Broadband in The Age (Day 4)

In which I explore the hopes for competition. Basically, the choice is up to the government: competition or the money. All past governments have chosen the money and we have paid for it. Tomorrow: some other broadband policies other than infrastructure that would make a big difference.

Government has missed the message on telcos

Joshua Gans, The Age, 13th November, 2008.

IN THE history of telecommunications policy in Australia, no government has chosen long-term competition over short-term gain or convenience. It has long been known that the competitive problem in Australia and the reason we have ongoing regulation is that our core wired network is in the hands of a dominant firm, Telstra. And it holds a dominant position in the main substitute service, the cable network.

Time after time, government has had the opportunity to change this. In the late 1980s, Telecom could have been broken up, but instead only its international satellite arm was spun off to found Optus. In the 1990s, Telstra could have been excluded from pay TV and, before privatisation, Telstra could have been broken up. In each case, governments have gone for the money, and the result is we are one of the few countries where a single firm dominates all forms of telecommunications. We continue to pay for that.

For many years, I believed regulation could substitute for our mistakes on structure. The regulator would constrain Telstra’s power in key segments and give newcomers breathing room to invest in services that would compete with Telstra. Where telecommunications use is most intense (in our CBDs) we have seen this and there is real competition. Other than that, only in mobiles have we really seen this, but this was an area where we got the structure correct at the start. This has changed my beliefs about what regulation can achieve.

If we had proper, infrastructure-based competition, we would have high-speed broadband across much of the country now. In this situation, the debate would be on how best to deliver broadband to areas too isolated for cost-effective private investment.

Instead, we have a regulatory morass. There appears to be only two serious bidders for the national broadband tender. For Terria, the Government would have to pass significant legislation and perhaps new regulations to try to avoid years of court battles as it tries to access Telstra’s copper network. At the same time, Telstra is likely to compete directly with the new joint venture. But the Government will be unlikely to recoup its investment.

If the Government behaves like previous ones, it will go for a return on its investment rather than competition. The Government should go for competition. This will require spending money to ensure competitive outcomes but this is, at least, a solid economic rationale for that expenditure.

It could also pay for that competition by going the Telstra route. As a condition for receiving the $4.7 billion, it could require Telstra to divest itself of its cable network and stake in Foxtel. That network would provide long-term competition in broadband for the national broadband network. It would reduce the need for a strong ongoing and heavy-handed regulatory regime.

Many economists argue that a light-handed approach is desirable. This could be achieved for the new network by ensuring an anchor product (say 5 Mbps and 10-gigabyte bandwidth limits) was regulated at a fixed retail price. Consumers would always have that option and any new providers with superior service would have to compete for consumers.

If some of these options could be considered, there is reason for hope in broadband. When we get the structure right, the need for costly regulation is removed. The ACCC has been deregulating more than regulating in the past few years. If the Government — by picking Terria or by choosing Telstra alongside some divestitures — chooses structure over the money, we can opt for a light-handed approach.

The winners will be consumers. After all, don’t we want them to be connected rather than simply to have the option to do so?

Joshua Gans is an economics professor at Melbourne Business School and managing director of CoRE Research, an economics consultancy. He has advised the ACCC on telecommunications regulatory issues.

2 thoughts on “Broadband in The Age (Day 4)”

  1. Another method is to

    Allow us to own the last mile. http://www.newamerica.net/events/2008/homes_tails

    Give everyone who occupies a dwelling in Australia a zero interest loan that can only be spent on a NEW last mile. (you can also sell the loan if you do not want to spend it but the loan must still be spent on a NEW last mile somewhere)

    (Trial it in Tasmania as a start)

    Now let the market work its magic.

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  2. Great article. There’s not enough sense in this debate.

    I sometimes wonder why we are where we are… perhaps the problem is that the people who understand the issues can recognise others who understand the issues – but for those in power who don’t get it, they can’t actually work out who they need to consult. And they get the person who sells themselves best.

    Anyway – to the issue.

    You mention the government could force telstra to sell off their HFC cable. I totally agree that 3 networks need 3 owners. However, right now the Telstra network is a complex interconnection of fibre connecting to exchanges, businesses, 3G transmitters, coaxial cable (HFC), and nodes/rims/cmuxes.

    I imagine that separating the HFC network would be quite a painful process – it’s an active network and difficult to extract. What’s more – if Telstra keeps the copper we still lose the competitive aspects of our smaller ISPs as Telstra upgrades, and only gain a single HFC competitor.
    ie: we move quickly to 3 choices in the city, and telstra still owns the only choice in rural areas.

    What happens if, instead, Telstra is forced to separate off just its PASSIVE network of copper wires and conduits and even the exchange buildings (call it Telecom), much as SingTel has promised to do. Telstra, Optus, iiNet etc would all still have their own fibre to an exchange, their own DSLAMs in an exchange, and everyone would then connect to “Telecom” owned ULL.

    The goal would be that iiNet, Internode, Optus etc are not forced to use Telstra for anything, but could if the price was right. Any product that today requires Telstra help would instead belong to Telecom

    Nationwide, every ISP/Telco could resell using Telecom copper, with great competition but limited to what copper can achieve. In the cities, Telstra and Optus would be free to expand their HFC networks while still allowing heavy competition on the existing copper.

    It’s only a start. Rural needs still aren’t solved but solutions could grow from Telecom. Telstra Rims/CMUXes would need to be replaced by Telecom Nodes.

    Just a different angle. Hope I explained it clearly enough!

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