National Broadband Network:
Some Big Policy Issues
7 April 2009: a very significant announcement
Substantial
increase in
spend
• Government committed to $43 bn project
• Previous proposal cost approx $15 bn
• Under previous proposal Government spend was $4.7 bn
Govt to
start new
business
• Majority Govt owned NBN co to compete with Telstra and others
• Reversed previous direction of policy – under which Govt capital
withdrawn from telecoms industry
Major regulatory
measures
foreshadowed
• Telstra to be subject to substantially tougher regulation
• Biggest change in over 12 years
1. How has the current system failed to meet its objectives?
2. How important is the growth of broadband?
3. What are the priority issues to turn the announcement into reality?
Has the current system met its objective – of
driving competition?
Mobile
Fixed Line
Opening Market
Structure
(1992)
• Telstra with small presence
• Optus, Voda given same GSM
licence as Telstra
• Telecom and OTC combined to
create massive Telstra
• New entrant Optus started from
zero
Regulatory
Mechanisms
• AMPS phase out 2000
• Competitors given legal right to
‘access’ Telstra network
Closing Market
Structure
(2009)
• Competitive
• 3 players (formerly 4) all with
own networks
• Market shares ~ 41%, 32%, 27%
• Telstra still dominant
• Market share > 70% in most
services
• Fixed line EBITDA margin > 50%
Results for
Consumers
• Innovation: GSM, 3G, content
services etc
• Falling prices, high take up
• Less innovation
• Price falls mainly due to regulation
3
Telstra’s Vertical Integration is a particular problem in
today’s market
Telstra
Networks
Telstra
Telstra
Retail
Sells
retail
services
Retail
customers
Telstra
Wholesale
Sells
wholesale
services
Telstra’s
retail
competitors
eg Optus
Sells
retail
services
Retail
customers
Because Telstra is vertically integrated, it can
undermine retail competition in a way that the
current regulatory system cannot control effectively
• Telstra can refuse to sell services to its retail
competitors – eg Business Grade DSL – Telstra
refused to sell to Optus for a year
• Telstra can provide higher performance
standards to its retail customers than wholesale
customers – eg connection times
• Telstra can impose retail-wholesale price
squeeze – eg (1) when Optus entered residential
DSL market in 2004, Telstra reduced its entry
level package price from $59.95/month to
$29.95; eg (2) in December 2005 Telstra
increased wholesale line rental prices by $3.45
while not changing its retail line rental prices
Case study: Telstra’s use of its market power to
suppress the take up of broadband
How Telstra choked
off take-up:
Australian Broadband Take Up - ACCC Figures
4,000,000
• High retail prices until
Optus’ entry in 2004
Optus
enters
DSL
market,
TLS drops
price
3,000,000
2,000,000
• Retail-wholesale DSL
price squeeze in 2004
• Capped speeds at 1.5
Mbps for ADSL1
• No ADSL2+ except
where competitors had
initiated, until Feb 08
Sep-06
Jun-06
Mar-06
Dec-05
Sep-05
Jun-05
Mar-05
Dec-04
Sep-04
Jun-04
Mar-04
Dec-03
Sep-03
Jun-03
Mar-03
Dec-02
Sep-02
Mar-02
-
Jun-02
1,000,000
Today’s broadband market still dominated by
Telstra – but unbundling is a bright spot
Broadband Market mid 2008
Telstra retail broadband
Broadband on Telstra’s
network
(HFC, DSL, wireless)
3.2 m
4.9 m
DSL via reseller
1.7 m
Total Broadband Market
~6.5 million
DSL via
unbundled service
~ 1m
Other (Optus HFC,
Unwired etc)
~ 0.6 m
Transition to fibre based networks
Today
• Copper from
exchange to home
• With unbundling,
either Telstra or
competitor can
install DSLAM in
exchange and use
copper to deliver
DSL
Fibre
Telstra Exchange
Telstra
network
Customer
Home
Competitor
Network Fibre
Telstra
DSLAM
Distribution Pillar
Competitor
DSLAM
Copper wire
Copper wire
Telstra Exchange
FTTN
• Fibre from
exchange to
node
• Copper from
node to home
Telstra
network
Fibre
Customer
Home
Node
Competitor
Network
Fibre
Fibre
Copper wire
Telstra sought to use transition to secure a new monopoly
Aug 05
• Telstra offers first deal: 6 Mbps network to 98% (no technology specified)
Nov 05
• Telstra offers second deal: 12 Mbps FTTN network to 4 m premises (~46%)
Mar-Aug 06
• Telstra-ACCC negotiations re ‘special access undertaking’ – fail
Mar 07
• Labor announces policy: $4.7 bn for 12 Mbps to 98%
Mar-Jun 07
• Telstra-Coonan negotiations re NBN price – fail
Nov 07
• Labor comes to power
Apr 08
• Conroy commences NBN RFP process
Nov 08
• RFP closes – Telstra fails to lodge compliant bid
Apr 09
• Govt announces RFP abandoned, it will build $43bn FTTP network
The way forward: structural separation of NBNCo
Private Sector
Investors
Private Secto
Investors
Sells
services
Government
• Own < 50% initially
• Individual caps at 20%
National Broadband Network
(NBNCo)
Sells
services
Other
Retailers
• 51%+ owner initially
• Will sell down after 5 years
Key aspects of pre NBN regulation remain to be resolved
 Will Telstra be subject to ‘functional separation’ or even ‘structural
separation’?
 Will Telstra be required to divest itself of
 HFC network?
 Stake in Foxtel?
 Will price setting process be streamlined?