Archive for September, 2007

AAPT – AUGUST 2007

Tuesday, September 25th, 2007

AAPT is Australia’s third largest telecommunications carrier offering local, national and international voice, data, mobile, pay TV and Internet services to business, corporate, government and residential customers. AAPT is a wholly-owned subsidiary of Telecom New Zealand and is one of only three Australian telecom providers to own and operate its own national voice and data network.

For further information please see: 2007 Australia – Telco Company Profiles – 2nd Tier Telcos.

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Coonan v Conroy

Monday, September 24th, 2007

Both understand telecoms
It is good to know that the two politicians who are most important to the telco industry both have an excellent understanding of it. They share the view that telecoms is important for the country and is a very important enabler in areas such as e-health, education, smart grids for energy savings, etc.

Senators Coonan and Conroy are also committed to making government funds available to provide a nationwide service that offers equivalent services at similar prices around the country. Importantly, this includes the funds needed to make infrastructure investments in regional areas.

And I believe that, from an industry perspective, most will agree that if we set the politics aside we will be able to work with either Senator Coonan or Senator Conroy.

Senator Coonan
Senator Coonan has certainly earned the respect of the industry as she has had to deal with some situations which were outside normal business practices. At a recent telco CEO dinner we expressed our gratitude to her for the support she gave to fundamental policy issues such as the safeguarding of a competitive environment.

That’s not to say there were no worrying moments for the industry. The Minister did come tantalisingly close to doing a deal with Telstra, and the industry should be grateful to the ACCC and the Treasury for making sure that this didn’t happen.

Unfortunately the Minister inherited a messy telecoms portfolio. Most of the problems that we are currently encountering would have been totally avoidable if the government had acted properly in the first place, during their first eight years in government.

Senator Conroy
Senator Conroy has made himself very accessible to our industry. He has consulted extensively with the players, taken an interest in new developments, and discussed options and plans as to how Labor can assist in developing some of the new national opportunities.

I am reasonably confident about ongoing industry cooperation under a Labor government; however, in the event that Senator Conroy becomes Minister for Communications, he will have a rather complex situation to deal with. He will need to take into account not just Labor’s plans but also the Broadband Connect (OPEL) and Expert Task Force issues. He needs to be strong and to base his approach on a sound regulatory foundation. Such an approach would earn him the support of the industry.

It would be great if Telstra were prepared to participate in this debate, but otherwise he would need to be decisive and immediately initiate the structural separation process that he has indicated he supports.

Foundations are not right
Without a sound regulatory basis any investment from either side will largely be wasted, and that would mean billions of dollars down the drain. Building on sound foundations could also cut the estimated costs of $5 billion into half. In one way or another we need equivalent and transparent access to the future FttH networks, either through commercial wholesale arrangements (as in the Netherlands, Sweden and Denmark) or through some sort of structural separation between infrastructure developments and the retail services provided over these networks (UK and New Zealand). I think neither the Minister nor the Senator would disagree with me on the need for this – it is just a matter how we get there.

Part of the Minster’s legacy is that under the sale of Telstra legal obligations now exist, which are making it difficult for her to begin a process of structural separation.

The Senator is on the public record as supporting structural separation, but he has subsequently gone extremely quiet on the issue. The fact that Telstra is supportive of the Labor infrastructure plans is also creating a sense of wariness amongst the industry players. How genuine is Labor’s commitment to structural separation? I believe Telstra is playing politics, as it knows only too well that it would be worse off under a Labor government.

Who will be the Minister
Who will the industry be working with after the election?

The Minister has already indicated her interest is in the portfolio of Attorney General and, as she has done a great job in the current Cabinet, she would certainly have a good chance of that position, if the Liberals retain government.

This would mean that we would lose our champion, and we all remember how bad things can get if the Minister does not give appropriate support to the industry.

But, equally, there is no certainty that Senator Conroy will become the Minister for Communications if Labor wins the election. My understanding is that he is genuinely interested in the portfolio but it would be up to a new Prime Minister to make the ministerial appointments.

So if a new Minister is appointed the industry would have to start from scratch. Telecoms is not an easy portfolio as it brings together rather complex technical, regulatory and political issues; and involves commercial and national interests across various disciplines, such as health, education, energy, communications, IT, science, etc.

The first year after the election will be crucial for the industry and it would be good if we had a Minister that we can rely on.

Lack of transparency
In the event of a Coalition victory it is to be hoped that the government has learned from projects such as Broadband Connect and Broadband Guarantee that a more genuine dialogue with the industry is needed, and that this should not take place behind closed DCITA doors.

I have grave doubts about this since, once again, the parameters set for the Expert Task Force for FttH are not transparent, leaving room for the possibility of negotiations taking place behind closed doors.

In the case of a Labor victory everything will hinge on the execution of the plan. They must be willing to consult with the industry and make any changes necessary to serve the country’s best interest.

So my questions are:

  • In either case (a Liberal or Labor government) significant regulatory changes are required to safeguard the future large-scale national investments in telecoms infrastructure. Many countries see structural change as the basis for that process. How do the Coalition and Labor intend to go about achieving this?
  • Can the Minister and the Senator tell us more about their personal commitment to the position of Minister for Communications?
  • Can we expect an improvement on the cooperative models between the government and the industry in relation to their infrastructure plans? In the case of Labor, are they prepared to start afresh, with a genuine attitude of bilateral participation and collaboration.

Paul Budde

See also:
Australia – Government Broadband Policies
Australia – Government Policies – Federal Opposition Policies – 2001-2007
Australia – Structural Industry Changes

Europe – Structural Separation Developments – 2007
Australia – FttN plans from Telstra and competitors
Australia – FttH Market – Analyses

Roundtable – Strategies for Fibre-ing Australia

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Australia – The Wholesale Market in 2006 – Analysis

Wednesday, September 19th, 2007

Telstra cuts wholesale rates in dying markets

In September 2006, the ACCC rejected Telstra’ March 2006 proposal in which it announced a cut of 32% to its wholesale local call charges, to encourage people to make more use their home phones and the fixed network as part of a package of proposed wholesale pricing changes.

The pricing was proposed in a new undertaking lodged by Telstra with the ACCC at that time.

Of course, there is no such thing as a free lunch, so, at the same time, Telstra was seeking an increase to 2.18 cents per minute on fixed network cost recovery to terminate a call on its fixed network in 06/07.

The wholesale discount was quite a clever strategy from the incumbent, and it has used it successfully in the past. The discounts it is providing are on services that are rapidly dying out, so maximising any revenue out of an asset that is already written off makes sense from its point of view.

Furthermore, by dangling this carrot it also has, in the past, successfully prevented others, such as Optus and AAPT, from moving more quickly into building their own new networks. This is one of the main reasons AAPT has been caught, and why Optus is suffering. By falling for the inducement of more attractive resale margins in the past, and of even further discounts now, these companies were able to obtain some easy revenue.

The future, however, is in broadband and applications – not in voice. This is where Telstra is fighting with the government, the regulator and the industry, and this is where the real action is.

So fortunately the ACCC didn’t fall into this trap. As I indicated at that time I didn’t think that the industry would be caught twice.

Telstra wants to retain its stranglehold

While there was a glimmer of hope during the early 00s that the wholesale market would thaw, the reality is that the telcos maintain a very tight control over this market and have no intention whatsoever of relaxing their hold. Sol Trujillo’s blunt request for an outright monopoly sets the scene for further developments. He also vehemently opposed any separation that would create a more wholesale-friendly telco environment.

This means that the traditional telco market in Australia will unfortunately have to rely completely on regulation. This is certainly not a scenario that I would like to promote. I feel that in certain areas we are definitely over-regulated, but it is impossible to relax any of these regulations because of Telstra’s uncompromising stand.

In the meantime the broadband/Next Generation Network (NGN) market allows companies to build new services on top of the infrastructure, making them less dependent on the very low access margins.

Companies building their own infrastructure are, of course, also making themselves less dependent on wholesale services; however there are significant risks involved, as Telstra has plenty of opportunities to undermine these developments by price dumping and other monopolistic trickery.

FttN – the need for industry cooperation

When Telstra launched its FttN plans I was one of the first to congratulate the company upon this visionary approach – and in particular upon the speed with which it proposed to introduce the new network.

However, at the same time I also mentioned that Telstra would have to sit down with the industry to discuss industry cooperation. What would be the migration path from DSL to FttN, and how would the rest of the industry be able to link into the new network?

Despite Sol Trujillo’s initial statement on his arrival in mid-2005 – that we, as a country, had to discuss these issues – he has never accepted any of the numerous invitations to become engaged in that discussion, one which he himself proposed. Instead he opted for a campaign of rhetoric, aimed at undermining government policies and telecommunication regulations.

Fortunately this bullying campaign has largely failed, with both the government and the regulator standing firm on all the issues Trujillo attacked.

From the very beginning I have maintained that he was bluffing. There was no way that Telstra would not roll out an FttN network, as this would amount to cutting of its own life blood. The company simply doesn’t have a choice if it wants to stay in the telecoms business.

On several occasions both Graeme Samuel and Minister Coonan said they were sure there was a way whereby Telstra would be able to get a decent return on its FttN investment and, at the same time, establish a network that would allow wholesale access on economically viable terms for the other providers.

When Telstra finally sat down with the regulator this concept quickly came to life and Telstra began to show a more positive attitude, however by June 2006 there still was no solution.

This change in Telstra’s behaviour did cause concern within the industry, as they were worried about a possible deal behind closed doors between the ACCC and Telstra. The ACCC immediately issued a press release to debunk that rumour. It has indicated that there will be a proper, transparent and open public debate on the issue before any decisions are taken.

The issue is rather simple, but as a result not easy. There should be an open end-to-end network on a wholesale level, into which the other players in the market can link. Ideally all players should be able to use this ‘network of networks’ on a commercial but equitable basis. This would reduce duplication, increase network efficiency, reduce costs and would give us a great opportunity to build a nationwide network.

If we take the government’s $3 billion of regional network funding into account such an approach would provide by far the best outcome for everybody.

The soon to be formed industry wholesale association (see below) could play a key role in this process.

Structural industry changes are required

Furthermore, a privatised Telstra will be forced by the financial market to better utilise its assets. At present some of these assets are hardly used (eg regional backbone infrastructure) simply to allow the company to keep prices artificially high.

This can’t go on forever.

The Ofcom ruling in Britain on the operational separation of BT will set a trend for a slow and long-lasting process of industry restructuring; which will coincide with a push for better asset management. A separated network division will surely be interested in maximising its assets. The company’s 2006 results is a vindication of this development. Only because of its current vertical integration with the retail organisation, whose interests lie in making it impossible for others to compete with them, do we have such an artificial situation.

I am not an economist but even I can see that from an economic viewpoint alone, this will have to change.

See also: Australia – Operational Separation of Telstra

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Telco business scenario for 2008

Monday, September 17th, 2007

Whichever way the election dice rolls, 2008 will be a very interesting year for the Australian telecoms industry.

The stakes are high, with close to $5 billion in the government coffers allocated for telecoms. There is also a unanimous understanding within the industry that, unless the foundations are right, this money could be easily wasted.

The Labor Party has indicated its commitment to structural changes, and there is little doubt that the Coalition would also move in that direction if Telstra failed to adhere to the outcomes of the Expert Task Force. It is still possible that Sol Trujillo could pre-empt all of this and start his own structural separation. As his personal windfall from that could run into tens of millions of dollars, it must be a very tempting proposition for him.

In the meantime, the regulatory changes that were established in late 2006 are starting to come into effect. The margins of the 2nd tier players are improving slowly, and this is predicted to continue during 2008 and 2009.

Any effect of more structural changes won’t become noticeable before 2009 and it will be very interesting to see what those changes will mean for the industry.

Because such changes will have far reaching consequences, companies will need to make their own assessments and plan to be well prepared for what may happen.

These issues and scenarios will be discussed at the annual State of the Industry Roundtables.

‘State of the Industry’ Roundtables with Paul Budde
cost $425 pp excl GST

Sydney – Wednesday 26 September 2007
Melbourne – Thursday 27 September 2007

Theme: Australian Telco Market moving into 2008
Next year the Australian telecoms market will top the $37 billion mark, with another $1.5 billion being added to that figure by 2009. Although the percentage growth might not look all that spectacular, when it is expressed in dollars it shows the power of this industry.

Over the last decade Telstra’s market share has only dropped by 5%; they still control two thirds of the total market; Optus is hovering around 20% market share and the other 600 providers squabble over the remaining 13%.

The smaller telcos are slowly seeing an improvement in their margins. In 2000, 48% of their total revenue went to Telstra in wholesale charges. Now this percentage is 44% and we estimate that, due to a better wholesale regime, this will further improve to 42% in 2009. At the same time the wholesale market is growing at twice the growth rate of the retail market, so the overall value of the 2nd tier market is slowly increasing in relation to Telstra and Optus.

The biggest slice of the market goes to mobile. Since 2000 its share of the total telecoms market grew from 25% to 37%. Total value grew from $6.5 billion in 2000 to $13 billion in 2007. Another billion will be added to this already significant figure over the next few years.

In 2005 Telstra’s market share in the mobile market had dropped to 40%. However, the company launched a fierce campaign following the arrival of Sol Trujillo and by 2007 had achieved a 42% market share and this could grow to 44% in 2009. Telstra’s market share increase is hurting Optus most as it depends, to a large extent, on mobile revenues (mobile accounts for 56% of total Optus revenues).

The data market remains the fastest growing market in overall terms, with a growth percentage of around 13% per annum for the 2007 – 2009 period. With the broadband market rapidly approaching 5 million subscribers, more than 60% of the population has access to email and Internet at home and close to 80% of the population has access to these services at work or school.

Data revenues, which include broadband and dial-up Internet will grow from $6 billion in 2007 to $8 billion in 2009, representing the largest growth in the industry. Telstra also dominates this market with a 66% market share. Under the current industry structure, we don’t expect any change in that percentage over the next few years.

Presentations and discussions will mainly concentrate on the latest results of our new Australian reports that we will publish at the same time.

I will bring you up to date regarding the latest research data and, perhaps more importantly, analyse the market with you – highlighting the areas where opportunities exist.

AGENDA
09.30 – 10.00Arrival and coffee
10.00 – 10.15Welcome, introduction of delegates
10.15 – 11.15Analyses of the Australian Telecommunications Industry (Revenues, Market shares, Trends and Developments) Analyses of Telstra, Optus, AAPT, Vodafone and Hutchison.

11.15 – 11.45Morning coffee

11.45 – 12.15Second tier industry
12.15 – 12.45Statistics, Trends and developments in access, infrastructure fixed voice.

12.45 – 13.45Light lunch

13.45 – 14.15Statistics, Trends and developments in mobile, Internet, Broadband
14.15 – 14.45Forecasting triple play, digital media. Conclusions.

14.45 – 15.10Afternoon coffee

15.00 – 16.30 Roundtable discussion
16.30 Close

Cost:
$425 per person (excluding GST) – this includes morning/afternoon coffee and lunch

Venue:
The Observatory Hotel
89-113 Kent Street, Sydney

Booking:
Online registration: http://www.budde.com.au/consultancy/public-workshops-seminars.html
Telephone: 02 4998 8144
Email: pbc@budde.com.au

Cancellations/Refunds Policy Roundtables
We are happy to give a refund, provided we are notified no less than 24 hours before the event.

Please notify of cancellations in writing to: pbc@budde.com.au

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Will Australia get Smart Grids?

Monday, September 10th, 2007

Excellent government initiatives
Australian utilities stand at the threshold of some important decisions. The State Government of Victoria has mandated the rollout of new electricity meters from 2009 – and at this very moment the Commonwealth Government (through COAG) is investigating a national policy.

The current debate originated, a few years ago, from the utilities’ need to be able to capture electricity usage in 30-minute intervals. This enables differential pricing by time-of-day and enables utilities to discourage certain types of ‘non-time-critical’ use during periods of high demand. Reducing peaks has a major impact on electricity generation costs – alleviating the need for new power plants and cutting down on damaging greenhouse emissions.

Victoria should be commended for initiating the debate.

The once-in-a-lifetime smart grid opportunity for Australia
It soon became clear that the additional information these meters generate can no longer be kept in the meter to await a bi-monthly or quarterly meter reading!

So what had been a metering problem became a communications problem (unfortunately in most utilities these two activities are dealt with in separate divisions). However, utilities are increasingly accepting the fact that they will have to consider the deployment of communications technology to enable the information to be sent electronically on a regular cycle.

How often does a country get the chance to replace 10 million electricity meters? Surely this generation has the obligation to use this opportunity to get it right.

Global warming – a new important political consideration
The key reason the smart meter issue was raised was the understanding that one can’t go on building power stations forever, and that a far more efficient use of energy was required for a modern society such as Australia. On top of that are the environmental considerations, and the responsibilities that rest upon both the utilities and the state and federal governments.

Seventy per cent (70%) of the cost of the smart grid overhaul is associated with the physical replacement of the meters in residential homes. We can afford to pay a bit more for a smart meter that can be left there for the next 15 years. Furthermore, smart meters are gateway products; home-owners can link other applications also, and upgrading simply becomes a software update, not a meter replacement.

This is all the more reason to go for an open standard, which will allow customers and utilities to add plug-and-play devices to the smart grid connection in the home or on the utilities’ infrastructure. Already many new energy saving and reliability improvement applications are becoming available and this will only increase over this market over the next few years. Interoperability should be a key element in the technology selection. Globally the IP standard is accepted by every single company in the communications industry, it therefore simply also has to be the standard of any smart grid network.

40-year-old proprietary solutions are not smart
From a strategic point of view it is obvious that meter reading constitutes only a small part of a much bigger process of modernisation – one that is being undertaken by the leading utilities all over the world to deal with those economic and environmental issues. The term ‘smart grids’ is rapidly gaining currency – it involves embedding computer and communications technology throughout electricity networks to deliver significant benefits in operational efficiency, fault anticipation, problem isolation/service restoration, asset management and the like.

In the rush to get Victoria’s plans underway by 2009, a proprietary system – containing 40-year-old technologies – and based on narrowband, has been suggested. This would address the 30-minute interval reading, but it does not take into account the smart grid options that are required to create all the other economic and environmental benefits. Unfortunately the federal government plans are linked to the Victorian plans, and so Victoria could drag the whole of Australia into an inadequate solution that would exclude smart solutions for another 15 years (changing meters in people’s homes is not something you would wish to do every few years).

Shouldn’t a clever country go for smart solutions?
The potential benefits of a full smart grid implementation are dramatic. Some US studies have suggested that savings of between 10% and 25% in electricity demand (and greenhouse emissions!) are achievable. Given that electricity consumption is the cause of around 40% of greenhouse emissions in the USA there are few initiatives that promise such significant benefits at a time when global warming has become one of the hottest issues confronting humanity.

On a more everyday level, efficient electricity networks ultimately flow through to tangible savings to the consumer.

So what is the solution?
This raises the question of what level of communications will be needed to support advanced smart grid deployments. One camp, led by the Victorian State Government (not by its utilities) argues that a low performance ‘narrowband’ solution is all that is needed to read meters, and the sooner we get on with this the better! As mentioned, the risk in this approach is that, since utilities can only upgrade meters every 15 years or so, the communications solution that is deployed today is what the utility will be stuck with for the next generation of investment.

A limited, narrowband communications solution will not support the real-time information flows that are involved in a smart grid deployment. It will not have the capacity to support communication between the utility and the plethora of increasingly intelligent appliances that we can expect to see in coming years. One only has to think back 15 years to see how progress would have been limited if the decision had been taken to lock into that old 486 computer with its 32 Mbytes of memory and 20 Mbytes of hard disk capacity for the next 15 years!

Let’s make smart decisions
The pressure to modernise electricity grids is commendable! However, if in our rush to make progress we take short-sighted decisions that foreclose our future for the next 15 years or so, Australia will be the loser.

Our country needs its politicians to lead the way in this important area, with a clear and far-sighted vision for the future.

The meter manufacturers would be only too happy to come back in few years’ time and do it all again, with proper smart meters next time, but this is about our future. If we get it right now, it will be the Australian people who will profit from lower prices and a cleaner environment. If we install dumb meters it will be their tax money that will be wasted. Furthermore, they will not be able to profit from the cost savings that a smart grid can deliver.

The broader picture
Finally, the benefits of smart grids go beyond the utility. Governments are able to make decisions on the basis of a societal cost/benefit analysis and could therefore recommend solutions which a utility alone may not. The multi-utility and non-utility potential of high speed communications to the house delivered in conjunction with electrical infrastructure is another benefit of a smart grids, this could help developing compelling business models.

Building on this, we shouldn’t try to solve communications for last mile requirements in isolation from other network communications needs and thus preventing synergies from being obtained. Other Government initiatives such as Broadband Connect, Broadband Guarantee, Clever Networks and the Fibre-to-the-Home Expert Task Force are all closely connected to each other as well as to Smart Grids.
Paul Budde

Australia – Broadband Power Line – Demand Side Management

Australia – Broadband Power Line – Smart Grids

Australia – Broadband Power Line – The Market in 2007

Australia – Broadband Power Line Projects and Forecasts

Australia – Energy Utilities Markets

Australia – UtiliTel

Australia – Utilities – Major Players

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