL.
Even with the 'retail-minus' resold products, the
margins were likely very small compared to the
margins available from continuing to sell dial-
up accounts (these were routinely sold at around
$10 per month, and still generated ICA revenues
at least in respect of own-network consumers
with usage less than 10 hours per month which
under the prevailing regulated ICA rates, would
generate cash flows from Telecom of up to $11.30
per month). Thus, they had no incentive to sell
broadband accounts to customers other than the
small proportion of high-valuing individuals who
opted for the more expensive high-volume pack-
ages, which generated bigger margins under the
resale agreements 26 .
The consequences of both the economic and
legislative incentives are evident in Figure 4. When
broadband uptake was low (pre 2004, when only
very high-valuing individuals were purchasing),
Telecom's rivals sold around 37% of accounts
under the resale arrangements. However, when
demand started burgeoning in 2004 and 2005
(New Zealand exhibited the 4 th -highest growth
rate in connections per capita in the OECD in
2005 and 2006 - OECD, 2007), despite having
access to both bitstream and resale products, and
over 50% of the addressable market already as
dial-up customers, competitors' combined market
share plunged, to a low of 19% in Q4 2004, and
then stabilised at around 25% across 2005-2007.
That is, contrary to theoretical expectations in
the regulation literature, as access possibilities
increased as a consequence of bitstream regulation
being imposed, competition, measured as entrant
market share, actually decreased . This otherwise
aberrant observation is most plausibly explained
by Telecom's competitors responding to the dual
incentives of low margins as a consequence of his-