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Ensuring a competitive telecommunications sector - and why it matters for Australia
22 Sep 2005
By Paul O'Sullivan, Optus Chief Executive at CEDA Brisbane

Introduction

If you reviewed the press reports of the last month, you'd be forgiven for thinking that Australian telecommunications is not so much an industry as a circus.

A nation has been asking itself the question - what is a suitable investment for Phil Burgess' mum?

And my fellow Irishman Bob Geldof called me the other day to say that he'd read some of the plaintive cries from Sol Trujillo about the dreadful state that Telstra was in, and did I think that he needed to organise another Live Aid concert to help them out?

But of course there are some very serious issues at stake.

Australia's national competitiveness depends crucially on having a world class telecommunications infrastructure - at world competitive prices.

National competitiveness is not an abstract notion - Australian jobs and Australian livelihoods depend on it.

A big part of being competitive is rolling out new broadband networks as quickly as possible.

Today, I want to talk about the right way and the wrong way to bring the latest broadband technology to all Australians.

Firstly, I want to tell you about how Optus is taking the fight to Telstra in broadband.

Secondly, I want to talk about what Telstra is doing in response - and show you that the new Telstra is not much different from the old Telstra.

The third thing I want to talk about is why all of this matters for Australia - and what we should be doing about it as a nation.

Optus is taking the fight to Telstra in broadband

Let me start with what is happening in broadband - and how Optus is taking the fight to Telstra.

Right now, there is a battle going on which will set the shape of telecoms competition over next decade.

On the one hand, the use of the fixed network for voice is gradually declining.

At the same time, the use of the fixed network for broadband is growing very strongly. Australia now has 2.2 million broadband users - up from 1.1 million in June 2004.

What's more, the technology which is used to deliver voice telephony is changing. Increasingly, voice telephony is delivered as a digital service which can be carried over a broadband connection.

Which means that, in due course, you will get your voice service at home as one of a number of 'applications' carried over your broadband pipe - along with movie downloads, and high speed internet access, and file swapping, and many other things.

In business terms, these trends mean that as the profit pool for voice telephony over fixed lines shrinks, the profit pool for broadband over fixed line is increasing - and will likely do so for some time.

Optus is working hard to establish a strong share in the growing broadband market. We want to make sure that the broadband market is not dominated by Telstra - unlike voice telephony, where Telstra has some 90% of the fixed access lines in Australia.

Optus has nearly 250,000 customers taking broadband over our cable network - in Sydney, Melbourne and here in Brisbane.

For customers outside of the footprint of that network, today we have to use a Telstra resale DSL service.

But the next big step for Optus is building out our own consumer broadband network using the 'unconditioned local loop service' - usually abbreviated to 'ULLS.'

What does this telco jargon mean?

It means that we can rent the copper line between the Telstra exchange and the customer's home. We put our own electronics in the exchange. And we build a fibre connection from the exchange back into our network.

In building this network, the only bit we acquire from the incumbent is the last, low tech portion - the copper wire to the customer's home. In many cases this has been in the ground for fifty years or more.

It is a bit like a new airline which comes in, flying its own planes in competition with Qantas - but using the same terminal at the very last stage to deliver the passenger safely to his or her destination.

For well over a year we have been quietly working on our plans to roll out a national broadband network to serve consumers.

It is no surprise that we would want to bring competition in broadband.

Optus was born in competition.

We were launched in Australia in 1992, giving customers choice in their long distance and international calls for the first time.

Then we brought choice in mobile.

In business services.

In local calls.

And in internet access.

The result has been more innovation; more choice; better services; and lower prices.

According to the ACCC, in the six years to 2004, the price of national long distance services fell by 32.2%; the price of international calls fell by 63.9%; and the price of local calls fell 39.2.%.

Today, I am able to announce that we will be able to bring the Optus revolution to broadband.

I have come here to Brisbane to make this announcement for good reason. Queensland has been at the forefront of broadband in Australia. It is deservedly known as the Smart State.

Already, under a contract with the Queensland Government, Optus is delivering business broadband services from over 30 exchanges around this state.

Today I am pleased to announce that Optus will be rolling out a new national broadband network to serve Australians.

We plan a commercial launch of our new consumer DSL services over our own network by the end of this year, and we will gradually open up new areas to service as we continue to roll out the network.

This roll out will dramatically step up competition in broadband and telephony services for consumers and small businesses.

We will have DSLAMs in 340 Telstra exchanges around Australia once the roll out is complete.

We will invest more than $150 million in this network build, in both DSLAMs and in fibre connections from the exchanges back into the main Optus network.

We will be able to offer an additional 2.9 million homes and businesses a suite of voice and data products that are fast, accessible, interactive and content rich.

What Telstra is doing in response

As you may imagine, our largest competitor does not exactly welcome this threat to its lucrative dominance in fixed line voice and broadband services.

Telstra might be under new American management, and they might be busy telling you that they've got a fresh, new approach.

Indeed, in their presentation to Government a few weeks ago, subsequently disclosed to the stock exchange, they talked about the transition from plain old telephone services - or 'POTS' - to pretty amazing new stuff - or 'PANS'.

But look behind the spin, and its not PANS or POTS but SOTS - same old Telstra stuff.

They don't like competition, and they will do whatever they can to block it.

We are seeing that in broadband in three important ways.

The first is Telstra's tactics in our contractual negotiations for ULLS.

Despite many months of negotiations, Telstra has refused to provide a price for the ULL service that we consider commercially fair.

But Optus is not going to be gamed into delaying our launch date.

We strongly believe that the future for broadband in Australia will be determined, over the next three to five years at least, by what happens with DSL services over the copper local loop.

So we are determined to build a strong presence as quickly as possible.

We'll get on with that - and go off to the ACCC to get the pricing resolved in due course.

The second thing we are seeing is Telstra trying to change the pricing rules for ULLS.

Telstra told the Stock Exchange on 5 September that it was very concerned about the ACCC's draft decision, "which includes proposed ULL prices that are de-averaged and below Telstra's costs."

What does this mean?

Telstra lodged an undertaking with the ACCC, nearly a year ago, proposing that the ULL price would be $13 in CBD areas; $22 in the suburbs; $40 in regional areas; and $100 in rural and remote areas.

Optus thinks these price levels are too high. But we think this price structure is fair.

Telstra's network costs are much lower in the cities than in the bush. It is only fair that it should charge its wholesale customers accordingly.

But the new management team of Telstra has changed its position.

They now say the price for ULL should be the same across the country.

Telstra's game is pretty obvious: it wants to jack up the price of ULL services to deter competitive entry in the cities. It wants to preserve lower per customer economics for itself - and be protected from making it available to competitors.

In turn, that means customers won't get cheaper prices and better service that the operators of new competitive broadband networks could otherwise offer.

Now let me be clear - Optus certainly believes that regional customers should get lower prices for broadband. However, we believe the best way to achieve this is through targeted Government funding - under programs such as the Government's recently announced Broadband Connect.

We saw the third part of Telstra's plan to suppress broadband competition a few weeks ago.

The headlines were dramatic: Telstra would build a national fibre to the node network delivering six megabits per second.

But there was a catch.

Telstra wanted the network to be completely free of the legal obligation to provide 'access' to competitors.

What is interesting is that we have heard this story not just from Telstra's new chief executive, Mr Trujillo, but also from its previous chief executive, Dr Switkowski.

In a media interview in February this year, he proposed that Telstra should be given a legislative holiday from the access rules so that it could build a national 'fibre to the home' network.

In that interview, Ziggy said:

"This is the big national issue for us and for the nation, and that is a critical bit of infrastructure."

And now we are hearing the same seductive siren song from Mr Trujillo - if you just let us out of the access rules, we will build a national broadband network.

Why all of this matters for Australia

Now you won't be surprised to hear that Optus is one hundred percent opposed to Telstra's proposals.

Is it, though, just a squabble between two competitors?

Well, my third main theme for today is that the issues at stake here are critical for our nation.

It is widely acknowledged that Australia must upgrade to a world class broadband infrastructure.

The big question is - what is the right market structure under which that will happen?

At Optus, we think the same principle applies for broadband as it does for any other service.

If all Australians are supplied by one monopoly operator, then you are not going to get the full benefits of the new technology you are building.

All of the experience in the Australian market and internationally says, if you want to drive mass market take up of a new technology like broadband, it is critical to have competition.

Competing providers will work harder to educate new customers to take up the service. And under competition prices are lower than under monopoly and hence more people are willing to buy the service.

So at Optus, we think that it is critical that the new Telstra - just like the old Telstra - is subject to strong, pro-competitive regulation.

That means, if Telstra owns and builds a piece of so called bottleneck infrastructure - such as a national fibre to the node network - then it must be subject to access obligations.

Telstra claims that being let out of these obligations will serve the national interest.

But as I've shown, when they talk about national interest, they're really talking about self interest.

Telstra also complains that such heavy regulation will dissuade it - and its competitors - from investing in new networks.

Indeed, Telstra says it faces heavier regulation than anywhere else in the world.

But that claim simply does not stand up to examination. Yes, there are rules requiring Telstra to give its competitors access to its network. But the same rules apply to the incumbent telco in most other advanced western nations - including the UK, France, Germany and Canada.

And in Australia, similar rules apply in other infrastructure industries like electricity, gas and water.

Moreover, as Morgan Stanley amongst others has observed, Telstra has the highest EBITDA margin of any of its peer incumbent telcos around the world. This suggests that the yoke of regulation does not bear down particularly heavily on Telstra.

In fact, in a recent editorial the Financial Times describes Telstra as having "grown fat on the fruits of its dominance - which have made it one of the world’s most profitable telecoms companies."

It went on to say that "Australia's national interest lies in fostering a dynamic and efficient telecoms industry - not in continuing to pamper a lumbering behemoth whose history of complacent and backward looking management has left it ill equipped to handle the opportunities of the information age."

Nevertheless, Mr Trujillo says that the rest of the industry hides behind regulation and we are not doing our share of investing in new networks.

He has called for an industry wide focus, saying that "Getting the best possible telecoms service to everyone is not going to be solved by Telstra acting alone."

Well, let me say that Optus is happy to take Mr Trujillo at face value.

If he genuinely wants to see investment across the industry, then Optus is all ears.

If Telstra has a proposal for joint investment in a national fibre rollout, Optus is ready to talk.

Who knows? We might be able to come up with a commercial model where we can jointly fund and own a national fibre network - and then we can compete vigorously to serve customers on that network.

Optus has followed a similar model with Vodafone for our rollout of third generation mobile services.

But for so long as we see the same old Telstra stuff, we at Optus will continue to argue for strong regulation to counter its market dominance.

Conclusion

Let me conclude by saying that the arrival of competition in broadband is like a new movie with the same actors and the same lines.

Just like in previous episodes - long distance, mobile and so on - Optus stands for competition. Hence today's announcement that we are rolling out a broadband network.

Telstra might have had a makeover, but underneath it is the Same Old Telstra Stuff - it wants to resist competition any way it can.

So in the audience, you must be very wary when Telstra says it is proposing a new network in the national interest.

Its real agenda is self interest. Just like Austin Powers wanted to get his mojo back, Telstra wants to get its monopoly back.

Optus is determined not to let that happen.

We will be driving competition, taking on the incumbent, and delivering better service, lower prices and more choice to people across Australian.

We wouldn't have it any other way.

Thank you.