The Rich are Getting Richer - but more equal with each other

The BRW Rich list is out for another year. Apart from the headline that Gina Rinehart is supposed to have gone from wealth of $20 to $14 billion what can we learn?

Well apart from that move at the top we can also reveal that the bottom entry has gone from $250 million to $286 million. However, the BRW is quite confusing in its list construction. Some wealth amounts are listed for families but occupy one place, whereas others might be listed in two names but the list for some reason gives them two places. As a consequence there are actually only 185 "wealth pools" listed, not 200. The average pool has gone from $1000 million to $1053 million. That's a growth of a bit over 5% and hence better than inflation.

Unsurprisingly if the bottom has increased and the top massively decreased the wealth distribution is ever so slightly more even as shown in the chart of proportion of population measured against cumulative proportion of wealth.

However the change is very slight. Statistical analysis of the list over the last ten or more years could be a fun exercise. I'll just add it to the long list of fun exercises I have to do.....

When research isn't

I have a weekly Google Alert on the term "Digital Economy"to keep track of what is happening in the policy space.

This week I got VERY EXCITED (yes I want that emphasis) when I saw two stories (Computer Business Review and  Information Age) that said over half of all UK businesses don't understand the digital economy.

You can understand my excitement, because getting business to understand the implications of the economic transformation we are in is a critical part of reaping the benefit.

One of the two handily linked to the media release issued by the company that commissioned the research. The release started:

A study released today has found over half (57%) of business leaders do not understand the Digital Economy, highlighting that organisations are not yet fully prepared to deliver the digital experiences and access buyers desire and require.

Reading the release I realised that both stories were simple cases of "churnalism" - faithful reproduction of the release as if it is an actual story. More importantly the release contained no link to the "study."

So I went to the website of the company that conducted the research, OnePoll, hoping to find it there. I was immediately concerned once I read the description of the company that came up on the Google search for OnePoll.

And down at the bottom of the homepage I found this delightful piece of text.

pr surveys for brand exposure
Generate content and news angles with a OnePoll PR survey, and secure exposure for your brand.
Our PR survey team can help draft questions, find news angles, design infographics, write & distribute your story.

The "study" was the creation of an agency that specialises in the creation of surveys that have only the purpose of securing brand exposure. I have emailed the contact on the press release and asked if there is a study that has actually been released, or whether the word "release" was a circular reference to the media release itself. (I recently had this conversation with an Australian PR firm over a similar claim of the release of a study).

These kinds of surveys are not new. As Kristen Drysdale explained in a recent episode (Serises 3, Episode 1) of ABC TV's The Checkout they are the source of most of the "clinical studies" claims made by the beauty industry.

My view is that in a data saturated world the last thing we need is bogus data that we need to wade through.

Joe Hockey got into a blather having used the term "disintermediation" to describe the disruption in the economy, but it has been around a long time and refers to the removal of the "middle men" in transactions. Shopping and the media are great examples.

If journalism is to have a future in mediating the information flow, it needs to understand that its job is to validate the claims made in a media release. It isn't hard to do. Simply Googling the name of the firm that conducted the research revealed that there should be concerns.

If a company claims research has been "released" but the details of the research haven't been released, then simply don't report the survey. Or even better write the real story that starts "today firm X tried to con the public and gain brand exposure by claiming to have released a study that wasn't released."

If the worst that happens to the commissioning firm is that they spend money and get no coverage, then one employee might not get their bonus. If the firm gets negative coverage as a consequence then management might care what marketing gets up to.

Telco competition hasn't reduced prices

Ever since the open market structure for telecommunications was adopted in 1997 in Australia, the ACCC has been required to publish an annual report reflecting on the state of competition.

As part of that report the ACCC has developed a price index to show the movement in prices. Every year it shows a real price decline.

In the media release to accompany this year's report the ACCC Chair Rod Sims states:

Competition is driving substantive reductions in the price of telecommunications services, significant infrastructure investment to improve the quality and coverage of services, and technological innovation. Consumers are seeing lower prices and improved services as a result of the vigorous competition that began in the 1990s.

 Unfortunately for the ACCC their price index isn't the only one available.

As part of the data collection for the Consumer Price Index the ABS also publishes data on the groups of goods used to derive the index. Communications data is available from 1972 and so the real price movement (Group Index/CPI) can be derived. The chart below shows the real price movements over that period as reported at the September 2014 quarter.

Communications is the red dotted line - and the decline has been relatively consistent since the 1975 spike. That spike (I think) was due to a massive increase in stamp prices when Post and Telecom were split from the PMG.

Since 1980 the ABS has kept a separate sub-series on telecommunications and postal prices. This shows that post prices have been stable in real terms while telecommunications prices just continue to drop.

There are two small blips in the 1988-91 period and around 1997 but neither of these periods of reform result in a fundamentally new trajectory.

I have previously undertaken a rudimentary econometric analysis of the data to 2009 and was able to demonstrate that scale and experience effects explained the price movements better than did the reduction in industry concentration as a consequence of competition reform.

It is a great pity that the competition regulator continues to claim benefits for a set of reforms that cannot actually be credited to them. In particular, infrastructure competition cannot be claimed to be the source of price declines in Australian telecommunications.

Turnbull's Triumph? Not really.

Christmas has come early for NBN Co and the Minister for Communications Malcolm Turnbull. Not only have they been able to announce the renegotiated deals with Telstra and Optus. The bigger present has been the mostly uncritical adoption of the company’s and the Minister’s messaging.

The AFR took the first prize by heading an Adele Ferguson column “NBN deal is Malcolm Turnbull’s triumph.” Elsewhere in the paper we were advised that “Telstra is primed to win a bigger role building and maintaining the national broadband network under a deal with the government-owned NBN Co.”

We need to just step back from this hype.

Firstly, let’s just note that Mr Turnbull always said the negotiation with Telstra, which started in September 2013, would be concluded quickly. In February this year he said they would be completed by “the middle of the year.”

If taking twice as long to complete the first significant task is a triumph, failure must be spectacular.

And despite descriptions of a “side deal” for Telstra in designing, building and maintaining the network, the reality is that both NBN Co and Telstra have simply said discussions are continuing.

The six month delay might be understandable if that more tricky negotiation was concluded, but it hasn’t been.

The next issue is to consider what Telstra is actually agreeing to. The Telstra announcement is thin on details. While Telstra is “kept whole” there is no detail on whether the specific amounts for duct leases and disconnection payments have changed. For the former we are advised that the payments deliver “equivalent NPV on a simplified basis.” For the latter the announcement merely says “payment construct preserved.”

We do know that NBN Co has taken on some extra costs. The first is a cap on duct remediation costs. The second is that NBN Co will bear the burden of duct remediation and maintenance costs in FTTN and HFC regions.

The announcement is totally silent on what the agreement says about the state of the copper before it is handed over.

It is well known that there are many cables that have suffered damage from a misguided earlier plan to seal the network with gel-filled joints. The gel has reacted with the cable sheath in many places, the only permanent solution of which is a new cable.

These are the joints that are currently ‘protected’ by inclusion in plastic bags.

Outside of the nit-picking on detail, the important point is that Turnbull’s renegotiation was only possible because there was a negotiation in the first place, and that only occurred because of a thing called “strategic commitment.”

Game theorists identify strategy as the move you make taking into account all the possible moves of your opponent. The question then comes down to how your opponent plays his strategy.

A good example is the story of the Optus Pay TV cable (HFC). As the second carrier Optus paid Telstra for access to the copper network for the origination and termination of each long distance call (originally called ingress and egress). Telstra was charging something like 4.5 cents per minute, and Optus thought it should be lower.

So Optus devised a plan to build an HFC network to also carry voice. But Telstra ignored the plan.

Optus then created a joint venture (OptusVision) with Continental Cablevision to build the HFC network. Telstra now realised the threat from Optus was real. Then CEO Frank Blount approached Optus offering to reduce the interconnection price, but by then Optus had a partner who told Optus they couldn’t do a deal because their voice traffic was now committed to the JV.

Telstra’s only response left was to build its own HFC network.

The move by Optus to sign a partner is a case of strategic commitment. An irrevocable act that will convince your opponent you are serious about the strategy.

Back in 2008 Telstra refused to submit its full bid for the original (fibre to the node) NBN unless the Government abandoned its requirement for structural separation. The Government’s advice was that there was no way to force Telstra to hand over its copper, and no rival bidder had a strategy for acquiring it.

The decision to proceed with a fibre to the home network was made on the advice of the Expert Panel and others that FTTN was not a cost-effective pathway to FTTP. However, it had the additional benefit of being a credible commitment the Government could make without needing Telstra’s co-operation.

Announcing the NBN in April 2009 as a decision rather than a plan added to its value as a strategic commitment. In reality it was only a proposal until the Implementation Study was completed in May 2010. It was never really a decision made in a rushed eleven weeks.

It was only when it was faced with this commitment and the proposed separation legislation (that only would have achieved functional separation and restricted Telstra’s mobile growth) that Telstra changed its strategy. They also, as a consequence, changed management.

It was only through these actions that the original negotiations occurred, and hence that Mr Turnbull has been able to conclude this new deal.

Whether it is a good or bad deal is yet to be seen. But so far it is nothing more than a transfer of the copper and HFC assets, though duct ownership stays with Telstra.

Clearly FTTH zealots will see it as a bad deal on principle. But that is a different discussion. NBN Co now presumably has all the information it needs to prepare a properly and fully costed Corporate Plan for MTM. That needs to be released in its entirety without redactions.

Does the nation have a Digital Economy Strategy?

A group of carriers, consumer and small business representatives has formed a coalition that argues that Australia must set an ambitious broadband policy for the next 15 years.

The group today launched a "2030 Communications Vision" project and plans to hold a seminar discussing broadband issues in February.

Retiring iiNet regulatory chief Steve Dalby claimed there has been "an absence of leadership on a broader, integrated view of why telecommunications is important to Australia and the Australian economy. There is no national objective or national strategy to take us forward in the digital economy."

Well - technically there is a strategy, because it was released by the Labor Government in 2011 and updated in 2013.

The status of the 24 actions listed in the update was advised in response to an Question on Notice from February Estimates. The status of the 34 projects was advised in response to an Question on Notice from May Estimates.

Before the election the Coalition released its own - somewhat limited - Digital Economy policy. Amongst a plethora of commitments the policy stated the Coalition would "update the NDES during its first term."

Presumably the construction that the NDES is to be merely further updated not replaced  means the EXISTING updated NDES is still the actual strategy.

Commentator Phil Dobbie in his weekly Crosstalk podcast made some disparaging comment about the NDES. Unfotunately I didn't write it down when I listened and I'm not going to go through it again.

What I'm waiting for is someone to subject the plan - especially as updated - to some decent scrutiny.
 And just maybe it would have helped if industry and consumers had engaged with the Strategy rather than take it as a given.

Competition in telecommunications ... ITU data

This week the ITU has published its latest ICT Development Index. I don't want to write about that now - except to state that like so many other similar exercises calling this an "index" is perpetrating a fraud.

The concept of an "index number" was developed to find a way to relate different prices and quantities in different time periods. The founder of econometrics Irving Fisher analysed said "For those who have made any attempt to penetrate their mysteries, index numbers seem to have
a perennial fascination." This may not be the case for my readers, but the survey article I took the quote from provides plenty of detail on how intricate is the process of developing index numbers for their use in analysing time series data.

The ITU's IDI is not such an index. It is an attempt to make comparisons across countries at one point in time. Indeed the construction of the index guarantees that the change in the index number from one time period to the next for an individual economy has no meaning. The only temporal comparison that can be made is of the rank.

This is because the final index number is composed as the weighted sum of a three sub-indices each in turn based on a number of indicators. The data for the indicators themselves are also first manipulated in a kind of standardisation process.

The report states that "The indicator weights were chosen based on the principal components analysis (PCA) results. The access and use sub-indices were given equal weight (40 per cent each). The skills sub-index was given less weight (20 per cent), since it is based on proxy indicators." Figure 2.2 provides a table of the actual weights used and it is hard to discern from this exactly what role the principal component analysis played.

Most significantly there is no objective test by which it is possible to determine if the IDI measures anything, nor if the value of the IDI has any purposeful predictive power. Indeed, like most indices of this kind (I'm thinking here of the Global Innovation Index) the composition of the index is heavily theory laden. There is nothing inherently wrong in a theory laden index if that index can then be compared to some other observable - because it then works as a test of theory. But if there is no such observable the index runs the risk of becoming part of a circular argument in support of the theory.

But I didn't come here to discuss the IDI - I need to do more maths before I reach any conclusions.

What I did come here to do was to pass comment on analysis in the report that purports to claim that competition in telecommunications markets has a statistically significant impact on reducing prices in telecommunications. I have serious concerns about the methodology employed.

(My own simple working paper on this reached a conclusion that competition is not a significant factor in price reductions).

My two concerns are to do with the model employed and the goodness of fit. Both fixed broadband and mobile market data are modelled. In both cases a simple linear model of prices is developed. This is highly unlikely to be the appropriate functional form for the relationship between prices and the relevant variables - including GNI per capita, industry concentration (HHI), urbanisation and a regulatory variable. At the very least theory would suggest that the effect of a change in concentration would be proportional to the HHI - not a linear composition.

In both cases the modelling claims that all the variables are statistically significant - though competition is identified as explaining only 5% of the variation in prices. However the R-squared for the two models are 0.408 and 0.409. The report claims that such a value of correlation means the models have "medium explanatory power" based on the range of possible values being zero to one.

This is simply rubbish. The reality is that such a low value means that more than half the variability in prices is due to factors not included in the model. One of those at least will be declining costs of technology due to local scale economies and global experience effects. The consequence of adding other variables or changing the functional form so that the explanatory power of the model increases will affect the statistical validity of all the variables.

It is, quite frankly, embarrassing to see a major international organisation publish such a poorly constructed piece of econometric modelling.

Competition in telecommunications...UK style

One of these days I will write a definitive account of how we all got so much wrong in the pursuit of better outcomes in telecommunications than were being delivered in the early 1980s. But today I just want to compare and contrast two countries, the UK and Australia.

The first thing to note is that both countries were early leaders i the move to restructure telecommunications markets - at least amongst those that had grown up under the European PTT model. Both were early (in the 70s) in spinning telecommunications out of the Post Office. Both introduced competition in the late 80s and early 90s.

The UK did one thing differently - they fully privatised BT before undertaking competition reform. But in reality it has made little difference.

The UK stayed with an industry specific regulator with both technical and competition function (Ofcom) whereas Australia dismantled AUSTEL in 1997 and gave competition and access to the ACCC.

BT sold its mobile operation to what became O2. BT also agreed to voluntary functional separation of its access network - but only in the face of a very determined Ofcom Chair Steven Carter.

But today we learn that BTs competitors are complaining through their industry body the UK Competitive Telecommunications Association (UKCTA) that BT still retains a monopoly position "some 30 years after privatisation and 10 years after the formation of Ofcom."

I'll be honest and say that from the Foreword to their report I can't understand exactly what it is that the UKCTA is arguing for. It seems to be another version of "we need you to increase competition by increasing regulation of the monopolist."  This, I might say, sounds awfully like the current refrain of Optus, Vodafone and the Competitive Carriers Coalition in Australia.

They seem to know what they don't like but I haven't ever heard anything that sounds like a convincing story of what the market structure looks like after whatever intervention they seek today. I have drafted something for publication elsewhere on the economics and if it doesn't get a run I'll share it here.

In the meantime getting a new single technology structurally separated access network for 93% of the population was a really good place to start. But no one was ever prepared to hitch their wagon to defending the one thing that could deliver.



Disclaimer: The CCC was originally formed around the meeting table in my office at AAPT. It's original mission was a response to the content sharing deal between Foxtel and Optus. At that time I questioned my colleagues at AAPT on whether as part of the deal we should demand that the Telstra HFC cable be made open access as it provided service in areas poorly served by exchange based ADSL. There was no interest because we did not have the capacity to build a billing and provisioning system to access it.