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IPA spins for Telstra « Previous | |Next »
July 11, 2006

Chris Berg, a research fellow at the IPA, had an op.ed. in the Australian Financial Review last week, which argued that the regulator telecommunication market (the ACCC) should butt out of shaping the development of fibre optic broadband network. I interpreted the piece as being opposed to the role of the regulator and as being very pro-Telstra.

Berg says that Telstra is a company that at least in theory should be aiming to maximise its financial returns. If a company, or individual for that matter, makes an investment in the market, they should be subject to their own judgement of what constitutes a fair return, not what a national regulator considers one to be. He adds:

The carrier built its copper-wire network under a government-imposed monopoly. It used taxpayers' funds to do so. Under these circumstances, it was perhaps reasonable to have a regulator open the network up to ensure at least the vestiges of competition. But there are very real problems with such a regulatory regime. Access-based competition encourages service providers, initially leeching off the monopoly provider's network, to step up the "ladder of investment" - slowly investing more and more in the existing infrastructure. This has its advantages in a marketplace with little innovation.

I would have thought that the introduction of ADSL2 by the small ISP's would be an example of innovation. It was Telstra that placed the bottleneck on innovation by capping the speed on its ADSL1 network and tried to spoil the competitive party. Berg, however, disparages this form of competition.

He says:

The ACCC's framework has encouraged the growth of small, fly-by-night internet service providers, whose business model is nothing more than a reliance on the ACCC-determined access prices. Country-wide, there are more than 250 of these ISPs, encouraged not by the whim of the free market, but by the decrees of the regulator. Given their perilous profitability, they are ill-equipped to withstand the rapid technological change of the sector.

Why so? These ISP's have been pushing the technological change after being provided with access to the copper-wire network that is part of Australia's public infrastructure. They have provided competition to Telstra. So the ACC has nurtured competition in telecommunications and has provided opportunites for better competition.The focus on supporting competition has given consumers new techologies (3G, fibre,wireless, broadband) more choice and better pricing.

Berg then shifts to the future proposals for fibre-optic broadband, Telstra is introducing this to future proof its network, which means defending its incumbent position, whilst planning faster broadband delivery to grow its business with its Fibre to the Node (FTTN network). Berg says:

But Telstra's competitors and the ACCC want to migrate the access-sharing framework, developed a decade ago for a monopoly network provider, onto a fibre-optic network developed by an entrepreneurial company with private capital. The FTTN network is highly speculative. Given the current state of technological innovation, it is a risky investment. Telstra must bear this risk alone.

So the regulator should butt out. It is the regulator stifling innovation and entrepreneurial investment. this does not make sense, as Telstra initially stated that it would only build its FTTN network if competitors were locked out, and subsequently put its plans on hold when it appeared unlikely that would happen. Telstra has also said that rolling out a FTTN network would "strand" the other ISP's investments in exchange-based DSLAM's, because the copper loop from the exchange to the "node" would be switched off by Telstra. Under pressure from the regulator Telstra has changed its position to to saying it would provide access on "reasonable terms".

The regulator, acting in the national interest, is trying to ensure fair access to the new fibre network in the absence of an alternative workable model to that proposed by Telstra. Australia needs some form of public infrastructure--that is the national benefit of FTTN can be significantly enhanced if the network is not exclusively owned by Telstra. Is this the first step in this direction---a consortium FTTP network being owned in part by Telstra, in part by other carriers and in part by investors? Should there be infrastructure competition? Should it be publicly owned?

Berg is spruiking for Telstra, isn't he?

| Posted by Gary Sauer-Thompson at 2:54 PM | | Comments (10)
Comments

Comments

By being, until relatively recently, the only company in Australia that had feasible access to the copper network -- copper that was paid for with public funds -- Telstra was able to force existing ISPs to use its ADSL network instead of rolling their own. Its actions have decimated the once-vibrant private internet industry in this country. Rather than "fly-by-night" operators, private ISPs actually introduced internet access to Australia, against the objections of Telstra (we must recall Telstra's attempt to use ISPs and the Internet as a reason to introduce timed local calls to the country -- well before Telstra itself provided either retail or wholesale internet access).

It is surely no coincidence that as the economics of private ADSL DSLAMs have improved -- largely because of the ACCC -- and broadband adoption is starting to take off, Telstra is now looking not just to throttle the investment in copper technology, but to actually make existing investment worthless, by needlessly disconnecting the copper when FTTN is introduced.

The copper network was put into the ground by the PMG and Telecom and should never have been part of the privatisation of Telstra. Berg's assertions about private operators operating on profit margins dictated by the ACCC are laughable -- Telstra is operating a copper monopoly given to them by the government, and this monopoly is a terrible mistake.

People like Berg either don't know or don't care about the history of the Internet in this country, nor do they understand the technical underpinnings of the network or the anti-competative way in which Telstra has acted (and continues to act).

As you can see in this article, alternative proposals are well advanced. Perhaps Berg simply has bought a lot of shares in Telstra, and is simply trying to screw up the Internet in this country to make a profit.

Mark,
you write Telstra is operating a copper monopoly given to them by the government, and this monopoly is a terrible mistake.
Yes Telstra should have been broken up and the copper wire network kept as public infrastructure. It is probably too late for that.

Maybe the IPA has received a commission from Telstra to do some spin?

Maybe the G9's alternative proposal is more of a discussion paper that gets people thinking about an alternative to what Telstra is proposing.

I presume that the financing is not in place. Are Macquarie Bank or Babock and Brown interested? What are the investment analyists saying? Is the market sceptical?

I don't know if the market -- meaning the financial market I s'pose -- is interested in investing in FTTN, but many ISPs both in and out of the G9 have already made massive investments in coax (Optus, Neighbourhood Cable, Telstra), DSLAMs (iiNet and others) or even dialup (Soul), so their ability to raise finance for something like this probably isn't in question; the existing investment is non-trivial and ongoing.

From inside the industry, I'd say there is massive concern about Telstra's ability to set the terms of any discussion about internet infrastructure in Australia. We're seeing this bizarre discussion that Telstra should be given anti-competative guarantees if it rolls out FTTN, even though it will be destroying existing infrastructure from existing competitors who are already providing measurably better service than Telstra (such as ADSL2). "It just don't add up!"

What's more, I for one can't see that there is any real case for a massive single investment in an Australia-wide rollout of a single technology such as FTTN. Apart from the fact that Telstra is already doing lots of FTTN (as well as FTTP), there are a lot of competing technologies (ADSL2, DOCSIS2 and WiMAX) that can provide broadband internet over a metropolitan area without locking out the competition (or digging up the streets).

It's pretty clear to me that this is all about starving Telstra's competitors of customers, and has nothing to do with broadband access. Most of the G9 operators are now providing VoIP service in direct competition to Telstra, at massive discounts, which must have Telstra quaking in it's oversized stomping boots. VoIP is beginning to see use in the provision of basic telephony to subscribers. Unless Telstra maintains ownership of the cables, it's not going to have a business for much longer.

In fact, it's been clear since pretty much the first day the Internet became commercial in Australia that the main impediment to retail internet has always been our inability to get cheap bandwidth into and around the country. Getting the data to the customer is easy -- there are plenty of alternatives that don't involve Telstra -- and this whole debate is nothing more than a power grab.

As for the G9, this proposal has been in the works for some time, and while I've not read it, I'd say they're pretty serious about it (since Telstra represents an extremely serious threat to them).

My guess is that you're correct about IPA. No sane, impartial observer of the history of the Internet in Australia could possibly come to the conclusion that Telstra is good for the Australian Internet.

Mark,
The finger for the mess can be directed at the Howard Goverement.They have been more concerned with getting a good deal on the sale of Telstra (Treasury and Finance) and they put the regulatory regime and infrastructure into the background. They--the ministers--had little idea about the latter nor did they understood the need and importance of highspeed broadband.

Stephen Bartholomeusz has an op.ed. in The Age that comments on the G9's counterproposal to Telstra's bottleneck infrastructure. He says:

THE Group of Nine's "competitive model" for a national broadband upgrade isn't, as many have interpreted it, a serious proposal for an industry consortium to build a new fibre-to-the-node network. While the G9 might like that, they must know Telstra will never let that happen — and that it can't force Telstra to allow it to happen.Nor is there any realistic chance that G9 will build even a scaled-down competing version of Telstra's FTTN network if Telstra builds its own.

As there is only room for one FTTN network the pressure is on the federal government. Bartholomeusz highlights a problem:
The notion that Telstra might participate in a shared-access model that gave its competitors, through its proposed SpeedReach special-purpose company, control over the building and operational decisions affecting the network is ridiculous. Why would Telstra provide the bulk of the funding in order to gift the network to its competitors and pay management fees to them?

He says:
The real point of SpeedReach, one suspects, is to influence the discussions the Australian Competition and Consumer Commission is having with Telstra over the FTTN and the terms on which competitors would gain access to it — and to lay the groundwork for a challenge to the Australian Competition Tribunal if the ACCC eventually signs off on an access regime and clears the way for the network to be built.

The ACCC is the key here. It has the responsibility to ensure competition. Will the Howard Government stand behind the ACCC and ensure comeptiion and a level playing field?

Bartholomeusz is not sympathetic to the G9 group:

Telecommunications, with its monopolist, would-be monopolists, free-riders and a regulatory regime that provides a compelling incentive for gaming by all participants is a most peculiar industry. The G9 proposals illustrate that neatly.

He seems to have lost sight of the policy imperative to establish competition in the telecommunications market. Many of these people talk the rhetoric of innovation and competition but they don't walk it.

Gary,


I certainly agree that the Howard government's handling of the sale of Telstra has been instrumental in causing these problems. Not that the old Telstra was benign, of course, but both the government's holding of so many valuable shares during a time of massive technological churn, and the distribution of so many shares to public, is a recipe for disaster for competition in the industry.


As for Bartholomeusz, I don't get it. There is no reason that we can't have heaps of competition in the internet industry; actually, such competition already exists. Most ISPs I know feel not just threatened by Telstra, but stymied by it. Several ISPs I work with are spending large sums of money creating alternative infrastructure, which belies the "hanger on" moniker.


In the dialup days, before we needed direct access to the copper we had something in the order of 1,000 ISPs in Australia, all of whom were leasing the Internet infrastructure (the "fat pipes") from Telstra (the monopoly provider) and had access to the end-user's copper via the normal (expensive) switched network. Now that ISPs have to put one small part of their infrastructure into Telstra exchanges -- which access probably costs Telstra less than Dialup internet ever did -- suddenly we need a monopoly. Nothing about this debate makes competative or technical sense. The debate is only sensible if you accept that Telstra is the source of huge wads of cash for certain important people.


So, what about me, the person leasing the line to my house? I've paid for that copper many times over. Shouldn't I have a say over the equipment on which the copper terminates? Why does Telstra get to make decisions affecting the wires running into my home?


Telstra is a private corporation built by a massive gift from the Government, which is trying desperately to maintain a monopoly that is neither natural, nor technologically or economically necessary. If anyone is a "free rider" it is Telstra. That the debate is so narrow and so skewed in Telstra's favour is incredibly difficult for me to understand. The trust that the public seems to put into this company is bizzare.

Mark,
I too am suprised by the narrowness and skewing of the debate in favour of Telstra by the informed commentators, given that Telstra is incumbent with anti-competitive ambitions. Currently Telstra is preventing the likes of iinet and internode placing equipment in Telstra's exchanges.

I presume that Telstra has been hard at work 'backgrounding'is my judgement. It is not just a case of poor journalism--not knowing that much about the situation or the industry.From a policy point of view having a single network does make good sense.

I can accept what John Durie in today's AFR says, that the credibility of the Optus-led G9 team is firmly on the line:

Until such time as it has full funding in place and firm proposals before the ACCC, its plan is in conceptual form only. Telstra has made it clear it will not join any consortium and is now negoitating with the government on its own proposal.

True. Funding is important for credibility. I can accept that pricing in the risk for rolling out a fibre-optic network is difficult given the low density of the market and the possibility of wireless technology taking off.

However, the G9 have to start somewhere in their fight for increased competition. They are confronted by Telstra devaluing the investments in ADSL by its competitors by rolling out FTTN.

It seems to me that the G9 strategy has been to give the ACCC some ammunition to fight Telstra's determination to use its market power to remain a monopoly and/or to pressure the Australian Competition and Consumer Commission to allow Telstra to have what it considers adequate returns on its fibre network.

But if Telstra doesn't come to the party re one FTTN network,then the G9 might be better off doing their own regional rollout and ensure they get good competitive access to Telstra's FTTN in the capital cities.

What is not being debated is wwhether free market economics works in telecommunications infrastructure: can it be profitable and delivering value to customers? This is the opposition in telecommunications infrastructure in Australia.

From a policy perspective the federal government should really be using its future fund to help build the required infrastructure---a proper fibre optic cable to the household rather than stopping at the exchange.

Gary,


I think the focus on funding is odd, given that we're discussing multinational corporations (Optus) and ISPs that have been in operation longer than Telstra has been supplying internet access (iiNet, among others). Why is Telstra's (unfunded?) proposal more legitimate that a group of 9 other established companies? Telstra hardly has a reputation for successfully getting cutting-edge technology out to consumers in any particular hurry. Is FTTN a stalling move intended to tie up the competition's access to funding, while Telstra takes it's sweet time getting around to actually deploying it? As you say, nobody will invest in DSLAMs, or the companies that operate them, if they think Telstra will make them redundant -- the chilling effect will linger even if Telstra never lights a single fibre.


In light of this article in the Age about media ownership, it should be noted that another reason for the behaviour of the Government and Telstra supporters is that concentration of the physical plant into the hands of Telstra equates to control of the (new) media. We've already seen the government's paranoia about SingTel supplying telecoms via Optus to the government. Is this push to force other ISPs out of the ownership of the "last mile" related to the War on Liberty?


I agree that free-market economics is not being debated; in fact the natural monopoly of the telco seems not even to be debated in socialist circles - centralise and nationalise is the cry! It's very strange, given the decentralised nature of the Internet, and communications in general. We see time and again where Telstra is treated like a water company when in fact it's exchanges could operate more like a franchise. The technology already works this way, it's the politics that cause the problem.


However, I must disagree with your last point. I believe that the government should stay well away from the last-mile. Government mandated fiber to the home is as unnecessary as fibre to the node. There are plenty of current and emerging technologies that can deal with that - twisted-pair (ADSL), BPL, WiMAX, DOCSIS, line-of-sight WiFi -- even laser!! There is no technical reason that we need government interference over the last mile except, perhaps, to provide standardised access to conduit.


The real problem for internet access in Australia is the long-haul international feeds; this has improved with southern cross, but it's still too expensive. Bring cheap data into the country and then we could stop sending all our servers overseas (making our own ISP industry more robust); we could spend money on infrastructure within the country; and we could get the bandwidth we want. The real cost of internet in Australia is the data charges, which have no practically no relationship to the last-mile delivery technology. 1.5Mpbs internet is expensive because 1.5 megabits is expensive.

I am speechless. This guy is an idiot. There are so many things wrong with the article that I'm just too upset to start.

Mark,
Okay I accept your point that:

that the government should stay well away from the last-mile. Government mandated fiber to the home is as unnecessary as fibre to the node. There are plenty of current and emerging technologies that can deal with that - twisted-pair (ADSL), BPL, WiMAX, DOCSIS, line-of-sight WiFi -- even laser!! There is no technical reason that we need government interference over the last mile except, perhaps, to provide standardised access to conduit.

I was thinking that Costello's Future Fund should make an investment to enable good public telecommunications infrastructure to happen

Mark,
Re the Davidson piece. There is a more informed account by Michael Sainsbury at the Australian. He says that the Howard Government has wanted media reform for almost a decade, Coonan has delivered, and that 'this should ring alarm bells at Telstra, although the company has developed such a tin ear for matters political that they may not be heard. He adds:

Coonan has $1.1 billion to hand out through her Broadband Connect fund to hotwire regional Australia. It will buy a lot of broadband. Expressions of interest are due in tomorrow and the cash will be handed out this year. This is money Telstra originally wanted from the Government last August, as part of its hurriedly put together plan to hotwire Australia. Telstra then decided it didn't want it and now will most likely ask for it again. What is unclear is how much it will now get.

Telsta has a problem has it has bagged Coonan that she is a "lightweight" with "no second act". Telstra took a decision to try and sideline Coonan last year, which, like most of its Canberra strategy, has misfired. Coonan is stronger than ever.

He says that Coonan is working on a broader plan, a national Broadband Blueprint designed to make next-generation high-speed services available all over the country, including many neglected outer metropolitan areas. I guess Telstra will not receive favoured treatment from Canberra.

Sainsbury then says that this week's presentation of an alternative fibre-to-the-node proposal by the group of nine telcos, or G9

shows another way of structuring the industry. The group laid out an alternative future for the industry which would require less regulation, without going all the way down the path of separating Telstra's network and retail operations. Even if it doesn't go ahead, it gives the regulator options. Of course, Telstra won't play ball, at least not yet, and it's easy to see the G9 bid as an attempt for some further wealth transfer from Telstra to others. Still, this is precisely the point of deregulating industries: to move money out of the pockets of monopolies and into the pockets of consumers. Some of this must be done via the pockets of new companies - the trick for government and regulators is to get the mix right, and this is where the Australian Competition and Consumer Commission comes in.

This succinctly highlights the flaws in the Berg, Bartholomeusz, Davidson commentary. It looks as if Telstra is running a campaign to stir up public opinion against the G9.