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Celebrating the Forces of Change
06 Apr 2006
By Paul O'Sullivan, Optus Chief Executive, at ABN AMRO Communications Conference

Introduction

Picking up on the theme of today's conference, 'reform and innovation', I want to talk the tremendous change which is sweeping through the telecommunications industry.

According to Telstra, change is a bad thing and should be resisted.
That might suit their script - but it's just not true.
Change is something to be celebrated – not feared.

It is good for customers; good for competition; and good for Australia.

So today I want to start by talking about the major forces for change in telecommunications: technology; competition; and the customer.
Next, I want to argue that despite some short term turbulence, the outlook for our industry is bright.

Third, I will point out one important proviso - that we must have regulation which stimulates innovation and change rather than protects the incumbent.

Forces for Change

So let me turn firstly to consider the forces for change in our industry.

You might expect me to point to technology - and it is certainly important.

The arrival of third generation mobile technology; the shift from circuit based to IP based telephony; and the delivery of broadband services over DSL; are three technological developments which are driving huge change at the moment.

But technology by itself is not enough.
There have been plenty of new technologies which have simply not been taken up in the marketplace.

I'll instance just one - wireless application protocol, or WAP. This was going to deliver data services over mobile, back in 1999. But it never took off. Consumers were just not interested.

What is more, there is often a long delay between a technology's invention - and its mass market adoption.

DSL, for example, was invented by clever engineers at Bell Labs - in 1988! Eighteen years later, and DSL is only now starting to build substantial penetration in the Australian market.

So technology is one force for change, but there are others which are of equal or even greater importance. And the point I have just made about WAP - that it failed to win customer acceptance - suggests another factor.

An innovation will only succeed in our industry if it is accepted by customers. If they don't buy the proposition - or the price - it will fail.

In our industry, we talk a lot about the importance of broadband for Australia's national economic performance. But it is easy to overlook the fact that the ubiquitous supply of broadband services is not enough to deliver those economic benefits. They only come if there is strong demand and hence a lot of people are using broadband services.

Just as there is not much point in a flash new cross city tunnel if the toll is so high that nobody uses it, there is not much point in a flash new telecommunications service if the prices are high and usage is low.

We have seen plenty of examples of this over the last twenty years. Telstra set the price for ISDN much too high - and hence it never really took off as a technology in Australia.

The same thing happened with Telstra's broadband pricing for several years. As a result, Australia's broadband penetration remained very low.

It only changed when Optus entered the residential DSL market in February 2004 - sparking sharp price reductions.

The result was a surge in customer acceptance of broadband - with broadband connections rising from under 700,000 in December 2003 to 2.6 million in December 2005.

And now the same issue confronts Australia with Telstra's plan to upgrade much of its network to a 12 megabit per second speed using fibre to the node. We might get the shiny new technology - but if history is any guide we will also get overpricing, and in turn customers will not change their behaviour and adopt the new services.

At Optus, we have always paid enormous attention to customer behaviour and what we can do in our marketing to change behaviour. This has distinguished us from Telstra which has traditionally been a technology-led company rather than a customer-led company.

In the late nineties, Optus drove tremendous growth in consumer mobile telephony with the innovation of YES Time - offering customers up to 20 minutes of free talk time to other Optus customers at off peak times. This move revolutionised the way Australians use their mobile phones.

In 2002 with broadband usage increasing and customers spending more time on line - but being stung by big bills - Optus introduced the concept of throttling.

When a broadband customer reaches his or her monthly download limit, we slow the customer's speed down to dial up speeds - in contrast to the traditional industry approach of slapping a big excess usage charge on the customer. By giving customers reassurance, we made them more comfortable about using broadband - and in turn encouraged take up.

And now with 3G technology offering faster speeds and new video features, Optus is again working to stimulate customer behaviour and change the way that our customers use their mobile phones.

In November 2005, Optus became Australia's first provider of 3G Instant Messenger through a partnership with Ninemsn. Instant Messenger is a popular and personalised way of communicating across all age groups.

By using the power of 3G, we have been able to make Instant Messenger as efficient on the mobile as through the PC - with the added benefit to our customers of being able to talk to buddies wirelessly.

Customer behaviour is a force for change on the demand side of the industry. But the other key driver of change is the market structure on the supply side.

You get a lot more innovation and a lot more change in competitive markets.

The Australian mobile market, with four network based mobile operators, is intensely competitive - and innovation has flourished.

The industry has invested hundreds of millions of dollars in new 3G networks. Price levels are falling, with mobile capped plans a marketing innovation which has firmly taken hold. And penetration is now over ninety per cent, and still growing.

By contrast, Telstra has remained much more dominant in the fixed line sector - and it has had much more success in protecting the status quo.

But Optus is working hard to make things a lot less cosy. Only last week, we announced aggressive new pricing offers on our new $150 million broadband network - called Optus Direct - as well as uncapped download speeds of up to 20 Mbps.

Until now, only a few small ISPs have offered such speeds. But now a major telco is bringing this benefit to the mass market.

When the rollout is complete, our network will extend from 340 exchanges around the country, serving some 2.5 million households and 400,000 businesses. Depending on their distance from the exchange, many of these customers will see significant speed advantages by switching to Optus.

Optus' rollout is an important part of the transition to broadband: a major change in the Australian telecommunications market, and one which illustrates very clearly my theme about what drives such change.

The availability of new technology - in this case DSL - is a necessary condition. But its mass market take up depends on customers seeing a need for it and adopting it; and in turn that is much more likely when there is vigorous competition amongst players jostling each other to win customers to the new category.

The Prospects for our Industry

The transition to broadband is just one trend playing out in our industry.

Another trend is affecting the mobile sector: aggressive reductions in effective mobile tariffs due to capped plans.

Thirdly, customer behaviour is changing, with more and more traffic moving to the mobile networks at the expense of the fixed networks.

And fourthly, particularly in the corporate sector, there is a steady shift away from legacy voice networks - and legacy data services such as ATM and frame relay - towards IP-based networks.

Telstra is pointing to many of these trends - and talking down the prospects for our industry.

If you listen to Telstra, there's plenty of bad news. Their PSTN business is in freefall. They are going to lose $800 million a year from ULLS. Telstra's share price has fallen by over 25%.

Telstra blames much of the damage on the way our industry is regulated.

I'm here to point out the fallacy of that argument.

It might suit Telstra to blame regulation for its short term challenges - but the same forces are playing out in markets all around the world.

Let me give you a more accurate picture.

It is true that our industry is going through some difficult times right now, and Optus has not been immune.

Our growth rates have come off sharply in the last twelve months. Recently we have made over two hundred people redundant as we maintained our strong cost discipline.

But with all that being said, we think the future is a bright one. I say that for three reasons.

Firstly, over the medium term, our industry is in the fortunate position of delivering services for which there is strong and growing demand. There is a lot of focus today on the price per unit declining - whether that unit be a minute of voice telephony or a kilobit of data.

But the other side of the coin is the continuing, remarkable growth in the volumes of data which we carry.

Over the last decade, the share of wallet spent by households on their communications needs has stayed broadly constant. Prices have dropped steadily - but usage has grown to offset the price drops.

In the homes of tomorrow, the volumes of data being sent and received - for applications like video on demand, videoconferencing and home entertainment - will dwarf what we think of as high bandwidth today.

The second factor which makes us optimistic is that there is a clear pathway to reduce our costs while continuing to maintain and indeed improve our service levels to customers.

If I take one example, the telecommunications industry has not travelled far at all in leveraging the benefits of on line customer service. By comparison to the banks and the airlines, for example, we are only just beginning.

At Optus, this is an area we are doing a lot of work on and we are really very excited about. Today, our billing function, for example, is expensive - we issue tens of millions of paper bills a year - and too often our bills are a source of frustration for our customers.

Tomorrow, we aim to deliver many of our bills on line, and give our customers up to the minute information about their spending which they can manipulate in ways which makes the information more useful and more comprehensible. We think we can make the billing function cheaper - at the same time as we make the customer experience better.

There is a third factor which makes us fundamentally optimistic at Optus. As the challenger, we have it all to play for. For us, change is good news, giving us the chance to win new customers and grow our market share.

For example, the transition to broadband means that there are millions of customers who are coming to this category for the first time - and it is much easier to win new to category customers than to disrupt an existing customer. It's not very surprising that the incumbent doesn't have such a favourable view of these kinds of changes.

But while they might not be good news for Telstra - it's a very different story for the rest of us.

Regulation and Change

The benefits of reforming telecommunications, by introducing deregulation and competition, have been immense.

The ACCC has found that since competition began in 1998, fixed to mobile call costs have fallen 21%, mobile calls are down 23%, long distance calls have dropped 28%, local call costs have decreased by 35% and international call costs have fallen 59%.

It is very unfortunate that the present management team of Telstra seem to think that part of their job is trying to turn the clock back to the days of Telstra having monopoly power over key elements of its network infrastructure.

Day after day, we hear them arguing that regulatory reforms are going to damage Telstra's shareholder value - as if that is a sufficient argument to cause the reforms to be shelved.

We have seen this in spades in the current debate on pricing for unbundled local loop.

The ACCC developed a pricing approach for the ULLS service, setting prices across four geographic bands. This followed extensive dialogue with Telstra over five years, including two successive undertakings being lodged by Telstra which supported the same four band approach.

Yet Telstra halfway through 2005 unilaterally reversed its position and suddenly said that it now advocated a national average price.

Never mind that it had taken the opposite approach for several years.

Never mind that the case for average pricing is inconsistent with both the accepted basis for regulatory pricing in Australia, and with Telstra's practice for other wholesale services.

Never mind that the ACCC is the lawfully appointed body with responsibility to set prices for ULLS.

Telstra seemed to think that a few headline grabbing claims about the money it would lose was enough to stop the whole process.

There are seven and a half million band two services. The incumbent's message to the households and businesses using these services appears to be: we want to unilaterally jack up the price our competitors will have to pay to serve you by $96 a year.

We don't think that approach will go down very well with Australians - or with the Government.

As Federal Senator Gary Humphries said last week, 'I am frankly deeply suspicious that this is about Telstra snookering their competitors in urban areas.'

And Steve Ciobo MP said he was 'exceptionally uncomfortable with the arguments that Telstra has put forward.'

Well might he be.

The ULLS debate is about broadband services being rolled out right now.

But there is an equally pressing debate about the next generation of broadband services for Australia.

Optus believes that Australia needs a path forward to higher bandwidth infrastructure. But we believe the market structure is just as critical as the technology.

A high bandwidth network which is exclusively controlled by the incumbent will be overpriced and underused. We think it will be a repeat of the ISDN story which I mentioned earlier.

Yet this is the likely result if Telstra gets its way.

It has demanded that the rules be changed - so that if it builds a fibre to the node network, it can have exclusive control.

Once again, the question becomes: is the proper role of regulation to foster innovation or to stifle it? Because if Telstra is given the right to build this network behind regulatory barriers, so that no competitor is entitled to purchase access to the network, then we will see a paradigm case of regulation being used to stifle innovation.

That is why Optus offered to co-invest in the network - building on the very sensible precedent of the joint ventures which have been used to build out Australia's new 3G networks.

We would compete vigorously with Telstra at the retail level; but by combining our capital with Telstra's - and potentially with other companies - in building the network, we could get a faster and more extensive rollout than would be possible otherwise.

There is plenty of evidence of the competitive pressures which Australia as a nation faces to upgrade our broadband infrastructure.

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."

If we are to meet these competitive pressures from other countries, we must unleash the forces of competition domestically.

Conclusion

Let me conclude by returning to the theme of my remarks - the forces for change in the telecommunications industry.

Our industry is changing very fast. Unlike some of our gloomy competitors, at Optus we think that change is a good thing - for our customers, for our industry, and for Australia.

Australia's national interest demands that our industry should embrace and foster change - and this should be the primary goal of our regulatory system.

The idea that the goal should be protecting the market position and fat profits of the incumbent is bad policy and bad business.

Only by vigorous competition and innovation will our industry deliver on its promise to our customers and to the nation. I am confident that we will deliver on that promise - and that Optus will play a very big part.

THANK YOU