Held to Ransom by Telstra

On Monday of this week, Telstra decided to unilaterally discontinue talks with the Australian Competition and Consumer Commission (ACCC) on its proposed upgrade  to Australia’s communications infrastructure. Despite ACCC Chairman, Graeme Samuel’s comment that he was ‘perplexed’ by Telstra’s decision  , it came as no surprise to many in the industry.

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In November last year, Telstra announced its plan to replace large sections of Australia’s copper phone lines in metropolitan areas with optical fibre. Its FttN (or ‘Fibre-to-the-Node’) plan would have extended existing optical fibre cable from telephone exchanges to small street cabinets (nodes), usually about 300 metres from people’s homes in metropolitan areas.

At the time, Telstra proposed to give its competitors zero access to this new network. This was unacceptable to the Government and Telstra has been talking with the ACCC about competitor access to the network ever since although it has periodically threatened not to go ahead with the $4 billion upgrade.

Monday’s announcement was therefore a case of Telstra giveth and Telstra taketh away.

But it didn’t have to be this way. I have urged the ACCC and the Government to call Telstra’s bluff in relation to its threat to abandon the upgrade. Why? Because the big bang upgrade, as suggested by Telstra, is completely unnecessary. A more sensible approach by Telstra, and one that I think it will eventually run with, is to follow world’s current best practice and immediately switch to high speed broadband (ADSL2+) on the old copper lines, while progressively and much more economically rolling out optical fibre.

Let me explain.

For more than a year, serious broadband development in Australia has been at a standstill with Telstra trying to force the Government to give the company regulatory guarantees (read: guaranteed less competition) for its proposed new investments. However, it has become crystal clear that the Government was not going to give in.

As a result of this impasse, many issues are currently on hold that could be readily (if not immediately) dealt with. First and foremost is the critical need to increase broadband speeds. In Europe, 80 per cent of broadband users have speeds higher than 2Mb/s (the speed needed for video based services). In Australia, fewer than 20 per cent have such a service yet 80 per cent of the network is ready to be upgraded, literally at the flick of a switch.

Other stalled issues that could be readily fixed, if there were the political will, include the upgrade of the network; providing broadband services to rural Australia 500,000 rural customers could be connected to an already available extended broadband technology; and providing competitors access to the Telstra network on economic viable terms.

Despite competition notices and other regulatory decisions, no progress has been made on any of these issues.

I had hoped Telstra’s CEO, Sol Trujillo, would use his ‘one year in office’ speech last month to announce a shift in the telco’s hard-line strategy. I had predicted that part of Telstra’s turnaround would be an aggressive launch of its ADSL2+ service utilising the existing copper-based telephone network, and a ‘triple play model’ which would include Voice over Internet Protocol telephony (VoIP), broadband and a video offering all for the price of one access charge. (Currently, users have to pay individual access charges for telephony, broadband and pay TV, totaling some $120. The triple play model could be available for close to half that price.)

But, of course, there has so far been no reconciliation. Instead Trujillo’s speech managed to further infuriate the Prime Minister, the Communications Minister and many others inside and outside government.

Nonetheless, I stand by my prediction that, very soon, we will hear about a new Telstra plan one based on ADSL2+. FttN will be put on the backburner and rolled out slowly it doesn’t need a rapid ‘big bang’ rollout. Apart from the USA (where they need to compete with cable-carried, broadband HDTV services) no other telco in the world is pursuing a big bang FttN rollout.

By proposing a ‘big bang’ FttN rollout, Telstra had hoped to cut off its current broadband competitors because an FttN network would not support the current wholesale arrangements. Telstra were clearly hoping that, under the pressure of arranging the controversial T3 sale of the remaining 51 per cent of Telstra, the Howard Government would give Telstra some kind of an FttN monopoly.

With the FttN issue out of the way we can now expect a speedy rollout of ADSL2+. Over the last few years, Telstra has quietly upgraded most of its existing telephone exchanges with ADSL2+ technology, which could provide speeds 100 times the current level to a very large proportion of the Australian population, immediately. (All other Western countries have launched ADSL2+ services since 2003. Australia is again one of the last to benefit from this technology.)

A switch to ADSL2+ will be very positive for customers but extremely disruptive for the Government, and Telstra’s competition. It will require a total rethink of various Government programs such as the $878 million Broadband Connect initiative. It will also result in Telstra’s major rivals like the G9 (lead by Optus), AUSalliance (led by Austar), UtiliTel (electricity utilities), the SE Queensland Councils and many other new telecoms, scurrying back to their drawing boards.

Thanks to Emo.

While the G9 haven’t ruled out continuing their plans to build their own fibre network, Telstra’s announcement on Monday will certainly see their plans been put on the backburner. Their plan was always to compete with Telstra, not build new infrastructure for its own sake. They wanted to make sure that they would get their share of the action if the market moved from copper to fibre based infrastructure. With broadband developments being based on the copper-based network for the foreseeable future, the current regulatory regime will stay in place and thus competition has been saved.

Apart from these predictions, the main thing to come out of the FttN debacle is the realisation that current regulatory arrangements are just not working. Telstra’s continuing refusal to engage in responsible discussions on national telecommunications issues makes it abundantly clear that the ACCC does not have enough power and the Howard Government does not have the political will to guarantee Australia’s broadband future.

The ACCC should have the power, as regulators do in other countries, to force Telstra to form some kind of ‘Future Network Workgroup’ with the rest of the industry, where issues to do with connection and access can be discussed. This applies, not just to the FttN network, which might now be removed from the limelight, but far more importan
tly to the underlying next generation network (NGN), which Telstra is implementing as we speak.

Since the ACCC has often indicated that its role is not that of a facilitator, it might be important for Minister Coonan to make sure that the ACCC is asked to organise this level of co-operation and that it is given, if necessary, the appropriate powers to bring the industry together.

But the ACCC has failed miserably in other ways. Its (non) decision making process takes far too long incremental progress being measured in years.

Take local loop unbundling (a step which is essential for broadband competition). Regulatory debate is now in its seventh year and we still don’t have a satisfactory outcome! There may be a decision handed down around 1 September meanwhile the real action is moving to NGN and fibre-based networks.

Similarly, it took the regulator over 10 years to get a proper access regime in place for telephone services just in time for it to see the shift away from voice competition to Internet/broadband-based accesscompetition.

And then there’s pay TV. In 1994, the then Minister for Communications, Michael Lee, declared that pay TV networks were open networks, and that there were processes in place allowing competitors to provide their content over them. Sixteen years later the Seven Network is still in court, battling to get access.

By way of contrast, the regulator in the UK (OFCOM) has the power to facilitate much faster processes it credibly threatened to break up BT (the old British Telecom) so that the national telco and the industry are together working out plans on how to implement the next generation of networks. (Of course, OFCOM is fortunate in that BT is happy to do this because it looks upon the wholesale market as its customers.)

New Zealand Telecom, which recently decided to flick the switch to ADSL2+ has also ‘voluntarily’ (after the Government threatened to break up the company) established industry workgroups to make joint decisions regarding the implementation of wholesale and NGN services.

Our regulatory system is certainly not delivering the outcomes we need in a timely fashion. The ACCC should start facilitating the level of industry co-operation that is required to implement future networks. And it should start doing so immediately.