Setting the record straight: Network Strategies’ advice on closing the NZ broadband gap
October 25, 2006
[Note that the following remarks are our own and made completely independently of the Ministry of Economic Development and any other interested parties.]
It was disappointing to find that in some academic circles there was a complete failure to understand the main thrust of Network Strategies’ work for the Ministry of Economic Development’s Stocktake, which was to uncover what needs to happen for New Zealand broadband penetration to exceed 25% within a reasonable timeframe. In particular we considered how to achieve expanded service rollout and greater bandwidth (and thus stimulate applications and usage) at an acceptable price. While in theory such a takeup may be possible under monopolistic conditions, in practice it is highly unlikely! With no competitive or regulatory pressures to reduce prices, consumers will inevitably lose out.
A key point we make is that the country characteristics described in our report suggest that New Zealand’s environmental characteristics are not atypical in relation to the Top 8 OECD performers in terms of broadband uptake.
“Examining various demographic, geographic and income statistics that may influence the level of broadband penetration, we see that New Zealand is not atypical in comparison with the countries within the OECD top quartile” [Network Strategies, The Broadband Divide, page 5]
Does this seem reasonable in view of the evidence? The answer is a resounding yes, considering the following:
- Six of the Top 8 OECD countries have GDP per capita between USD20 000 and 30 000, as does New Zealand
- Four of the Top 8 countries have relatively small markets – that is, less than 6 million population, as does New Zealand
- New Zealand has virtually the same population density as Norway and Finland
- New Zealand’s geographic area is very similar also to that of Norway and Finland
- Five of the Top 8 countries have a highly urban population (over 79% of the population living in urban areas), as does New Zealand
Misrepresentation of our methodological approach
The Howell submission to the Select Committee (11 August 2006) misrepresents and/or misconstrues Network Strategies’ methodological approach in its report to the Ministry of Economic Development The Broadband Divide (April 2006). Of particular concern is the fact that she misrepresents our approach by inventing a methodology which bears no resemblance to the approach actually employed. Thus Howell’s claims that she demonstrates weaknesses in our methodologies and findings (page 70) are based on a distorted and inaccurate view of our report. In addition she misquotes our report, and inappropriately uses quotation marks as if to indicate she is quoting from our report when in fact her words do not appear in any text in our report. This is certainly surprising when the author is an academic.
Howell characterises Network Strategies’ methodological approach as a “diagnosis” methodology:
“The Network Strategies authors ‘diagnose’ a competition ‘problem’ by taking the top eight countries in the OECD by broadband uptake at December 2005 … and then comparing them to New Zealand on the basis of a variety of demographic, economic and competition characteristics… The comparison involved ‘identifying the key characteristics that distinguish the top quartile from New Zealand’ (Network Strategies, p.4). The acceptance or rejection of a characteristic being significant was done by ranking the New Zealand statistic alongside the Top 8 country statistics, and rejecting as a possible explanation any characteristic in which New Zealand was not at the extreme. Only if New Zealand ranked 1 or 9 was the characteristic considered to have explanatory power in respect of the difference between New Zealand’s broadband uptake and that of the Top 8.” [Howell, page 66].
Firstly it should be noted that all of the quotations Howell uses in the above are either incorrect or her own words and not those of Network Strategies. We make no reference in our report to diagnosing a competition problem and the quote from page 4 of our report is incorrect. Our actual words are “what are the key characteristics that distinguish the top quartile from New Zealand?” In other words, we seek differentiating factors that may justify New Zealand’s low position on the overall broadband rankings by focussing on characteristics of the leaders. Contrary to Howell’s claims, we do not reject characteristics on the basis of New Zealand being at the extreme (“ranked 1 or 9”) of the Top 8 country statistics, rather we find that New Zealand’s ranking cannot be justified purely by characteristics such as a small market or low incomes. Our analysis clearly demonstrates that broadband takeup is influenced by a complex combination of environmental factors – demographic, economic, geographic and regulatory – therefore any attempt to simplify causality shows little appreciation of the underlying market dynamics.
The following claims by Howell did not appear in our report nor did they form any part of our methodology:
- “As a result of this methodology, the Network Strategies rejected GDP per capita as being important, because New Zealand’s GDP per capita exceeded that of Korea, the 2nd-ranked OECD country” FALSE
- “New Zealand’s small market size was excluded as a possible cause, because Iceland (1st) had a small population” FALSE
- “Population density was also excluded, because Iceland (very small population) and Canada (8th – very large uninhabited land mass) had lower population densities” FALSE
- “Geographic area was also excluded, because Korea, the Netherlands (3rd), Denmark (4th) and Switzerland (5th) were smaller, even though each of these countries has a population density between 9 times and 33 times that of New Zealand” FALSE
In all of the above cases Howell’s reasoning is her own, yet it is represented as that of Network Strategies.
It is notable that in relation to urbanisation Howell chooses to question 'the plausibility of metric... given that it ranks New Zealand as nearly one third more urban than the Netherlands (66.3) which has a population density 32.8 times that of New Zealand in a land area that is only 1/13th of the size' (page 67). This statement also indicates a confusion in differentiating between population density and urbanisation, Howell appearing to believe that urbanisation and population density are similar metrics. However since the population of the Netherlands is four times that of New Zealand, with a much smaller land mass we would naturally expect a large difference in population density between the two countries. Nevertheless this does not necessarily imply that a greater proportion of the population inhabits urban centres in the Netherlands than in New Zealand.
Howell also chooses to use an OECD measure of urbanisation in which the non-rural population is classed as either “urban” or “intermediate” – in other words Howell’s use of the OECD definition of term “urban” excludes a large portion of the population who live in cities or towns and thus should also be expected to have good access to broadband services. This same OECD source is also notable for categorising the entire New Zealand population as non-rural, which would no doubt surprise New Zealand farmers.
Other misconceptions about our report
In Section 2.2 of our report we examine the comparative affordability and desirability of entry level broadband service offerings. We demonstrate that entry level services are affordable to New Zealanders but that the service offered is inferior to that offered in the leading countries where speeds are typically higher and there are no data caps. We illustrate the limited range of activities possible within set data caps. Howell (on pages 67-8) refers to our illustration as “a hypothetical basket” and suggests that we should have used as the basis for our illustration “actual average usage”. Furthermore she asserts that bandwidth usage patterns are highly skewed and that there is evidence that average New Zealand residential usage is half that of Australian usage. Clearly it has not occurred to Howell (or perhaps she just misses the point) that actual usage patterns in New Zealand may be constrained by the limits imposed in the broadband service offerings. If a service is priced the same, yet delivers less, this perhaps may have some influence on takeup!
In section 2.3 of our report we examine the market share of new entrants in the total broadband market. Howell writes:
“That low market shares of new entrants is accepted as the ‘cause’ of New Zealand’s low broadband uptake is astounding, given that cardinally, New Zealand's measure is only marginally less than that of 6th-ranked Finland (lowest new entrant share in the top 8), and that the country with the highest new entrant share is adjacent to Finland in the rankings (5th-ranked Netherlands). [Howell, page 68]
Once again Howell invents words for us – nowhere in our text do we claim that low market share is the “cause” of low broadband uptake, nor do we claim to have produced empirical “proof” (Howell’s quotation marks). Furthermore, the Netherlands is not the 5th ranked country but the third. We presume Howell actually meant Switzerland in this reference and not the Netherlands.
Unfortunately for Howell, her imagined 1 or 9 “diagnosis” methodology breaks down at this point since we clearly examine New Zealand’s performance in terms of new entrant participation relative to the entire OECD sample:
“Of countries ranked higher than New Zealand only Germany (20%, ranked 18) and Portugal (19%, ranked 21) had similar or lower market share for new entrants” [Network Strategies, page 12]
When Howell cannot fit our ensuing consideration of unbundling into her imaginary methodology and 1 or 9 “test” she claims that this is a failure on our part.
“The failure to apply the methodology consistently across all identified characteristics means that the unbundling characteristic, which would have been rejected as insignificant if subject to the test … is proposed as the ‘solution’ to the ‘competition’ problem.” [Howell, page 69]
It should be noted that, once again, Howell’s quotation marks have no relation to any statement in our text.
Why does any of this matter?
Network Strategies believes that the current Select Committee process considering amendments to the Telecommunications Act is key to delivering New Zealand’s future competitive telecommunications environment. Given the importance of this Select Committee process, it has become necessary for us to address publicly a submission to the Select Committee which includes misinterpretation and serious misrepresentation of some of our earlier advice to the Ministry of Economic Development on New Zealand’s broadband gap.
In summary, we believe that the misunderstanding, misrepresentation and misquotation of Network Strategies’ work found throughout the Howell submission is of an extremely serious nature as these errors are used to form the bases of arguments and conclusions which seek to persuade the Select Committee to follow a particular regulatory course.
Note: Network Strategies Limited acted as an advisor to the New Zealand Ministry of Economic Development (MED) for particular aspects of the Telecommunications Stocktake review. The views expressed in this article do not necessarily represent the position of the MED or the New Zealand Government.