Reflections on "NZ pays too much for broadband"

NZ Compare published a press release saying New Zealand broadband prices rate in 128th place out of 223 nations. It asks “Do Kiwis pay too much?”

NZ Compare uses data from a survey by UK-based Cable.

Cable is a service provider, so hardly an independent observer of the market, but nevertheless this is the data we have to work with.

Average price of a broadband connection

The press release says the average cost of a broadband connection in New Zealand is US$48.60 (for the rest of this story all prices are in US dollars). This compares with $2.40 for an average plan in Sudan. The most expensive is the Solomon Islands where a plan will set you back $457.84.

New Zealand is fractionally cheaper than Australia where the average is $52.21. The USA is even more expensive at $65. All three nations are significantly more expensive than the UK where a plan costs $38.79.

In the press release a Cable executive suggests prices are higher in some countries just because the sellers can get away with charging more. That’s not unreasonable, but it could be an oversimplification.

Same product, different prices

There are a range of explanations for how prices for what on the surface is essentially the same product in each country can differ so much.

Let’s start by pointing out that we may not be comparing the same product in each country.

Perhaps the simplest example of this is that we know that New Zealanders living on the UFB fibre network don’t get the same product as Australians living on that nation’s NBN network. Almost every NZ fibre user gets 300 mbps down and unlimited data. Many Australians get less than 50 mbps.

Average broadband speeds across all technologies in New Zealand are around 100 mbps. Digging keeping into the Cable data shows the average “broadband” speed in the Sudan is 5 mbps. It’s debatable whether that even counts as broadband.

Across the board, the price data is not comparing apples with apples. We’ll park that idea for now because there are other considerations.

Purchasing power parity

The Cable data is presented without any reference to something called "purchasing power parity”. This is a tool economists use, among other things, to compare the cost of living in countries. A fibre plan may only cost $2.40 in Sudan, but everything else is also cheaper and wages are far lower.

One famous look at purchasing power parity is the Big Mac Index which tells us the exact same burger costs more than $7 in Switzerland but only a shade over $2 in Taiwan.

And by extension there is the idea of affordability. It might take, say, a New Zealand third year teacher, four hours to earn enough after tax income to pay for a month’s broadband. Meanwhile an Australian third year teacher might only need to work three hours to buy the same amount of broadband even though prices there are higher.

The numbers here are to illustrate the point, don’t take them literally.

Comparisons

If you take PPP and affordability into account New Zealand broadband may still look expensive relative to some countries, but the gap will narrow with others.

Another way to look at whether New Zealanders pay too much for broadband is to flip the question on its head to “do New Zealand broadband service providers make excessive profits?”

The main telcos are profitable, but they’re not making high margins from broadband; mobile is a more lucrative market. The broadband market here is competitive with dozens of players.

Network building costs

We also need to take input costs into account.

It costs a lot less to build a fibre network in Singapore than in a place with a more dispersed population like New Zealand. The input costs are higher here. You'd expect prices to be lower in densely populated counties than in places where the population is spread out, that aside, infrastructure is more expensive to build here.

Government can explain two other reasons why prices can differ between national markets. New Zealand telecommunications is regulated by the Commerce Commission which has a focus on making sure it remains competitive. There are niggles, but the big picture is that competition continues to work well here.

Subsidies

The other way governments can affect broadband prices is with subsidies. Here there were soft loans to help fibre companies build the UFB network and there are grants for rural comms towers and other projects, but there isn’t much direct government subsidy.

If we take all these matters into account, we can conclude New Zealanders are not, in general, paying too much for broadband.

This brings us back to NZ Compare, the organisation that issued the press release.

Shop around

NZ Compare allows broadband customers to comparison shop for a better deal. It makes money as consumers browse and click options on its site. While that means it has an incentive to keep users checking and churning, that’s not a bad thing, informed consumers get better deals but only if they shop around.

And that’s another point of difference between the 223 markets the Cable survey canvassed. Markets where there is a free flow of price information and where it is relatively easy for a customer to switch from one broadband provider to another are more competitive. That in turn means users are less likely to pay too much for their broadband.

So, do Kiwis pay too much for broadband? After working through all the arguments shown here, that looks unlikely.