Telecom Asia: Australia's great broadband disaster: after a decade of political in-fighting over the

This is the story how a single mistake can turn into a multi-layered catastrophe. About how industry structure can drive government policy. About how the powerful will drive players in a market to their own ends. About how monopolies will thrive despite the most rigorous of regulators.

This then is the story of the great broadband disaster Down Under.

To a casual observer, it might seem an unlikely tale--Australia has been one of Asia's pioneers in telecom deregulation as well as in the adoption of new technology.

Australia introduced the first full service competition regime in the Asia-Pacific in 1992 and the first totally liberalized market in 1997. It boasts very respectable ownership rates for mobiles and PCs of around 70%, and around 60% for the Internet. It has far and away the strongest competition watchdog along with a well-resourced and experienced industry regulator. It has 600 ISPs, 80 long distance providers and four mobile operators, each of the latter with an international footprint.

As much as any other market in Asia-Pacific has set the pace for telecom reform since the late 1980s.

Yet the story of Australian telecommunications in the decade since full competition began is that of a never-ending trench war between politicians, regulators, media magnates, new telcos and diverse groups ranging from farmers to pro-privatization lobbies.

More than anything else, they are arguing about the future of 50.1% government-owned Telstra--the country's biggest company, the most widely-held stock, the incumbent telco and the dominant cable company.

Yet amid the political thrust and parry, few have noticed that the industry structure has since lost the ability to deliver competitive outcomes.

No alternative

One long-standing Telstra critic is Professor Alan Fels, chairman of the national competition regulator the Australian Competition and Consumer Commission (ACGC), who describes Telstra as one of the world's "most horizontally and vertically integrated telecommunications companies."

It is Fels who points out that Telstra controls the local loop, is the largest mobile carrier with two digital networks, is the largest retail ISP, the largest wholesale data and Internet provider, and is a 50% shareholder in the biggest pay TV company.

And, almost uniquely in the world, it has been allowed to build a hybrid fiber coax (HFC) cable network which has been leased all but exclusively to its own pay TV company, a joint venture with the country's two most powerful media tycoons, Rupert Murdoch and Kerry Packer.

"In the local call services market competition has had very little impact," Fels says, adding that Telstra's competitors have virtually no alternative but to use the incumbent's network--even the main rival, Optus, relies heavily on the Telstra local loop.

"The clear message from this analysis is that Telstra has overwhelming dominance across the telecommunications market and in almost every segment of that market," Fels told an industry event in early March.

The impact of Telstra's sway in the market shows up most clearly in what has become the most critical aspect of the "last mile"--the growth of broadband.

The figures tell the story. With less than 2% of the population using a broadband connection, Australia now ranks 23rd on the global league table of broadband connectivity, behind 18 OECD countries as well as Hong Kong, Taiwan, Singapore and Estonia. And it is sinking.

Ewan Sutherland, chief executive of the International Telecommunications Users' Group (INTUG), says that even if Telstra meets its target of 1 million users by 2005, this will put the country somewhere between 30th and 40th. He notes that Japan, by comparison, has added more than 1 million users since the start of the year.

A decade behind

"Australia's target is so far down the world ranking it's just not true, and I'd say you were running a decade behind world leaders like Korea," Sutherland says. "So if your target is world-class mediocrity, then Australia seems to have made that target."

Australia's broadband crisis is the result of two decades of failed telecommunications policy.

The first step was the establishment of a dedicated company, Aussat, in 1980, to run the national satellite project. By the end of the 1980s, Aussat had launched two birds, was preparing for a third, and had run up nearly A$1 billion in debts.

The then Labor government, which had resisted the idea of allowing Aussat to compete more broadly with the incumbent, hit on the idea of privatizing Aussat and throwing in a set of licenses.

After an intense debate, it rejected the idea of turning the then international monopoly, OTC, into a competitor, and instead bundled it into the domestic monopoly to create Telstra. Aussat was sold to a consortium that included by Cable & Wireless and BellSouth and became Optus, the second carrier with exclusive fixed network rights for five years.

Thus was born the region's sole telecommunications duopoly, setting a platform for "convergence"--not of technologies, but of competition.

Ironically, the man responsible for ensuring the services and networks converged is the current Telstra chairman, Bob Mansfield who, in his capacity as Optus' first CEO, set the company on course in 1994 to build a "triple play" cable access infrastructure for TV, voice and data.

Optus' determination to built an HFC cable to 3 million of Australia's 6 million households galvanized into Telstra building a rival cable to 3.5 million homes.

One Telstra executive at the time routinely began presentations with the joke that, with two cables being built "either everyone in Australia is going to have access to a cable, or half of Australia will have access to two cables."

Naturally, it is the latter that has eventuated. But worse is that the dominant owner of the copper and trunk networks has been granted control of the largest HFC network and allowed to become the biggest player in pay TV.

The outcome today is an all-powerful carrier and a government squeezed in a mesh of dangerously conflicting interests. Policy-makers must balance between economic efficiency and community fairness, powerful farmer lobbies and consumers demanding low prices, as well as keep satisfied the millions of voters who own Telstra stock.

Just for good measure, they must also play off the tycoons Packer and Murdoch, who between them own the major TV network and newspaper chain; Telstra's intervention into pay TV also ensnares it in the contentious world of media policy.

"Out of touch"

But these are problems that neither Communications Minister Richard Alston nor Telstra has been willing to publicly confront.

"Australia is a classic case study for the rest of the world," Alston pronounced in a speech the day prior to Fels' presentation. He said a recent policy review had showed "that the overall regulatory framework is currently about right."

He added: "Claims that competition in Australia is not working and that Telstra continues to monopolize the market just don't ring true in light of the results of Telstra's competitors, the pressure on Teistra's own revenues and the fact that companies such as Hutchison are making major investments."

For its part, Telstra responded to Fels' remarks with a statement assailing him for being "out of touch" with the market realities of telecommunications.

The Telstra statement did not mention broadband, DSL, or cable, but quoted Telstra CEO Ziggy Switkowski declaiming: "The chairman's claims that competition is failing is incorrect. It ignores the fact that in the last ten years the regulatory regime has delivered to consumers substantially lower prices, dramatically better service and much wider choice."

It's a long way from the position taken by many in the industry. Typical is Microsoft's submission to a Broadband Advisory Group (BAG) inquiry: "Growing evidence suggests that a failure to address Australia's slow uptake of broadband will result in a significant loss of economic opportunity for the nation." It quoted a report by the Allen Consulting Group warning of the negative impact on employment of the lack of affordable broadband access.

"It is not clear that the current regulatory and policy framework is conducive to encouraging broadband connectivity," Microsoft added, singling out access and pricing in the local loop.

It is only in the last year that Alston has come to acknowledge the importance of broadband, having previously dismissed it as primarily a distribution platform for pornography and gambling. As recently as 12 months ago he still maintained that for consumers it was mostly for "entertainment-related" activity such as music and video downloads and thus of dubious value for national productivity.

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One problem Alston has identified is the way broadband is measured. The BAG, chaired by Alston, said in its January finding that the government should "encourage the OECD to introduce mechanisms that measure the effective use of broadband and not merely takeup."

According to the BAG, criticisms of the poor availability and pricing of broadband contribute to "perceptions" that Australia lags behind other nations, raising questions on the part of the BAG over how broadband progress is measured.

The BAG instead recommends a highly subjective formula from another Alston-appointecl agency, the National Office of the Information Economy (NOIE), which measures broadband "readiness" and "intensity". By a happy coincidence, Australia comes a global third in readiness, according to NOIE metrics.

Not much help

Unfortunately, Australia's performance in Australian government-preferred indicators is not much help to a consumer or business trying to make sense of a Telstra or Optus price sheet.

Available for download from the company's Web site, the Telstra ADSL price schedule runs to three pages. Consumer prices range from A$59.95 ($35.80) a month to A$329.95, plus another A$17 a month if you are not a Telstra voice customer.

By comparison, PCCW, the leader in the world's second-most broadband-connected market (to use a derided OECD measure), Hong Kong, has a single price of HK$218 ($28), with no installation fee and no bandwidth limit (actually, it has another price, HK$298 over 18 months, which includes a Nokia 2188 phone.)

So the Hong Kong incumbent's price is below the cheapest Australian price, with no add-ons.

But that's only half the story. Unlike PCCW, or Korean or Japanese providers, Telstra sets strict data transfer limits, starting at 500 MB (for total upstream and downstream data) for the low-end package and going up to 10 GB for the most expensive service. Users who exceed these must pay a per-byte penalty.

What's more, the Telstra packages for the most part don't even come near broadband speeds. For the offerings costing less than A$100 a month, users are getting 256-512 kbps download speeds, with the top end maxing out at only 1.5 Mbps.

"It's a pathetic offering," says Sutherland--"so slow you couldn't get it in Japan or Korea."

"There is a problem with the promotion of broadband," says Rosemary Sinclair, managing director of the Australian Telecommunications Users' Group. "If the operators had all promoted IDD as 64k circuit-switched telephone undersea cable voice service, who would have bought it?

The pricing and promotion are still a long way short of describing "what broadband gets, rather than the 256k up and 64k down," she says. "You have a service people don't understand [and] you have a unit in a price table which most don't understand."

And while 75% of exchanges are DSL-ready, it is not clear how many customers each of these these can support, she adds.

Still, Dennis Mullane, general manager for broadband growth at Telstra's Big Pond ISP, believes broadband is "going along very nicely", pointing to the extent of the rollout and the growth in services. He doesn't accept Australia is one of the laggards, although he believes one of the main suppressants of demand is the flatrate dial-up service.

"Dial-up Internet services are still well-appreciated," he says.

Metered broadband the barrier

Yet, says INTUG's Sutherland: "Flat rate dial-up is available in Canada but has not stopped take-up of broadband. It is also available in South Korea, though it is barely used. This strongly suggests that it is broadband pricing and not dial-up pricing that determines the speed of take-up of broadband.

"It is really metered broadband in Australia and New Zealand that seems to be the barrier."

The obvious answer to Sutherland and others is for the government to force Telstra to shuck off the cable network and the pay TV content business as well. While incumbents everywhere still dominate the local access telecom loop, there is no reason why they should also dominate the HFC access network.

Cross-platform competition is an essential ingredient in the growth of broadband, as seen in active markets such as Korea, Japan and the US. In Korea and Japan, it is DSL that has the edge, followed by cable and satellite. In the US, the cable companies hold sway over the sluggish Bell companies.

Those looking for genuine broadband competition to emerge in Australia are pinning their hopes in the inquiry by Fels' ACCC into the recent pay TV content deal between Telstra and Optus. The deal is actually the final working-out of the HFC building madness of the 1990s, where the two companies have now agreed to share premium Hollywood and sports content. Crucially, Telstra is also allowed to bundle the service with voice offerings.

The ACCC gave it interim approval late last year, but Fels has been asked to report more fully on "emerging market structures" in the telecom and pay TV industries.

Certainly, Fels doesn't appear encouraged by the industry outlook. He said in his March speech that the ACCC had concerns about Telstra's potential to dominate the future combined broadcasting and telecom markets.

But his recommendations will still have to ride the political gauntlet of a thousand lobbyists. And with an election 18 months away, will Alston and his colleagues be ready to make hard decisions that could reduce the value of Telstra stock?

Probably not. But there is an upside. The sclerotic broadband efforts of Telstra and Optus are forcing the rest of the community to bring other broadband assets into play.

The prime example is the biggest state government, New South Wales, which is also one of Australia's biggest spenders on telecom services. It has a considerable amount of infrastructure of its own--in particular, a railway network and electricity distribution system with fiber connections and rights of way. The state leader, Bob Carr, has vowed to harness these assets into kick-starting the use of broadband in schools, hospitals and government offices across the state.

On a smaller scale, the regional city of Mildura, with a population of 50,000, encouraged a startup cable TV provider to establish itself locally. With the city council as a foundation customer, Neighborhood Cable has been able to build out a network in direct competition with Telstra's ADSL service in Mildura along with other regional cities Ballarat and Geelong.

Peter Vale, the council's manager for IT and telecommunications, said most of the council's traffic, including voice, was now IP.

"That will help drive demand for total IP infrastructure, bypassing the PSTN. Once you go IP, it's just a matter of bandwidth."

And that's something competition is good at generating. "We've got broadband coming out of our ears here," says Vale.

PRICING ADSL

PCCW

Plan          Fee                  Data Limit            Max. speed

Residential   HK$218 (A$47)        Unlimited             Up to 2Mbps

Telstra

Plan                          Fee                        Data Limit

Residential   With Telstra         Without Telstra
              preselection         preselection

500MB         A$59.95 (HK$277)     A$76.45 (HK$353)      500MB
1GB           A$76.95 (HK$356)     A$93.45 (HK$432)      1GB
3GB           A$94.95 (HK$439)     A$111.45 (HK$513)     3GB
5GB           A$179.95 (HK$831)    A$196.45 (HK$906)     5GB
10GB          A$329.95 (HK$1524)   A$346.45 (HK$1,600)   10GB

Plan          Max. speed           Data surcharge

Residential   kbps                 (per MB)

500MB         256/64               A$0.159 (HK$0.734)
1GB           512/128              A$0.149 (HK$0.688)
3GB           512/128              A$0.139 (HK$0.642)
5GB           1500/256             A$0.119 (HK$0.550)
10GB          1500/256             A$0.099 (HK$0.457)