26 March 2015

Australia has a very unique fixed broadband market in comparison with other similar countries. A long process of market de-regulation and privatisation of Telstra has failed to create a market structure that drives competition in the interests of broadband consumers.

Other countries with similar telecoms history to Australia, such as Canada, Britain and Germany, have successfully de-regulated and privatised their telecom industries and created market dynamics that deliver investment, innovation and efficiency that benefit consumers and the digital economy.

But in Australia we rely solely on government to heavily regulate the industry to protect the interests of consumers. Regulation enables the likes of Optus, iiNet and TPG to use Telstra’s monopoly copper network, thereby creating an artificial form of competition.

Britain and Germany also regulate access to monopoly networks but importantly competition with cable TV networks is driving upgrades of the old monopoly phone networks to “deep fibre” broadband networks. In Australia, lack of such infrastructure competition has forced the government to step in and fund the upgrade of both copper and cable networks to provide 21st century quality broadband.

So government is now both regulator of the industry and investor in critical but expensive new network infrastructure. But just as in the 1990s when the government was the owner of Telstra and driver of de-regulation the government again finds itself in a conflicted situation.

As an investor the government is keen to ensure its get a return on its investment in the NBN for both financial and political reasons. Any loss, which would be taken through the federal budget, will be a cause of significant concern.

Competition between the private telcos (Telstra, Optus, TPG, iiNet and M2) is meant to ensure consumers don’t get a raw deal. But these private telcos have moved the network investment risk to the government and are now focussed on maximising profits and returns to shareholders.

This change of dynamic towards profit maximisation has been most evident through the industry consolidation of the last few years. Companies such as AAPT, Dodo, Primus, InterNode, Adam Internet and Netspace have been acquired. Significant back office and network cost savings have been achieved and the share prices of the acquirers (TPG, iiNet and M2) have rocketed upwards.

But at what point does this industry consolidation cross a threshold that is not in the best interests of the consumer.

The bid by TPG to takeover iiNet will see this consolidation move to a new level. In normal competitive markets the acquisition of the 3rd largest broadband provider by the 4th largest (see graphic below) would not normally present a “substantial lessening of competition”.

screenshot-www.accc.gov.au 2015-03-26 09-34-21

But, due to the NBN, Australia’s fixed broadband market is not a normal market. Competition is already compromised by the use of an underlying common network by all retailers. Scale efficiencies that may be pro-competitive in normal markets by allowing more efficient recovery of investment do not apply. Benefits that come from scale are likely to lead to excessive profit taking by retailers.

Consumers face risks of having to fund the underlying NBN network upgrade and also the potential excessive profits of retailers who have avoided the network investment risk. In the balance between shareholder profits and consumer benefit the risks appear stacked against the consumer if NBN retail competition is sub-optimal.

The ACCC is on record as favouring a market model of infrastructure competition through a dis-aggregated NBN as per the recommendations of the Vertigan Panel. In this scenario, scale efficiencies through industry consolidation may be pro-competitive and benefit consumers.

However, the Government has not (yet) pursued this policy. How should the ACCC, as the protector of the consumer’s interests over shareholder interests proceed in its analysis of the TPG/iiNet takeover?

On one-hand a merger of TPG and iiNet would be beneficial for consumers by creating a competitor that can take on Telstra and Optus in any future disaggregation of the NBN. Furthermore, existing investments in Fibre to the Basement (TPG) and DSL/cable networks in Canberra, Geelong, Ballarat and Mildura (iiNet) may be expanded.

But, given Government policy is up in the air on any future NBN network disaggregation and has placed barriers against private sector network investment in superfast broadband, should the ACCC block the merger to ensure consumers are not gouged by excessive retailer profits?

Australia’s recent history of privatisation and de-regulation of the fixed telecommunications market has not worked in the consumer’s favour. Large profits have been made by shareholders of private sector companies while the taxpayer has taken on the risk of the huge capital investment required to upgrade the network. Competition has been artificial rather than robust.

So who do the consumers have on their side? At least the Greens have taken a stand and pushed for the takeover of iiNet by TPG to be blocked by the ACCC. Most industry commenters seem to be comfortable that the merger is not a problem – maybe that’s because they are first and foremost shareholders rather than consumers.