In fairness, we often have heard that same charge levied against telecom industry strategies as well. Perhaps the best example is the market power exercised by former incumbent service providers, whose fixed line networks once were legally-sanctioned monopolies.
Of course, those days are long past, as most regulators have insisted on opening markets to more competitors.
The argument by would-be wholesale customers of fixed network owners is that those owners ought to welcome wholesale traffic contributed by competitors who lease capacity and services from the facilities-based competitors.
So are telecom executives “dumb” for turning away such wholesale traffic? You might ask any executives in Europe whose networks have robust wholesale obligations. Ask them what their market share is, or gross revenue, or profit margin, under such circumstances.
You might well expect such executives to say that “scarcity” does convey business advantage, and that network owners are behaving rationally in making access to their networks as “scarce” a possibility as they possibly can.
In fact, analysts at HSBC argued early in 2011 that “a degree of pricing power is (at long last) becoming apparent in the telecoms sector, at least in Western European markets, thanks to scarcity emerging as a factor on both the fixed-line and the mobile sides of the industry.”
In fixed line, the capital required in the shift from copper-based infrastructure to fiber
platforms is reasserting the importance of scale at the expense of the un-bundlers, and resulting in a more benign pricing environment,” HSBC said.
Meanwhile, in mobile, the finite nature of mobile spectrum has already led operators to begin rationing capacity based on price.
Scarcity is the reason telecom always had been a monopoly in the past. It was deemed too expensive to build more than one network. In essence, that remains the thinking, in countries where there are robust mandatory wholesale requirements.
“We believe that this vital ingredient has been largely missing in both the fixed line
and mobile elements of the sector over the last decade, but is now making a reappearance; as a consequence, we think that telecoms should – at long last – begin to enjoy a measure of pricing power,” HSBC has argued.
The new element is the need to upgrade copper networks to optical fiber access, an undertaking expensive enough, with financial returns risky enough, to make would-be competitors think very hard about building their own networks. In fact, even regulators seem cognizant that the capital investment decisions are highly risky, encouraging rather new thinking about allowing investors to reap more of the rewards of their investments.
One point is that if scarcity does re-emerge in access, prices and revenue should improve. The second point is that executives are rational, and not “mistaken” about the value of scarcity in their businesses.
