Australian Telecommunications Summit

Strategies for a competitive telecommunications and ICT industry.

Sydney
30 July 2003

Broadband: Is there any other issue so pressing, so important that it will determine one way or the other the very survival of communities?

Let me begin by reasserting Labor’s commitment to broadband.  Labor’s vision for Australia is for universal broadband access.  Universal – that means everyone, at affordable rates and a quality service.

Labor also believes that there is a direct relationship between need and remoteness from cities:  that is, the more isolated your geographic location, the greater the need for affordable, reliable broadband services.

I have a lot to say about this issue so I will proceed on the assumption that we are in agreement about the urgent need for affordably, quality connectivity.  I assume that the compelling benefits for broadband over narrowband are understood.

The government’s contribution to the improvement of internet service has been memorable for its inadequacy.  Senator Alston’s big commitment arising from the Besley Report was to make the provision of 19.2kbps a licence condition for carriers.  This is analogous to making it a license condition for vehicle builders to include an engine.  An obvious and sensible inclusion, but laying bare the useless rip-off the product was without one!

So much of the so-called broadband response by the Government is actually responding to inadequacy of the existing pitiful and aging infrastructure to cope with data and internet usage.  And much of the response claimed to address the lack of service quality is only reinforcing the monopolistic situation that allowed the pitiful and aging infrastructure problem to arise in the first place.

So whether it is the Internet Assistance Program, elements of the Besley and Estens inquiry responses or the extended zones contract, increased expenditure of taxpayers money to improve services has occurred as a direct result of  a having a lazy, anti-competitive carrier in a monopolistic position to control the crucial last mile.

But this is only half the story.  The other half is genuine future proofing: networks that will carry the broadband-hungry content that will drive regional and rural economies for the next 30, 50 even 100 years.

Far from future-proofing Australian networks, the existing inadequate infrastructure is being reinforced.  This will have the opposite effect of preparing Australia for the 10 and 20 mbps pipes homes and businesses will need.  Real future proofing means building networks capable of carrying 10-20mbps of data and having a pricing structure to allow it to happen.

For Governments, this means ensuring the competitive environment in communications is conducive for new business cases for new, alternative, truly broadband infrastructure.  Only then can the content, applications and more sophisticated interactive uses emerge.

Competition and Ownership

It seems that we have forgotten that the starting point was acceptance of the policy proposition that competition in telecommunications would:

	Reduce prices
	Improve services
	drive investment

These three things would work hand-in-glove.  The theory was that over time, several things should have happened.

	As competition became stronger, consumers should require less protection, because they could shop around;
	Telstra would require less regulatory attention as they would respond to opportunities to sell access to competitors
	Less intervention would be required by government to drive new investments, with only areas of identified market failure defining a role for Government.

This scenario was completely dependent on strong and effective competition to keep everyone honest, particularly Telstra as the incumbent.  What Professor Alan Fels said in his final report to Government was that competition in telecommunications had failed and would keep on failing.  He pointed to whole areas of chronic failure. As a symptom of this failure he pointed to the need for more and more regulation, eg the Consumer Service Guarantee (CSG).

In other words. Prof Fels points quite clearly to evidence of the failure of competition in by the need for more and more regulatory intervention to protect consumers and control prices. But we can also see a symptom of this failure in the ever greater government intervention needed to drive investment , for example over $1 billion spent on infrastructure-oriented programs like Networking the Nation (NTN),  Advance Networks Program (ANP) and the Building Advance Regional Networks (BARN).

Another symptom of the failure of investment is a step even further back from new infrastructure.  The Government has now been forced to intervene in the maintenance of the existing telecommunications infrastructure.  Much of the Estens response to poor internet services in the bush, and much of the response to the Broadband Advisory Group (BAG) is aimed at upgrading the existing infrastructure to be able to support existing dial-up internet services!  This is a far cry from affordable broadband per se.

Estens himself said competition was the starting point in to improving regional telecommunications services: the strong implication being that competition was obviously failing.

The Government response has been to throw taxpayers money at the symptoms of the problem while persistently refusing to acknowledge the root cause – failure of competition.

This refusal I believe is driven by the Government’s fundamental conflict of interest in propping up Telstra’s share price to optimise the chances of privatisation.  But I bet even the government did not think Telstra would require so much propping up!

Professor Fels has no such conflict and pointed straight at the root cause: the fundamental incentive for Telstra to favour themselves over others with respect to the access regime.

In the absence of effective competition, we can say with confidence that the taxpayer is never able to stop reaching into their own pockets every time there is a problem in telecommunications, be it metro, outer-metro, regional, rural or remote, if the Government wants to maintain services.

In privatising Telstra, the Coalition wants to create a private company that will forever have to have its investments in some parts of the country financed by the taxpayer.

In other words, we will have the worst of all worlds:

	A privatised Telstra that dips into taxpayers pockets on a regular basis to update failing infrastructure;
	A privatised Telstra has no way of handing back profits to the broad community through a public dividend;
	A privatised Telstra implementing lowest common denominator service that can be maintained by only regulation.
	A privatised Telstra that continues to invest in internet -inhibiting infrastructure

This last point takes to the next area of emphasis in my presentation this morning.

Perpetuation of poor infrastructure

A huge legacy of under-maintenance and infrastructure neglect has been exposed through the Senate Australian Telecommunications Network Inquiry.  But there has been other aspects to the chronic and debilitating underinvestment by Telstra in their network.

However, because their network is the network through which competitors also provide services via the Access regime, poor infrastructure affects competitor’s ability to provide services as much as it does Telstra.

Let me focus on just one aspect of the infrastructure.

A pair gain is a collective term for a range of devices that split or multiply existing copper pairs to create more services.  By more services I mean more dial tone.  Pair gains made sense when the network was used for voice only.  Lots of dial tones can be extracted from one length of copper when 2.4kbps was all that was needed for good voice quality and OK fax.  Connection speed had little relevance.

But then in 1993-94 the world changed and people all over the place started using telephone lines for dialling up the newly commercialised internet.  Suddenly speed mattered.  Suddenly pair gains mattered because they impacted directly upon the speed and quality of the data connection people were able to achieve.

In March 2001 I launched my Pair Gain Victims campaign.  At the time I knew there were several different types: Small ones that split individual copper pairs into to ‘dial tones’ and halved connection speeds on each to less than 28.8kbps:  Larger ones called Remote Integrated Multiplexors or RIMs, that seemed to provide reasonable speeds but prevented ADSL connections.

The campaign struck a chord with frustrated internet users.   What became apparent very quickly was that Telstra’s use of pair gains in their network was “secret telco business”.   There was not one word of the existence, application or use of pair gains on Telstra’s web site or the inhibiting effects.

My campaign led to the public exposure of the extensive use of pair gains for consumers, for the first time, who had been kept in the dark.  Not least because Telstra charged a whole new ‘line’s’ worth of rent, whether a pair gain was installed to achieve a second ‘dial tone’ or service at home.

Given that second lines where installed often to create a ‘data’ line for internet, it is easy to understand why some people got angry and frustrated with the run-around they got from Telstra who plain refused to acknowledge the existence and use of pair gains in the network.

To cut a long story short, the campaign helped solve many mysteries of poor service, slow speeds that were indeed a result of Telstra’s local loop network infrastructure, not just modem configuration and ISPs, as Telstra had everyone convinced was the case.

After endless estimates hearings and evidence painstakingly extracted through the Senate Inquiry into the Australian Telecommunications Network, a clearer picture is starting to emerge.

There are 7 types of small pair gains:

	ANT 1 – up to 50 kbps
	1+1 FM carrier system 26.4 kbps or 9.6 kbps on derived channel.
	2 channel digital pair gain system 19.2 kbps
	4 channel digital pair gain system (Phase 1 type and phase 2 type) up to 7.2 kbps
	Rural access multiplexor RAM  (Phase 1 type  26.4 kbps and phase 2 type 28.8 kbps)

3 medium pair gains systems.

	Mini line concentrator 14/5
	Mini line concentrator 15/6
	Mini line concentrator 16/6   all up to 50 kbps but limited dial-tone……

6 large pair gains systems

	Large line concentrators up to 50 kbps
	Remote customer multiplexor 26.4 kbps
	Digital Concentrator system DCS-20 26.4 kbps
	Remote integrated multiplexor 26.4 kbps non-integrated or up to 50 kbps.
	Small Capacity Distribute systems SCADS 28.8 kbps
	SCADS with G703 (transmission )28.8 kbps

Radio concentrators, used extensively in the donut are even worse…

	Digital radio concentrator system DCRS – up to 7.2 kbps
	High Capacity Radio Concentrator HCRC – up to 26.4 kbps

There are around 12 other types of radio concentrators, point to point and fixed wireless access with an average maximum connection speed of 14.4 kbps.

So what is the Government doing?  It is worth re-capping their form to date in the midst of the effort to Privatise……

1^st tranch sale

250m  1997    RTIF

20 June 1999  -2^nd tranch sale – Social Bonus

	10m     1999    TIGERS Trials in Innovative Government Electronic Regional Services
	40m     1999    Intelligent Island (combines with TIGERS)
	40m     1999    Advance Networks Program (ANP)
	15m     1999    Connecting Tasmanian Schools
	25m     1999    continuous mobile phone coverage on busiest highways
	150m   1999    untimed local calls in remote Australia
	15m     1999    Launceston broadband project

16 December 1999

	70m     1999    BARN
	45m     1999    Local Govt Fund
	36m     1999    Internet Access  (Local points of presence)
	20m     1999    Telco needs remote and isolate communities
	3m       1999    More for mobile phone coverage

15 May 2001

Response to Besley Inquiry

	52.2m  2001    National Communications Fund
	12m     2001    Govt proportion of Internet Assistance Fund (to achieve 19.2 kbps) Note Telstra component of $38m included means total $50m.
	37.7m  2001    mobile phone coverage for centres with more than 500 people
	50.5m  2001    More for improving mobile coverage

Total so far $671 million

This means that for this taxpayers money being spent, the situation is getting worse for consumers, not better. On the 25^th June, the Coalition issued a press pack announcing that they had accepted ‘all’ of the Estens Inquiry recommendations.

However, going back to my main point that lack of competition is the root cause, the fact that there was no recommendation specifically addressing the need to improve competition is proof this inquiry is a stunt to garner National party support for privatisation.

In other words, the Coalition ensured the Inquiry also fundamentally missed the point about competition being the problem.

Lets take a look at what was said….

On 25 June 2003 the response to Estens Inquiry to date including insisting that Telstra replace radio concentrator systems  (although evidence to the ATN inquiry indicates that this only occurred when they break down).

Another ‘accepted’ recommendation was that the Government require from Telstra formal undertakings to improve services affected by pair gains.  Telstra themselves nominated the cost of $2 billion to replace all pair gains and continue to defend the ongoing installation of some types of pair gain systems.  So much for that.

Other elements of the response included few surprises:

	15.9m  2003    further extend mobile phone coverage to small population centres…
	4m       2003    Satellite handset subsidy
	10m     2003    IT training and support in rural and remote areas

But finally we get to the Broadband issue.

The ‘National Broadband Strategy’ that was announced contained the following….

2.9m – national co-ordination of strategy aimed at government procurement (demand aggregation) called the National Broadband Strategy Implementation Group (NBSIG)

	8.4m – demand aggregation through the creation of Demand Aggregation Brokers. (DAB)
	23.7m ‘catalytic funding over four years’ to aggregate demand of health and education (through ‘DAB’s) through the Coordinated Communications Infrastructure Fund (CCIF)

and finally the

107.8m – Higher bandwidth Incentive Scheme (HBIS)

In other words, there is 107.8m for HBIS and 35m for demand aggregation for the Commonwealth.

Little is said about the use of these related demand aggregation for stimulating the construction of alternative infrastructure to compete with Telstra.

There is nothing that I could find in the Government material that raised the spectre of using these demand aggregation strategies to displace Telstra as the incumbent monopolist and create competition.  Competition being the root of the problem, after all.

What has been created is quite possibly a mechanism to legitimise what I see as Telstra’s predatory pricing strategies in regional Australia.  Everyone knows Telstra has a habit of pulling a ’special’ rate out of the bottom drawer when the local communities who are fed up get their act together with a community telco or leverage their demand for better prices from competitors.

Demand aggregation is smart policy but only if it stimulates competition, not reinforces a monopoly.  This new announcement of the Government ensures the latter is a distinct possibility, particularly when viewed in conjunction with the way existing expenditure of the Government on connectivity programs has served to entrench Telstra’s monopoly in regional and rural Australia.

And now the HBIS.  Well, we can minus 35m up front because that much is pulled out of an existing program – building advance regional networks, or BARN.  This means 107.8 minus 35 =  leaving 72.8 million new money.  I should say BARN was part of the Besley response, so it is interesting to see this money being underspent and then recycled into each new announcement.

The minimal amount of information about how this money is a perfect example of how taxpayers money is manipulated to support Telstra’s monopoly.  Although the details are still t be finalised, It seems the money will be spent on ‘one-off, per customer’ payments.  In other words, only service providers existing or able to install in that market will be eligible.  The details conveniently are yet to be worked out.

Ideally, all this money will go to independent broadband local loop infrastructure providers who are battling to get their business cases to stack up because of, you guessed it, anticompetitive behaviour of Telstra in those markets.

The point is that there is nothing in these initiatives that will change anything.  The Government diligently avoids supporting ‘disruptive’ technologies and many of their funded projects reinforce Telstra grip on the markets.  In the context  of the Emerging markets report delivered to the Howard Government recently, which says competition is going backwards, this is a grave situation.

In conclusion, I would like to quote Professor Alan Fels, then Chairman of the ACCC in his final Report to Senator Alston, Minister for Communications, Information Technology and the Arts, on Emerging Market Structures in the Communications Sector, which was released publicly in June 2003. Fels asks this question and then answers it:

Is the supply of telecommunications and broadcasting services currently competitive?

Whilst regulation has generated some positive outcomes in the telecommunications, pay TV and FTA sectors, the Commission believes significant competition concerns remain in each of the sectors outlined below.

In relation to Telecommunications, the following observations and recommendations were made:

The Commission’s analysis indicates that the progress of competition in telecommunications markets is slowing. To date, the type of benefits that have arisen from the introduction of competition in telecommunications markets have largely flowed from competition at the retail level of the market as opposed to competition between telecommunications infrastructure providers (the wholesale level of the market).

The incumbent, Telstra, remains a dominant firm in telecommunications. It is one of the most integrated communications companies in the world, continuing to be the major wholesale and retail supplier of telecommunications services, including:

	local, national, long-distance, international and mobile telephony
	dial-up and broadband internet
	data
	printed and on-line directories
	pay TV (through its 50 per cent ownership interest in Foxtel).

Importantly, Telstra owns two of the three major local access networks outside the CBDs of major cities. In addition to owning the copper (PSTN) network that connects virtually every household in Australia, Telstra owns the largest cable (HFC) network, which passes 2.5 million homes. The second largest carrier in Australia, Optus, owns the other HFC network. This network passes approximately 2.2 million homes.

The extent of Telstra’s dominance of the sector is demonstrated by the fact it receives almost 60 per cent of total industry revenue, which is almost four times the revenue that its closest rival, Optus, receives. It is reported to receive over 90 per cent of total industry profits.

Chapter 4, which is titled Ownership of Foxtel and the Telstra/Foxtel HFC network says:

Telstra’s market power means it continues to gain strong first mover and other advantages in the supply of new services. The absence of effective competition also reduces opportunities for innovation. Telstra will largely determine the nature and timing of new technologies. It will always be concerned about cannibalising existing revenues and protecting its dominant position when making decisions about the investment in, and supply of, new services.

In consideration of these issues, the Commission has previously stated that:

[A]ccess regulation alone may not be sufficient to curb market power in converging markets such that it may be necessary to consider whether structural separation of ownerships of inputs to these services is required.[1]

A number of international precedents illustrate the types of competition concerns that arise in relation to ownership of media, pay TV and telecommunications companies. Several OECD countries have prevented incumbent telecommunications companies from owning cable networks. The European Commission has also objected to a number of merger proposals between traditional telecommunications companies, cable companies and content providers on the grounds that they would be damaging to competition through foreclosure of key inputs to competitors and/or that they would allow leverage of market power across markets.

The Chapter concludes with the following recommendation:

The Commission believes there would be significant benefits from divestiture of Telstra’s HFC network. This view is based on the likely improvement in the competitive dynamics for basic telephony and broadband services flowing from the creation of a new independent facilities competitor.

I believe this is the bare minimum of structural change required to try and get competitive pressure into the broadband market.  It is the bare minimum because competition driven from the cable network will not directly assist those not able to access the cable network.  The Foxtel network only goes past 2.5 million homes.

It is not likely that the Howard Government will do anything at all with this or other recommendations contained in the ACCC report as they are due to bring their bill for the full privatisation of Telstra into the Parliament.  This means Telstra’s bottom line will be a key concern as they try and fatten the company up for a share price that makes the sale feasible by their standards.  This special concern the Coalition has for Telstra’s share price drives the cosy relationship that sees hundreds of millions of taxpayer dollars subsidising basic services and upgrades for a company unwilling to invest in anything they don’t have to – even if, and sometimes especially if it harms potential competitors.

The Howard Government has no interest in the penetration of broadband in Australia and the policies needed to improve the situation.

That is why Labor persisted with a Senate Inquiry into broadband competition.  This will help to progress the debate and test the conclusion made by Fels in the Emerging markets Report mentioned earlier with stakeholders in the community, government and industry.  No wonder Senator Alston opposed this inquiry – it will shed a great deal of light on what I believe and what Professor Fels believes is a parlous and worsening state of broadband competition.

I will conclude by providing the details of this Senate Inquiry and urging stakeholders to make submissions.  The Senate has referred the above matter to the Committee for inquiry and report by the last sitting day in March 2004.

The terms of reference are:

(a)   the current and prospective levels of competition in broadband services, including interconnection and pricing in both the wholesale and retail markets;

(b)   any impediments to competition and to the uptake of broadband technology;

(c)   the implications of communications technology convergence on competition in broadband and other emerging markets;

(d)   the impact and relationship between ownership of content and distribution of content on competition; and

(e)   any opportunities to maximise the capacity and use of existing broadband infrastructure.

The Committee invites written submissions from interested individuals and organisations to be lodged by Tuesday, 30 September 2003. The Committee prefers submissions to be lodged in electronic form, sent by email to ecita.sen@aph.gov.au. The email must include full postal address and contact details.

Alternatively, submissions may be sent to the Secretary, Senate Environment, Communications, Information Technology and the Arts References Committee, Parliament House, Canberra ACT 2600.

Advice on preparing a submission is available via the Committee’s web site.

Thankyou.

[1] ibid., p. 18.

Tagged: broadband, ICT, Internet, pair gain