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How to make broadband a mass market industry
16 Feb 2006
By Paul O'Sullivan, Optus Chief Executive, at Internet Industry Association Annual Dinner

Introduction

As tonight's crowd shows, the Internet Industry Association is a meeting place for some very different types of people.

We've got the staid corporate types like me and my Optus colleagues.

But we've also got some of the original, authentic, 'started the business in a garage when I was fifteen' types.

Perhaps over time the balance has shifted: fewer t-shirts with the logos of obscure heavy metal bands, and more suits and ties.

As well as a meeting place, the IIA does vital work in speaking up for our industry - to politicians, to regulators, to the media, and to the community.

Ours is a very young industry - which means it can easily be misunderstood.

That is why the IIA's advocacy work is so important - and why it has strong support from Optus.

The IIA also provides a forum to debate the big issues for our industry.

Such as the question which has been posed as the theme of this dinner: what is 'next' for the Australian internet industry?

Tonight I want to suggest a vision for what our industry can achieve - what should be next.

Internet access in Australia should be ubiquitous. Everybody should have it; everyone should use it.

We've had a decade of hype about how the internet was going to bring telemedicine and electronic banking and videoconferencing into every home.

Those predictions date back to the days of Ted Pretty's black skivvy.

Today, of course, that skivvy is a mere historical curio, a museum piece - much like Telstra's commitment to wholesale.

And yet we have still come nowhere near to fulfilling the potential of the internet for Australia.

So tonight I have three main points. First, that internet and particularly broadband penetration, while improving, is a still a long way behind where it should be.

Secondly, I want to highlight what is at stake for Australia in getting our penetration up to world competitive levels.

Thirdly, I want to identify some of the barriers which have held us back - as an industry and a nation. By overcoming these barriers, we can deliver on the vision of a ubiquitous internet.

Internet Penetration

So let me turn firstly to the question of internet penetration and particularly broadband penetration.

The picture has dramatically improved over the last two years.

According to the ACCC, as at 30 September 2005, total broadband take up was almost 2.6 million - up 98% on the figure twelve months previously.

Optus has been a big part of that increase. We recently achieved the milestone of 500,000 broadband customers.

And it was our entry into residential DSL in February 2004 which brought a sharp drop in retail prices - in turn sparking the phenomenal growth of the last two years.

But as we all know, this growth has come after several years in which Australia was, quite frankly, the idiot in the OECD village.

Even after this surge, we are still well back in the pack.

According to the most recent OECD statistics, which came out in June 2005, Australia has 10.9 broadband subscriptions per 100 residents.

That puts us seventeenth, just behind Luxembourg, and below the OECD average. This is in stark contrast to Denmark, Iceland and Norway that have about 20 broadband subscriptions per 100 residents.

Nor is the comparison with other technologies a flattering one. For example, the penetration of mobile phones in Australia is now over ninety per cent, and still growing.

In other words, almost every adult Australian sees a mobile phone as a necessity in their life - while less than half of Australian households feel the same way about broadband.

Why it Matters for Australia

That brings me to my second theme: driving internet penetration is important not just so that we can all grow our businesses - it is critical to Australia's competitiveness and prosperity as a nation.

For corporates and governments, IP based applications will be critical to getting cost efficiencies.

And better IP based services from corporates and governments will give households more reason to go online.

In the future, a country that does not have virtually ubiquitous broadband will simply not be competitive.

There are numerous credible economic estimates of the substantial macro-economic benefits of broadband.

For example, the Federal Government's Broadband Advisory Group (BAG) report cited an estimate by consulting firm Accenture - the universal adoption of broadband could produce economic benefits of $12 to 30 billion per annum to Australia.

That report is three years old - ancient history in internet terms - and I believe that estimate is conservative.

So the prize is huge.

But equally, the threat of falling behind is very serious.

We can't be a nation of knowledge workers without the right tools.

As Alcatel's Australian CEO observed in 2004: "It doesn't matter to Australia that 65 per cent of the population of South Korea has a broadband internet connection. It does matter that the Koreans are using it to be more productive and better educated than we are."

What is Holding us Back

So if Australia's broadband penetration is poor - and yet the returns to improving it are high - what do we as an industry need to do?

I believe there are three main barriers which are holding back growth and penetration in internet and broadband in Australia.

It's Too Hard for the Consumer

The first is that we simply make the experience too hard for the consumer.

We do not offer a simple, seamless, integrated, end to end internet product which mums and dads can buy off the shelf with confidence.

I know that many of you here this evening will wish to differ - including many of my own Optus team.

But consider how much our customers have to worry about: the type of connection - be it DSL, cable, wireless or satellite; the speed of the service; whether their PC is compatible; their download limit; what modem they should use; conflicting software on their PC; security; filters and firewalls; internet addresses; to bundle or not to bundle.

That's more decisions than some people make in a life time.

Contrast that with the model in pay television.

As the consumer, you make one phone call - and then everything else is done for you.

The operator - be it Optus Television or Foxtel or Austar - will come and install the set top box, connect it to the network, and even give you a brief tutorial in how to use it.

Now my friends in the pay TV industry would be the first to admit they have some challenges of their own - but I certainly think their model is effective in removing significant barriers to customer take up.

At Optus, we have taken important steps towards reducing customer complexity. We've simplified our plans, we throttle speeds so customers don't get big bills and we're investing $150 million in our ULLS based broadband network.

In addition the barrier of complexity, our industry must also address the well publicised concerns of security, fraud, SPAM and so on. The IIA is right to highlight these issues, because they are further barriers to consumer take up of our product.

Consumers don't see what they would use it for

The second barrier to take up is that many consumers do not know what they will use the internet for. They just do not see a reason to get an internet connection or a broadband connection.

This gets more important factor as we to go beyond the first thirty per cent of households. By definition, as an industry we are now seeking to attract people who are not particularly tech-savvy.

Yet what do these people see when they look at our marketing? They see offers for faster download speeds, or 20 gig download limits.

If you don't see the benefit of having internet access, then a faster speed or a higher download limit is simply giving you more of something you don't want.

It seems to me that as an industry we need to do a better job of selling the benefits that internet access can bring in people's lives.

We need to show the benefits of exchanging emails and photographs with friends and relatives; the benefits of doing banking and shopping and travel bookings online; the benefits of doing online research for study or hobbies.

If I can point to a good example of this approach from another industry, Qantas has a billboard near Sydney airport showing a father taking his son to soccer practice, with the message that 'we'll get you there in time for your most important meetings.'

Now, one difficulty with this kind of marketing is that our industry is vertically disaggregated.

The typical ISP will naturally tend to focus its advertising on the parts of the process that it controls - such as download speed - rather on the parts that are upstream from it - such as the benefits of internet banking.

But maybe we can learn from the tourism industry. There are advertisements for South Australia, or Melbourne - even though much of the benefit from that advertising spend will be captured by individual hotels or restaurants in those destinations.

Do we need an 'Australian Internet Visitors Bureau' which sees its mission as marketing the internet as a destination? This would benefit both ISPs which provide 'transport' to the destination, and content providers which are the equivalent of the restaurants and hotels at the destination?

There is not enough competition

The third barrier is at a more fundamental level - the economic structure of our industry means that there is not enough competition.

I tend to think of the internet industry in three layers - the physical telecommunications network at the bottom layer; the provision of internet access at the next layer; and the provision of content over the internet as the third layer.

In all of these layers, the market structure is far from ideal.

In the physical network layer, most households in Australia have only one connection coming into the home.

The company which owns all of those connections has around ninety per cent market share in basic access.

The very same company is able to leverage its market dominance at the bottom layer into a very strong position in the internet access layer. And increasingly it is seeking to dominate the content layer as well.

In recent months, Telstra has been flexing its muscles on many fronts.

They've demanded a holiday from the regulatory regime - as the asking price for rolling out the fibre to the node network.

They've jacked up the price of local call resale by over $3 a month, while keeping their own retail prices unchanged.

They've pushed up the price of wholesale DSL to many internet service providers.

And they have unilaterally increased ULLS prices from $13 in the cities and $22 in the suburbs to $30.

Many have speculated that Telstra's real agenda is to kill the ULLS rollouts from Optus, Primus, iiNet, Internode and others - rollouts which offer the best chance for decades to break Telstra's monopoly on local access.

In fact, the latest developments are eerily reminiscent of the cable wars of the mid nineties. Optus announces a new network which will bring competition to Telstra - and Telstra responds with its own new network which mysteriously happens to match almost exactly the footprint of the Optus network.

To borrow a line that somebody else we know seems to like using: 'I've seen this movie before.'

The events of the last few months simply highlight Telstra's desire to reverse the trend to greater competition. We must continue to battle that trend - because otherwise it will remain a factor which dampens broadband take up and Australia's progress.

Conclusion

Having highlighted the barriers we need to overcome, let me conclude my remarks by returning to the vision I identified at the outset.

Broadband internet should be an ordinary part of life in Australia. We should have 100% household penetration. Broadband needs to become the fourth utility - behind electricity, water and gas.

For broadband to be a true become a mass market service and the fourth utility, we need to overcome the barriers I have mentioned.

Tonight, then, I want to call on all industry participants to jointly shoulder this challenge.

Let's make our product simple, easy to use, robust, cost effective and compelling.

Let's work to market the benefits of using the internet.

And let's build a more competitive market structure - where the logic and dynamic of competition drives all of us to greater achievements in bringing new customers into the category.

In turn, we will deliver an important outcome for the whole nation - world class, high speed, ubiquitous internet services which help Australian consumers and businesses live, work and compete more successfully.

Thank you.