10 September 2014

The Vertigan Panel has released two reports in the last few months that have sought to clarify the way forward for Australia’s fraught telecommunications policy debate.

Both have fallen into line with the government’s policy regarding the rollout of the multi technology mix to replace the previous government’s policy of deploying fibre-to-the-premises to over 90 per cent of Australia’s homes and offices.

However, the reports, so far, have not addressed some of the long term historical issues with Australia’s telecommunications market structure.

Some 25 years ago, the Hawke and Keating governments started the process of deregulating Australia’s telecommunications industry by breaking up the then Telecom Australia monopoly. Today we have a situation where government is funding the creation of a new National Broadband Network monopoly.

Why is the Australian government still involved in telecommunications, especially in the large urban metropolitan areas where a natural monopoly is not the status quo? Questions about supporting telecommunications regional and rural Australia through subsidies are important, but these can only be considered once the structure of Australia’s telecommunication cash cow markets — the metropolitan areas — is resolved.

What has gone wrong?

In a few short words, Australia’s process of deregulation has failed to produce infrastructure competition in the fixed telecommunications market. The mobile market, being a brand new market since the early 1990s, has flourished on the back of infrastructure competition between Telstra, Optus, Vodafone and for a time, Hutchison Telecom.

Networks are being upgraded as new technologies are released (Analog, GSM, 3G, 4G). New innovative services and handsets are being released without any government intervention. Internationally, we are seeing infrastructure competition in the fixed telecommunication market on steroids. In the US, we have AT&T and Verizon responding to threats from Google, Comcast and TimeWarner with the rollout of FTTP and fibre-to-the-node networks. In Europe, we see British Telecom and Deutsche Telekom rolling out out faster FTTN in response to Virgin Media and Kabel Deutschland respectively.

Pressure from the market is driving up headline broadband speeds — just last week the recent Vodafone acquisition, Kabel Deutschland, announced the release of 200Mbps products. Deutsche Telekom may find its FTTN network needs more fibre investment. The rise of the “Gigabit Network’ is coming from competitive forces driving investment in fixed networks. Private sector funded fibre is being deployed widely to get closer to the end user.

Cable vs. telcos

A common thread in other markets is the battle between cable networks and telco networks. Back in the 1970s and 1980s, cable networks were built for subscription TV. Telco networks provided basic telephony. Since the 1990s, these networks have been converging to both operate in the same market to deliver broadband services that provide TV, telephony and internet access.

The latest cable standards (DOCSIS) have enabled cable to provide higher headline download speeds than FTTN networks, requiring telcos to build more fibre — FTTP and fibre-to-the-drop point — to stay competitive. In summary, convergence to a broadband world, has enabled these two asset classes, in properly structured markets, to compete for the same customers and drive investment and innovation.

In Australia, we had the nascent beginnings of such a market structure when Optus started deploying its cable network in the mid-1990s. However, seeing the potential threat, the still government-owned Telstra teamed up with News Corporation, to follow Optus down every street with its own cable network. After a bloody battle, where both companies announced huge financial losses, Telstra and News Corporation won the day and Foxtel became the dominant subscription TV business in Australia. Despite these losses, today’s Telstra CEO, David Thodey, has said the decision to partner with News Ltd and create Foxtel was “the best thing we’ve ever done”.

Optus, however, was not able to recover from this rout, and the Optus cable asset has played a minimal role in infrastructure competition.

The ACCC chairmen of the early 2000s, professor Allan Fels and Graeme Samuel, saw the looming danger of Telstra’s control of Foxtel and called for Telstra to divest their Foxtel shareholding. A Telstra spokesman of the day is quoted as saying the Howard government rejected this advice because it “would only lead to greater media concentration and deliver no benefit to consumers.”

Telstra, relieved of any push to relinquish its control of the Foxtel network, was able to control the fixed telecommunications market until this day. The ACCC, despite much recent criticism, was the only bulwark against a total Telstra retail monopoly. The access regime it supervised has enabled competitors such as TPG Telecom, iiNet and M2 to grow into sizeable companies, however no challenger cable based company has emerged after the battles of the 1990s and early 2000s.

An opportunity missed

Australia’s industry and policy decision makers missed the opportunity now delivering benefits in most other comparable markets to have cable networks compete against telco networks to deliver better fixed broadband. Instead, Australia debated how to separate Telstra’s retail business from its network business. The inability for successive Coalition and Labor governments to negotiate a deal for Telstra to invest in FTTN demonstrates the power Telstra had in the fixed telecommunications market. The creation of NBN Co was a bold attempt to break this stranglehold. The prospect of a government national FTTP network was enough to get Telstra and NBN Co to negotiate a deal for Telstra’s structural separation.

All parties to the NBN debate acknowledge FTTP as the end game. NBN Co’s original FTTP plan was to get there as soon as possible without complicated operational and commercial issues of dealing with legacy networks. This could only be done with government backing and specific regulatory arrangements. It was a unique plan that unfortunately could not get broad political support, despite the huge leap it would provide for Australia’s digital economy prospects.

But back to the present.

We now have a government policy backing a multi-technology mix. This essentially is a re-engineering of Australia’s cable assets (Telstra and Optus) and last mile telephony copper assets so that they work into the Labor government’s NBN model of a wholesale monopoly network provider.

Communications Minister Malcolm Turnbull is confident he can gain control of the necessary cable and copper assets without paying Telstra and Optus any more than the valuations struck under the definitive agreements negotiated in 2011/12.

The real cost benefit analysis yet to be done

The question for the Vertigan Panel is now then clear. When the government gets control of these assets, with NBN Co as presumably the asset owner, what should be done. This is the question that needs to be addressed – not which is the optimal technology and what is the market’s “willingness to pay”.

Should Australia continue down a path with few, if any, parallels in other international markets. What will be the incentive for government to continue to invest in fibre technologies? Or should these assets, now under government control, be readied for privatisation with a requirement that no single owner can control both cable and copper assets? Internationally, competition is driving more fibre investment than government can with its strained finances.

The Vertigan Panel has this opportunity under its terms of reference to consider “the issues associated with infrastructure based competition and the economic benefit of alternatives”. This is the real cost-benefit analysis that should be done.

Australia may still have one last chance to reap the benefits of infrastructure competition and ensure that there are incentives for private sector capital investment to build high speed broadband networks in metropolitan areas — the rest of the world is doing it this way.