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"...public opinion deserves to be respected as well as despised" G.W.F. Hegel, 'Philosophy of Right'

Telecommunications--strange commentary « Previous | |Next »
July 13, 2006

There certainly does seem to be a lot of very pro Telstra commentary happening at the moment in the Fairfax Press. We have had Stephen Bartholomeusz and now Kenneth Davidson. Both are writing in The Age. What is going on? The Age is spinning forTelstra. Has The Age been captured by Telstra--fee for comment?

Notice what Davidson is saying:

...the insistence of both Labor and Coalition governments on imposing a competitive regulatory regime on Telstra, which forces it to sell access to its copper network at below replacement cost to its competitors, has simply created a clutch of arbitrageurs whose profits are generated by their ability to undercut Telstra's charges to fixed-line customers. Apart from Optus' investment of several billion dollars in a largely redundant duplication of Telstra's national network, the net result of the competition has been intrusive marketing, with a profusion of call centres and a plethora of deliberately confusing customer plans.

Telstra blocked Optus with the cable network to defend its monopoly position. What we have here is the same spin as Bartholomeusz and Chris Berg --the ISP 's that have been innovative and pushed competition in the telecomunications market are classified as 'arbitrageurs'.The words are different---Berg uses 'small, fly-by-night internet service providers' whilst Bartholomeusz uses 'would-be monopolists, free-riders' but the message is the same. Put a question mark over the innovative ISP's competing with Telstra to break an anti-competitive monopoly.

Davidson then turns to the next major technological advance-- the extension of the fibre-optic network to link with the copper-wire network, where fibre-optic cables would connect to the street nodes through which each of about 200 houses connect to the copper loop.He highlights the implication of the Telstra proposal:

the new technology would effectively bypass the local equipment put into Telstra's exchanges by competitors.This would make what limited investment they have made redundant — and make it impossible for them to collect their rents.In other words, Telstra's proposal would drive its nine competitors — AAPT, iiNet, Intermode, Macquarie Telecom, Optus, Primus, Soul and transACT — out of business.

That's right. It's a classic Telstra move to protect its monopoly position. So what does Davidson say?That the G9
report that attempts to justify competition by offering an alternative model in the form of a Gang of Nine-and-Telstra consortium. But the proposal is a camel...There is nothing in the report about who stumps up the capital. Clearly it is either the Government or the overwhelming majority will have to be raised by Telstra, which will be pretty much the same thing if the Government shelves the T3 sale.

Here is a report that attempts to establish an alternative to Telstra's proposal and to go beyond it being canned because it doesn't have thge financing in place. Shoyuldn't we be evaluatign the proposal vis-a-vis Telstra's to see which is the better model. Nope says Davidson:
The proposal is so cheeky, and the Government, the Opposition and the Australian Competition and Consumer Commission are so mindlessly committed to competition, that this Tower of Babel might get up unless it is blocked by an outraged public opinion.

Huh? So competition is bad? Monopoly is better? The ACC is mindless? This sounds like Alan Jones or John Laws in its over the top rhetoric.
Davidson finishes thus:
But what the hell. As the report says, "FTTN is not an absolute good. If it comes at the cost of destroying competition, it is not worth having." I bet the saddlers said something similar when they saw the motor car was about to replace the horse and carriage.

Note the grotesque distortion. The G9 are talking about a different model of motor car (FTTN) to theTelstra one, not defending a horse and carriage (copper wires).

| Posted by Gary Sauer-Thompson at 4:03 PM | | Comments (4)


Here I am again! I don't have much time for a considered response but I did write to Davidson to take him to task about this "natural monopoly" rubbish. (I just discovered that I sent him two copies of my reply to his, one of which was my angry draft... oops)

Anyway, his reply to my first email was

The fixed line network is a natural monoploy. Do you know any country in the world which runs parallel telephone lines down the street?

Given that my phone line in my home here in Windsor (Vic) is connected to Optus' cables, I have to say that he has some pretty weird ideas. Down the road in St Kilda I could have connected to Telstra, Optus or even Foxtel, if Foxtel provided telephony over it's otherwise identical cable. But we all know why they don't.

To be honest it's almost as if we are dealing with people who have no idea about the technical aspects of what they are talking about. There hasn't been a "natural monopoly" in telecoms for years, what we're talking about is historical inertia.

Davidson goes on to say that

The interconnect price in Australia encourages arbitrage and leaches away Telstra's revenue which should be used for maintenance and upgrade of the network
but apart from the fact that this is the first time I've heard anyone argue that Telstra isn't making enough money, the interconnect price has nothing to do with this discussion. (As far as I knew, interconnect was the technical term for connection of the voice networks; what we are actually talking about here is disconnect.)

Davidson is correct that the pricing encourages arbitrage but I thought that was the whole point. God help anyone who wants to buy wholesale internet directly from Telstra. These ISPs add so much value to the transaction that Telstra is widely considered to be a dirty word in the basements and back offices of most companies I do business with.

I did enjoy reading about Telstra's battles with Coonan, though I think it's too soon to argue that the Government won't end up helping Telstra... not at least until T3 is over and done with.

cheers Mark

Well I'm struggling to. I completely missed Davidson's technical use of 'arbitrageurs'.

An arbitrage is an attempt to profit by exploiting price differences of identical or similar financial instruments, on different markets or in different forms.A type of investor who attempts to profit from price inefficiencies in the market by making simultaneous trades that offset each other and capture risk-free profits. An arbitrageur would, for example, seek out price discrepancies between stocks listed on more than one exchange, buy the undervalued shares on the one exchange while short selling the same number of overvalued shares on the other exchange, thus capturing risk-free profits as the prices on the two exchanges converge.

Well it's not risk free.Telstra's FTTN could mean thathe ISP's lose their investment in Telstra's exchanges that provide us with ADSL2; an investment Telstra was unwilling to make.

I had to look up "arbitrage" and obviously misunderstood the definition. But I agree with you, the ISP's investment is certainly not risk free, and as you say, the ISPs are the ones who are actually pushing the technology out there. If it wasn't for iiNet and others pushing ADSL2 then it's hard to believe Telstra would have got around to it.

In fact, if it wasn't for ISPs we'd probably still be a very, very long way behind the rest of the world:

Although Telstra's deal with Microsoft to use the Microsoft
Network doesn't bar it from supporting other information
networks, such as the Internet, Telstra has no plans to
open up the arrangement. (SMH, circa May 11 1995)

(at the time that article was written, I was a partner in a regional ISP)

Returning to the monopolist, I just received a bizarre email from Davidson. In response to my point that we already have 3 telephone-capable cables in my street (including the 2 coax cables from Optus and Foxtel) he said,

the pay TV cable down your street is junk, unsuitable for

Given that I already receive basic telephony service down this cable, along with very good broadband internet, I have to opine that the debate is certainly not being engaged with any sort of integrity, intellectual or otherwise.

Davidson also replied that I was wrong about interconnect being very expensive. To my mind, he is conflating interconnect with ULL, unless there's another definition of interconnect floating arround. He says that interconnect is cheap, below cost, but my understanding is that it costs millions of dollars to get an interconnect agreement with Telstra, and I know from personal experience that Interconnect was the main reason we didn't have more niche telephony providers in this country (though VoIP is changing this now).

The debate has actually become irrational, and it seems Telstra has effectively seeded the media before the G9 even got a chance. I personally have no idea why the media would want to boost Telstra - to me it borders on collusion.

what is being missed by the Davidson kind of commentary is that Telstra is a media compnay that creates,aggregates and distributes content as well as being a company that owns and runs a telecommunications network.

Telstra wants to build its media assets--eg., Foxtel content will be distributed over its new fibre-optic cable network. It makes sense as networks access is beein commoditised and prices are falling. Hence the need to get a share of the revenues from content delivered over its network.

The media reforms are going to change things--eg., the rise of video over broadband. Television over the internet threatens everybody --free-to-air and Foxtel. Maybe Telstra will team up with Ninesmsn on its new network?

There is a new game in town. That is how Neil Chenoweth in Friday's AFR puts it.

So what we have is a failure to grasp the formation of an integrated communications industry. We also have the Government's failure to develop an integrated communications strategy.