What is a Monopoly? The divergence of theory and practice in the context of Australia’s telecommunications access regime.
29 July 2023
A widely accepted definition of a monopoly is a supplier of a good or service for which there is no close substitute¹. A monopolist is said to have market power (or monopoly power) meaning that it can set prices and restrict output to maximise profit. This definition of a monopoly and the concept of market power are well-recognised in the economic literature.
Despite a consensus regarding the definition of a monopoly, and the related concept of market power, regulatory practitioners and economists often disagree when it comes to their application. A recent example being the ACCC’s assessment of NBN Co’s Variation to its Special Access Undertaking (SAU). The ACCC in its Draft Decision appears to acknowledge several alternative broadband networks delivering a range of substitutable services but then concludes that:
we consider that wholesale competition will remain dependent on NBN Co’s wholesale offers, notably the pricing of certain plans and their service quality, along with continuing investments by alternative networks.²
This conclusion appears to be a little different from the ACCC’s previous thinking. Specifically, in its Communications Market Study Final Report, released in April 2018, the ACCC stated:
Its monopoly position means NBN Co is more likely to maximise profits than to maximise output to serve the interests of service providers (or in the case of a government-owned monopoly possibly, be more prone to cost inefficiency in the absence of strong capital market disciplines or efforts to replicate these via proxy mechanisms).³
The implication of this later conclusion by the ACCC is that not only is NBN Co a monopoly provider of fixed-line broadband services in Australia, but also that the NBN network is an “essential facility” - that is, the NBN network is a facility that exhibits natural monopoly characteristics and can’t be duplicated economically.
With the exception of NBN Co, the majority of market participants in Australia’s telecommunications industry appear to agree with the ACCC. For example, the previous wholesale incumbent, Telstra⁴ argues vigorously that NBN Co (which has a market share of approximately 68 per cent of wholesale fixed-line residential services⁵) faces limited competition from fixed-line, fixed-wireless and mobile broadband services⁶ and that “NBN Co’s pricing behaviour aligns with that of a traditional monopolist”.⁷ Similarly, TPG Telecom argues for a strengthening of the regulatory framework applying to NBN Co on the basis that “NBN Co is a commercial entity that owns monopoly assets”.⁸ Finally, the Australian Communications Consumer Action Network (ACCAN) argues that “The regulatory framework of NBN Co, as a national monopoly provider of an essential service, is critical to ensuring the benefits of digital technologies can be felt across the nation”.⁹
By contrast, in its materials lodged with the ACCC in support of its SAU Variation proposal, NBN Co argues that Australia’s wholesale broadband market is highly dynamic with alternative fixed and wireless networks experiencing significant growth in recent years. Importantly, NBN Co does not claim not to have market power, nor does it claim that it faces effective competition across its entire network footprint. Rather it provides an overview of the state of competition for the provision of wholesale broadband services in Australia and the extent to which there is competitive entry into this market. NBN Co then goes on to request that the ACCC have regard to the intensifying level of competition when making a decision as to the reasonableness of its proposed SAU Variation. Specifically, NBN Co’s submission states:
nbn is not an unconstrained monopolist for high-speed broadband services in Australia. In this regard, nbn should not be considered as a ‘traditional’ infrastructure monopoly provider of essential services.
….
The ACCC’s assessment of the Variation should have regard to these market realities as well as the extent to which nbn may face increased competition driven by ongoing investment in alternative broadband network technologies, ongoing technological change and changing consumer preferences. Regard should also be had to the extent to which there is asymmetric regulation for the supply of broadband services and the extent to which this distorts competition and encourages inefficient market behaviour.”
In any regulatory process in which the terms and conditions of access to a regulated facility are being set or reviewed by the regulator, it is to be expected that there be a level of debate amongst industry participants about the extent, and nature, of market power enjoyed by the regulated entity. Such debates should inform the regulator’s decision regarding what regulatory settings are appropriate. What is surprising in the context of the SAU regulatory process is the divergence of views between NBN Co and other industry participants, as well as the ACCC’s apparent high-level regard to this issue even though the regulatory process has taken more than 2 years to complete.
The remainder of this article examines the extent to which NBN Co is a monopoly provider of wholesale broadband services in Australia. To do this we apply a simple analytical framework of monopoly in which we attempt to confirm the presence or absence of the defining features of a monopoly market structure for the provision of wholesale broadband services in Australia and the extent to which NBN Co’s historic market conduct is consistent with the exercise of monopoly power. To do this we rely on publicly available data and information provided to the ACCC by NBN Co and other industry participants throughout the SAU regulatory process.
Economic theory suggests that a monopoly exhibits four key characteristics.¹⁰ There is only one supplier in the market; there are high barriers to entry; there are no close substitutes for the product or service and that the monopolist sets prices and restricts output to maximise demand. Each of these are examined below.
1. NBN Co is not the only supplier operating in the market.
As NBN Co’s submission to the ACCC clearly demonstrates the market for wholesale high-speed broadband services in large parts of Australia is supplied by numerous network operators using a range of technologies. For example:
Telstra, Optus and TPG offer fixed wireless broadband services Australia-wide over mobile networks that cover 99.5 per cent, 98.5 per cent and 96 per cent of the Australian population respectively.¹¹ These services are marketed as alternatives to an NBN fixed-line connection, they provide internet connectivity at speeds generally accepted to be high-speed broadband and they also provide voice call functionality.
An increasing number of satellite providers (including low earth orbital (LEO) satellites) offer wholesale broadband services over an increased coverage zone throughout Australia.
A number of network operators, such as Vision Networks and Opticomm provide wholesale broadband services to RSPs using a range of fixed-line technologies, including fibre to the premises (FTTP), hybrid fibre coaxial (HFC) and fibre to the basement (FTTB).
Of course, one may argue that the relevant market is the market for wholesale fixed-line broadband services in Australia. But even when one adopts this narrower market definition, NBN Co still does not meet this limb of the definition of a monopoly because, as mentioned above, NBN Co is not the only supplier of wholesale fixed-line broadband services in Australia.
Of note, is that the ACCC places considerable weight on NBN Co’s ubiquitous coverage which is unmatched by any fixed-line broadband operator. However, while NBN Co is the only ubiquitous provider of wholesale broadband service, if the ACCC considers that the relevant market is a national market - which appears to be the case – then NBN Co is not the single supplier of those services in that market because there are many suppliers which offer services to some but not all that market. In other words, ubiquity in the presence of localised competition does not make NBN Co a monopoly for the supply of services in a national market.
2. There are high barriers to entry.
The capital-intensive nature of broadband networks means there are clear barriers to entry. However, thanks to rapid and ongoing technological advances these barriers to entry are not insurmountable. This is evidenced by ongoing and increasing competitive investment in non-incumbent broadband network infrastructure over the past 23 years. For example, in its Mobile Nation 2022 report the Australian Mobile Telecommunications Association (AMTA) reported that capital investment in 5G networks by Telstra, Optus and TPG had averaged $5.4 billion per year between 2018 and 2022 suggesting total investment of $21.4 billion over 4 years.¹³ Over the same period NBN Co’s total capital expenditure was $17.9 billion indicating that expenditure in non-NBN broadband networks has in recent years outstripped capital expenditure by NBN Co.¹⁴ This suggests that despite the presence of some barriers to entry they are not sufficient to render NBN Co a monopoly provider of broadband services in Australia.
Other potential barriers to entry can also be ruled out.
I. NBN Co is not a statutory monopoly: Despite its Commonwealth Government ownership and its statutory infrastructure provider status NBN Co is not a legislated monopoly. Furthermore, despite claims that NBN Co gains commercial benefit from its Government ownership, in the face of ongoing competitive investment in fixed-line and other broadband technologies it is hard to make the case that NBN Co’s Government ownership represents a material barrier to entry or expansion. To the contrary, data from the Australian Bureau of Statistics (ABS) relating to capital expenditure in the Telecommunications Sector suggests that over the period 2016-17 to 2021-22 the lion’s share of investment in broadband network infrastructure came from operators other than NBN Co (non-NBN networks accounted for an annual average of approximately 66 per cent of total investment in the telecommunications sector).¹⁵
II. NBN Co does not benefit from contractual barriers to entry: Neither the Definitive Agreements between Telstra and NBN Co or the Optus HFC Subscriber Agreement serve as a barrier to entry or expansion for competitive network operators. To the contrary, neither of these agreements have prevented Telstra and Optus from investing in fixed wireless broadband capabilities and marketing their fixed wireless services as an alternative to a NBN broadband connection.¹⁶ Similarly, in the business segment both Telstra and Optus continue to operate dedicated fibre networks to serve business and government end-users. Furthermore, the network preference arrangements that are a feature of the Definitive Agreements have not prevented Telstra from using non-NBN Co networks, such as the OptiComm network in South Brisbane and in new development areas.¹⁷
III. Economies of scale do not appear to be a disincentive to bypass the NBN Co network: Despite broadband networks exhibiting economies of scale, scope and density such that it may be technically feasible (and potentially welfare enhancing) for NBN Co’s network to serve the entire demand for broadband connectivity in Australia, this has not proven to be a barrier to entry or expansion. Indeed, when one considers that all broadband networks exhibit economies of scale, scope and density the recent customer migrations by Telstra, Optus and TPG of low end-users away from the NBN network in favour of their own newly built fixed-wireless 5G networks suggest that these operators are able to exploit the economies of scale, scope and density inherent in their own networks while reducing the extent to which economies of scale, scope and density are realised by NBN Co.
3. There are no close substitute services.
Even if one accepts that the relevant market is the market for wholesale fixed-line broadband services in Australia there is clear market evidence, as detailed in NBN Co’s submission to the ACCC, to suggest that fixed wireless services are close substitutes to fixed-line services. In addition to the evidence proffered by NBN Co the following four observations support this position:
I. Fixed wireless services have comparable functionality and performance characteristics as fixed line technologies. This is evidenced by the fact that the fixed-wireless services deployed by NBN Co in regional areas are considered by industry, the ACCC and Government to be part of NBN Co’s ubiquitous fixed line network. Importantly, these services are supplied by NBN Co on largely same terms and conditions as NBN Co’s fixed line services and are regulated by the ACCC on the same basis.¹⁸ The technology that NBN Co’s uses to supply its fixed-wireless services to RSPs is the same technology that is used by other providers of fixed wireless services both in regional and urban areas.
II. NBN Co’s Corporate Plan and SAU Variation anticipates a need to competitively respond to competition from fixed wireless and other networks. For example, NBN Co’s Corporate Plan states:
“NBN Co operates in a competitive market, so the Company must think about how it can best enable customers to make the most of the nbn network, and appreciate the difference in service provision between this and other options for connectivity such as mobile, low earth orbit satellites, and private fibre and fixed wireless networks”. ¹⁹
III. The operators of fixed wireless networks anticipate deploying fixed wireless services as a substitute for fixed-line services. This is illustrated by statements by Kim Kroh Anderson, Telstra Group Executive for Product and Technology, at Telstra’s Investor Day held on 13 August 2020:
“fixed wireless access will be a core technology to improve our customer experience, where the fixed technology is underperforming or not sufficient to work, learn, or be entertained from our homes.”
…..
There is a significant interest in our 5G home internet product from many Australians. And we will over the next 12 months scale our solution to capture the value of 5G fixed wireless access to continue addressing the underserved households in Australia.”
Similarly, in public submissions to the ACCC opposing the proposed TPG-Telstra spectrum sharing arrangements, Optus raised concerns that a lessening of competition in the market for mobile services may adversely impact the incentives that Optus has in respect of deploying fixed wireless services as an alternative and competitive offering to NBN Co’s fixed-line services. In raising their concerns, Optus clearly makes the case that fixed wireless services are close substitutes for NBN fixed-line broadband services. Specifically, Optus states:
Fixed broadband services are broadband Internet services provided over fixed networks such as the NBN and other fibre-based networks (FttP, FttN, HFC, etc). Fixed wireless services are counted as a technology used to supply fixed broadband services due to the functional similarity between fixed wireless and other fixed access technologies.
The improved latency and higher bandwidth of 5G means that mobile broadband and fixed wireless services may offer an increasingly attractive alternative to traditional fixed-line broadband. All three of the MNOs now offer some form of 5G home broadband product which is generally priced comparative with comparable NBN plans….
The ACCC considers the extent to which 5G mobile and fixed wireless services could become a substitute for fixed line broadband services in terms of speed, data allowance and price remains unclear. That is not to say there are not a growing number of households that are switching from NBN to FWA alternatives.
IV. Fixed wireless network operators currently advertise and make specific marketing claims suggesting that their fixed wireless services are an alternative to a NBN fixed-line connection. Evidence of this was provided by NBN Co in their public submissions to the ACCC.²⁰
V. Consumers and households consider that mobile and fixed wireless services are alternatives to fixed-line broadband connections. This is evidenced by:
a) Research commissioned by NBN Co that suggests that a growing proportion of household consumers consider that fixed and mobile broadband offers better value for money than both non-NBN and NBN fixed-line services. Importantly, this market research asked consumers to think about the value for money of different broadband offerings in the context of their monthly bill for their home internet service.²¹
b) In November 2020 the Australian Bureau of Statistics (ABS) announced that following public consultation it would no longer collect census data about internet access by households. This is because public consultation suggested that “with the growth in internet access outside of the home on mobile and other devices and the fast pace of technological change, the collection of data on household internet access in the Census now has less relevance”. ²²
3. NBN Co’s is not pricing above its long-term marginal cost and there is no evidence that NBN Co is restricting supply to maximise profits.
Unlike a competitive firm that must set its prices according to the market, a monopoly firm is able to set its prices to maximise profit. To maximise profit a monopoly firm will price above its long run marginal cost and is able to engage in price discrimination.
A quick browse of NBN Co’s website and its historic financial results leaves no doubt that NBN Co does not satisfy this criterion. First, NBN Co has been unable to set its prices at profit-maximising levels. This is evidenced by the fact that NBN Co has consistently priced under the maximum price caps set by the existing SAU and NBN Co is not currently pricing at cost recovery levels. In fact, based on NBN Co’s most recent Corporate Plan, NBN Co is not expected to achieve prices that recover its efficient costs until later this decade. Second, NBN Co is prohibited by legislation from engaging in either price or non-price discrimination, even where such discrimination would be welfare enhancing. This obligation has many consequential impacts on NBN Co - the most significant being that NBN Co must, in effect, negotiate its supply terms with the industry as if it were one single customer. This provides NBN Co’s customers with significant bargaining power such that NBN Co is not a price setter in the market.
Related to this point is that a Monopoly will not only seek to price above its costs, but it will also seek to restrict supply and lower service quality to maximise profits. Again, NBN Co does not satisfy this criterion. First, NBN Co must supply services subject to the category B standard access obligations (SAOs) and the Statutory Infrastructure Provide (SIP) obligations which means that it must supply a broadband connection and/or service upon reasonable request. The effect of these obligations is that NBN Co is prohibited from restricting supply of services to maximise profit. Second, history suggests that NBN Co has proactively invested and made operational changes to increase service quality over time²³ and that there is no evidence of NBN Co eroding the quality of its services over time to maximise profit.
While NBN Co does not fit the definition of a monopoly, or for that matter an essential facility, this says nothing as to whether or not NBN Co possesses a degree of market power. That is a separate question which requires a separate and different analysis. However, even if one assumes that NBN Co does possess a substantial degree of market power this does not automatically justify the application of traditional access regulation as applied to essential facilities in the electricity, water and transport sectors (or to NBN Co currently). To the contrary, it is only if there is evidence that NBN Co has misused its substantial market power to the detriment of competition and economic efficiency that would justify regulatory intervention and, even then, alternatives to access regulation should be considered.
Unfortunately, Australia’s telecommunications regulatory regime which regulates NBN Co does not allow the ACCC scope to consider alternative forms of regulations for NBN Co. Instead, the NBN Companies Act simply stipulates that all NBN Co services must be supplied subject to the access regime set out in Part XIC of the CCA. There is little room for consideration of the extent to which NBN Co faces competition or the market distortions that may arise from such regulation. This makes the NBN Companies Act a blunt regulatory instrument which when applied to a highly dynamic industry creates a high risk of regulatory error.
¹ Petersen. G., Bull. M., and Dermody. C., 2016, Access Regulation in Australia, Thomas Reuters, P.17.
² ACCC 2023, Variation to the NBN Co Special Access Undertaking: Draft Decision, Annexure G P.7. See Draft decision - NBN Co SAU variation - 2 May 2023.pdf (accc.gov.au)
³ ACCC 2018, Communications sector market study final report, p 99 see Communications Sector Market Study Final Report April 2018 (accc.gov.au)
⁴ In June 2000, despite having a wholesale market share for local access lines of approximately 96.7% Telstra argued that it faced competition from “strong, well-established competitors”. At this time Telstra also claimed that the overall telecommunications market in Australia was “fiercely competitive” and that “no part of the telecommunications industry can properly be described as a natural monopoly.” See for example Productivity Commission 2001, Telecommunications Competition Regulation, Report No. 16, AusInfo, Canberra.P.107; Telstra Corporation 2000, Review of Price Control Arrangements: Telstra’s Public Submission on the ACCC Discussion Paper, P.5; and ACCC 2001, Review of Price Control Arrangements: An ACCC Report, P.16.
⁵ NBN Co Limited 2022, nbn Special Access Undertaking Variation 2022 – Supporting submission: Part A: Executive Summary and Key Narratives. See Figure A2 P.26
⁶ See Telstra Corporation 2023, Telstra Submission in relation to NBN’s proposed SAU variation: Public Submission, Pp.55-61. TELSTRA CORPORATION LIMITED (accc.gov.au)
⁷ Ibid P.31
⁸ See TPG Telecom 2023, Proposed variation to the NBN Co Special Access Undertaking TPG Telecom response to ACCC consultation paper: Public Submission, P.2. TPG - Submission to ACCC consultation paper - Public version.pdf
⁹ ACCAN 2023, NBN Co Special Access Undertaking (SAU) Variation (November 2022) Submission by the Australian Communications Consumer Action Network (ACCAN) to the Australian Competition and Consumer Commission (ACCC), P.4. ACCAN - Submission to ACCC consultation paper.pdf
¹⁰ See for example Katz. M.L. and Rosen. H.S. 1991, Microeconomics, Irwin, Pp.447-486
¹¹ Optus 2022, Submission in response to ACCC market inquiry – Telstra and TPG application for merger authorisation for proposed spectrum sharing in regional Australia. Public Version, P.16. Optus submission - 27.06.22 - PR VERSION - MA1000021 Telstra TPG_0.pdf (accc.gov.au)
¹² For example, Telstra argues that NBN Co incorrectly defines the relevant market stating the mobile broadband should not be considered a substitute and that competition from fixed wireless providers is limited. See p.58 of Telstra Submission.
¹³ Deloitte Access Economics 2022, 5G Unleashed: Realising the potential of the next generation of mobile technology, P 12 see amta.org.au/wp-content/uploads/2022/03/5G-Unleashed-Final-Report_combined-v2.pdf
¹⁴ ACCC, NBN Co - Special Access Undertaking, NBN Co Regulatory Information, various years. See NBN Co - Special Access Undertaking | ACCC
¹⁵ Australian Bureau of Statistics 2018-19, Australian Industry, ABS, https://www.abs.gov.au/statistics/industry/industry-overview/australian-industry/2018-19
¹⁶ NBN Co Limited 2022, nbn Special Access Undertaking Variation 2022 – Supporting submission: Part A: Executive Summary and Key Narratives. See Table A2 P.31 SAU supporting submission (executive summary and key narratives).pdf (accc.gov.au)
¹⁷ Uniti Group, Uniti Acquires Telstra Velocity & South Brisbane Exchange Assets, 16 December 2020, See 44r0j433dj1rnq.pdf (asx.com.au)
¹⁸ For example, if accepted by the ACCC the SAU will not differentiate the regulatory treatment of fixed wireless services supplied by NBN Co from its fixed line services delivered over FTTP, FTTN, FTTB, FTTC or HFC. Similarly, the ACCC’s Speed Guidelines treats services delivered over NBN Co’s fixed wireless network in a consistent manner to those delivered over NBN Co’s fixed line network.
¹⁹ NBN Co 2022, Corporate Plan 2023, p.3 see NBN-Co-Corporate-Plan-2023.pdf (nbnco.com.au)
²⁰ See NBN Co Limited 2022, nbn Special Access Undertaking Variation 2022 – Supporting submission: Part A: Executive Summary and Key Narratives. SAU supporting submission (executive summary and key narratives).pdf (accc.gov.au)
²¹ Ibid, see Figure A4.
²² ABS, 2021 Census topics and data release plan, 16 November 2020, see 2021 Census topics and data release plan | Australian Bureau of Statistics (abs.gov.au)
²³ An example of this was NBN Co’s decision to pause the sale of HFC services to address network quality and service reliability issues. Another example was NBN Co’s In-Home Wiring initiative in which it proactively developed a diagnostic tool to identify premises with-in its FTTN footprint with in-home wiring faults.