BuddeBlog

In the last few months, the events surrounding Telstra have inspired every man and his dog to think up ideas, strategies and policies regarding the future of telecommunications in Australia.

In the present circumstances, I believe we should exercise a little restraint and use this opportunity to come up with a sensible plan for the future.

Let’s recap some of the events
The Senate has now rejected the privatisation of Telstra for the second time.
The Prime Minister is continuing to use Telstra as a political tool, by suggesting that former Minister for Telecoms Richard Alston should be brought back into the debate – perhaps even making him the new Telstra chairman.
The Labor Opposition has suggested Telstra divest itself of Foxtel
The ACCC has made a number of structural industry recommendations in relation to the Foxtel divestiture, the structural separation of Telstra, the wholesale arrangements and accounting separation.
ITU, OECD and other national and international organisations have criticised Australia for its low level of broadband penetration
Telstra has started a broadband war, aimed at undermining competition in the market
VoIP, digital TV and WiMax have arrived on the Australian market as potentially very disruptive technologies for Telstra.
Telstra has spent another billion over the last few months on more non-core activities, and more investments (Indonesia) are underway.
The last-mile telecoms infrastructure has been neglected for close to 20 years, certainly in relation to broadband upgrades.
Foxtel has launched digital TV; however, it is severely hampered by the fact of Telstra’s 50% ownership and the draconian government rules on pay TV content and technology issues.
The conflict within Telstra’s board is an indication of more deep-seated problems – within the Telstra structure (CEO, strategic direction of Telstra) and also in relation to the power struggle involving the government, Telstra’s management and News Corp. Sam Chisholm’s connection with News Corp has already been noted, and the lobby for another News Corp ally, in the person of the undoubtedly credible Jacques Nasser, to become the new Telstra chairman needs to be looked at from this perspective as well.

I have probably missed a few events, but these certainly are the most important ones. So let’s use them to draw a few commonsense conclusions:
Technologies are converging (VoIP, digital TV, broadband, wireless). This offers a number of new opportunities for the industry, for regional users, for competition, improved lifestyle options, plus a range of economic benefits. Let’s, therefore, look at these developments from a high-level policy perspective, rather than from the current silo’s-based one.
Ongoing government interference in Telstra’s business affairs is not the way forward, but, while the incumbent continues to be as dominant as it presently is, political interference will remain the order of the day. For example, the new Telstra chairman should not be chosen on the basis of their loyalty to the government.
Telecoms infrastructure is critical to Australian society and the Australian economy and does need government direction and support.
The level of competition envisaged in the Telecoms Act of 1997 has not been realised and the regulatory framework needs to be modernised.

I am sure that we can find more or less widespread agreement on this higher level. Of course, there will have to be a bit of give and take – for example, Telstra might be happy to unshackle itself from government ownership (read ‘political interference’), but it might not be prepared to accept structural separation or an increase in competition. However, Telstra is arguably the most vertically integrated national telco in the world and this requires a very high level of regulations, you can’t have it both ways.

And we also need to be mindful of the issue of the national good.

To date, clouded by its untenable position on privatisation, the government has ignored the reports written by the ACCC, OECD and others. Their behaviour is undemocratic and leaves the door wide open for further political polarisation of telecoms in Australia, and particularly in Telstra.

While most will agree with Labor’s position on Telstra’s divestiture of Foxtel, it would be a missed opportunity not to consider the bigger picture first, to establish where the divestiture fits in, and what effect it will have on the other issues listed above.

Once again we have been presented with an opportunity to do what I have been recommending for many years. All the parties involved should sit down together and produce a blueprint for telecoms in Australia – working from a common vision and developing, step-by-step, a number of strategies, beginning with the ones that will get majority support.

This should all be done judiciously – taking reasonable steps to maintain the balance, but avoiding piecemeal solutions that will only create confusion later.

Most ingredients for the blueprint are already in place in the various reports produced by the ACCC, BAG, Estens, Senate Inquiries, OECD and ITU. Let’s ask for a reliable, independent government think-tank to have a look at all these high-level issues and produce a discussion paper that can then be considered by all the parties involved.

But the government should guarantee that, this time, it would take such a report seriously. Let’s have a democratic process of intelligent debate on these matters, eliminating the politics and making use of the help that can be provided by organisations such as ATUG, AIIA, IIA and SPAN.

Paul Budde

See also:
Australia – Structural Separation
Australia – Analysis – From telecom to media monopoly
Australia – Analysis of the Estens Report
Australia – Privatisation of Telstra
Australia – Broadband – Analysis Telstra Offer April 2004
Australia – Broadband – Developments and Analysis 2004
Australia – Pay TV – Analyses of the Digital TV Market
Australia – Pay TV – Regulatory – Telstra-Foxtel Divestiture
Global – Broadcasting – Analysis – Digital FTA market in 2004

The ACA announced in April 2004 that it is investigating if further spectrum allocation is needed to support the provision of broadband wireless access (BWA) services.

The demand for broadband services has provided an enormous stimulus to the wireless communications industry. BWA services have been deployed commercially in many areas with considerable success. So much so, that people are now starting to knock on the ACA’s door asking for more spectrum, particularly in regional areas.

The ACA is considering whether to make more spectrum available so that they don’t inhibit growth or stifle competition. The bands identified by the regulator as providing possible opportunities to expand BWA services include:
2010-2025 MHz
1900-1920 MHz (in regional areas)
1785-1805 MHz; and
1880-1900 MHz.

See also:
Australia – Mobile Communications – Spectrum Developments
Wireless Broadband Market

It didn’t come as a surprise when, in May 2004, Optus made a takeover bid for the company.

Optus had indicated their interest during previous infrastructure-based consolidation processes. They missed out on the last occasion, when Telstra took over the network from IP1. So, determined not to let that happen again, the company investigated with due diligence and basically came to the same conclusion that we did – UEComm is perhaps the most efficient infrastructure-based telco in Australia at turning around its business.

The company has scored many good business wins over the 2003/2004 period; it is now based on a much sounder financial basis and is growing both revenues and profits.

By being very focused on its core business of selling bandwidth and transmission capacity, the company has performed better than its competitors in the market.

In 2003, its current owner, AGL, indicated that the company was for sale, and Optus came to the conclusion that this would be a good match. It will also assist UEComm, as it will now be able to tap into the company’s backhaul network.

This will provide them with much easier and cheaper access, nationally and internationally.

See also:
Uecomm Limited
Australia – Telecommunications Infrastructure CAN and CBD Networks
Australia – Telecommunications Infrastructure Inter-City Networks

BuddeComm have released the 2004 “Africa Report” as part of their annual research publications.

Key developments:
Despite some remarkable changes in Africa’s telecom market over the past few years, overall teledensities remain extremely low, with the rollout of fixed lines by incumbent operators barely inching forward in most countries, while the uptake of mobile telephony moves rapidly past it. Africa’s low population densities and sparse population makes wireless systems in the form of cellular mobile networks more economical than a fixed-line infrastructure.
The last two years have been difficult for the global telecom industry but Africa has remained a resilient market, thanks largely to the rapid take-up of mobile phones and roll-out of networks.
With around 12% of the world’s population and less than 3% of the world’s telephone lines, Africa is fast evolving as a continent of unlimited opportunity. An encouraging sign is the way countries across the continent are adapting to the demands of the Information Age. Many governments are relinquishing their grip on telecom operators resulting in advancement in ICT through the deployment of the most enabling of technologies, which create an unprecedented growth. This trend is opening new frontiers and brings with it endless possibilities for development and progress.
South Africa remains the largest telecom market on the continent where the industry has contributed 5.8% contribution to the past year’s GDP. This is likely to increase further following the introduction of the Second National Operator (SNO) in 2004.
Many countries are undergoing sectoral reform and foreign investment is being actively encouraged across the continent as privatisation and liberalisation are progressively being introduced. More than one-third of all state telcos have already privatised and several more set to undergo privatisation in the near future.
Mobile telephony continues to be the continent’s fastest growing sector due to the evolution towards next-generation wireless systems, liberalisation of mobile markets and introduction of prepaid cards. Mobile phones now outnumber fixed lines in Africa at a higher ratio than on any other continent. Since Uganda became the first African country were mobiles outnumber fixed-line connections, more than 30 other countries have followed suit.
Some individual markets continue to grow at rates unseen anywhere else in the world. Demand for mobile lines is so high that in some countries the existing networks are struggling to cope. According to ITU data, countries such as Morocco, Cameroon and Uganda had over five times more mobile phones than fixed lines in 2003. By 2010, Africa is expected to notch up some 200 million mobile subscribers.
Nigeria will be Africa’s fastest-growing mobile and fixed market over the next two to three years. As a result, it will attract significant investments in infrastructure and licence fees.
The convergence of fixed and mobile networks and services will continue to dominate the market with future licensees gaining combination licences with the ability to operate both a wired and wireless systems.
Another important development is the introduction of new entrants in the fixed-line market. SNO licences have been issued to companies in Ghana, Nigeria, Tanzania, Seychelles, South Africa, Zimbabwe, and South Africa, and other countries are following this lead.
Africa’s data traffic is experiencing strong growth, particularly in South Africa. Demand for value-added data services is driven by market forces and rarely as an initiative of service providers. VSAT has established itself as a viable option for networking as well as Internet connectivity.
While Internet uptake is growing steadily, its use remains comparatively minuscule. Africa remains the least connected continent in the world both from the view of the total bandwidth feeding the entire continent and from an Internet penetration perspective. Overall growth is slower than world averages and is less than half the growth rate of mobile.
The implementation of broadband networks is very limited – Africa is still struggling to ensure universal service of basic voice services. This not only takes the focus away from broadband initiatives, it also shows there is no critical mass of consumers to use broadband services. The rapid spread of mobile telephony provides opportunities for mass Internet access via broadband wireless technology.
South Africa and Namibia were the only two southern African countries included in the Omedium access’ list of the world’ first Digital Access Index (DAI) published in November 2003, which measures an economy’s access to ICT. Other African nations given the medium ICT ratings include Botswana, Libya, Tunisia, Egypt, Cape Verde, Algeria, Gabon and Morocco. All other African countries fall within the low access category.
The lack of competing providers to route international traffic combined with over-dependence on satellite technologies and a regional market fragmented into low-volume national markets has resulted in prohibitive prices for international traffic. This constrains the development of Internet use as it creates high costs for limited bandwidth. The lack of cross-border links is also impeding growth of national and regional trade.
Recent telecom sector reforms have had impressive results, especially in rolling out access to basic telecommunications services. But the lack of telecom infrastructure is the most pressing economic issue currently holding back the continent’s development. The next challenge for Africa’s policy makers is to intensify the reform effort and tackle a broader agenda of infrastructure development needs.

The publications for the “2004 Telecommunications in Africa Reports” are divided into the following volumes:

Geographic Reports:
Overviews and Telecommunications Companies in Africa
North Africa (Algeria, Chad, Egypt, Libya, Morocco, Sudan, Tunisia).
West Africa (Benin, Burkina Faso, Cote d’Ivoire, Gambia, Ghana, Nigeria, Senegal).
Central and East Africa (Botswana, Cameroon, Democratic Republic Congo, Ethiopia, Kenya, Tanzania, Uganda).
Southern Africa and Indian Ocean Islands (Angola, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, South Africa, Swaziland.
Price $395 per report (excl GST)
Market Reports:
Mobile Communications in Africa 2004
Broadband and Internet in Africa 2004
Telecommunications in Africa 2004 (Major Players, Infrastructure, datacomms)
Price $595 per report (excl GST)

See: http://www.budde.com.au/publications/annual/africa/africa.html.

Overview of major USO policies
Most countries around the world have government policies in place in relation to a universal service obligation – formal guidelines on how to provide a range of (basic) telecommunications services to citizens.

In North America, where there is a reasonably high level of competition, money is transferred through a set of government regulations from the more profitable metropolitan-based telcos to regional telcos.
In Europe, and most of the rest of the world, where there is a national incumbent with significant market dominance, that player is required to provide and finance the USO.
In Australia and New Zealand, competitors are required to co-fund the USOs offered by the incumbent.
In Italy, cross-subsidies are obtained from other sections of the industry.

An interesting point in respect of the second example above is that, while, on the one hand, the incumbents argue that they need to be subsidised, once they are put to the test (for example, through an USO tendering process) they actually go out of their way to obtain the USO services. Examples of this are the USO arrangements that exist in Switzerland and Chile.

The reason for this apparent eagerness is that, although the obligations are costly, they also generate a number of benefits, and, in the long run, these benefits appear to outweigh the negatives. The USOs enhance their national brand and, in fact, there is often an obvious emphasis in advertising campaigns on the fact that all these services are delivered to remote communities. It makes for interesting stories and it creates a feel-good attitude in the market.

It also allows them to on-sell from the basic services to more lucrative services, adding extra ARPU. And the fact that these incumbents are often the only provider for all such services in those USO regions makes the on-sell process even easier.

Necessity for more innovative USOs
However, the USO is moving with the times.

Up until a few years ago it only applied to basic telephone services, but in today’s world people need to be online – and, in particular, to be online via broadband networks.

It is often regional users that have a more urgent need for broadband than city dwellers. With health and education budgets under pressure and a range of government and businesses services disappearing from regional centres, broadband can offer an alternative through tele-education, tele-health and a number of e-government and e-business applications.

At the same time, broadband networks in most of these regions are not economically viable. More innovative solutions need to be developed and the USO arrangements of the future need to take this into account. Current USO arrangements don’t necessarily encourage such developments – the USO provider has no competition whatsoever, and so cannot be pushed into upgrading services and providing new infrastructure.

The emphasis of future government policies needs to switch from the old models mentioned above to more flexible models that stimulate new initiatives. New services such as broadband infrastructure development in regional areas can also be auctioned off, but in these processes preference should perhaps be given to new players.

Around the world we are already seeing interesting developments in this direction – developments which that are not necessarily classified as USOs.

In the USA, over 600 municipalities have developed their own broadband networks that they also make available to their citizens. Canada has a very innovative regional development plan in place, as has Sweden and some of the other Nordic countries. It is in these countries with harsh environmental conditions and large empty spaces that innovations are the driving force.

In Australia the second largest telco, SingTel Optus, has suggested that it use its USO contribution, which is required under the current regime, to build new innovative services in USO areas, separately from the incumbent.

Paul Budde

See also:
Global – Industry – Key Regulatory Issues
Global – Industry – Regulatory Overview, Privatisation
Global – Industry – Regulations – Structural Separation
Global – Industry – Deregulation
Australia – Regulatory Environment – USOs and price caps