Australia – The Wholesale Market in 2006 – Analysis.
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
