Regulated Retail Tariff Structures, Dial-Up Substitution and Broadband Diffusion: Learning from New Zealand's Experience

Abstract

Despite an apparent absence of supply side impediments to the uptake of broadband New Zealand has persistently exhibited one of the lowest numbers of connections per capita in the OECD. Whilst geographic demographic and economic factors may partially explain the disparity they fail to explain the comparatively low uptake in a country that in the early 2000s ranked amongst the top OECD countries in the number of internet users per capita and average usage per account. Demand side factors however offer some insights. Using a combination of diffusion theory two-part tariffs price discrimination and bundling this paper proposes that the historic flat-rate tariff for local voice telephony has resulted in substitution from legacy dial-up to frontier broadband internet access in New Zealand occurring at a higher user valuation of both internet connection and usage than if the telephony tariff was set at a level whereby the fixed component recovered fixed costs and the variable usage component was set at marginal cost - the tariff structure that prevails in most other OECD countries. The New Zealand experience suggests that the extensive use of flat-rate tariffs for the current generation of broadband technologies (e.g. ADSL) may impose similar braking of the rate and timing of substitution to future internet access technologies (e.g. fibre to the home). These effects are exacerbated if the legacy connection is purchased as part of a bundle where customers predominantly value other elements more highly than the internet component. Substitution inertia created by the flat-rate tariff may only be overcome by the development of new applications which are both highly-valued by the majority of users and which can only be feasibly deployed using the frontier technology.