Submission - Inquiry Into the Australian Telecommunications Network
Submission by
Australian Consumers’ Association
to
Senate Environment, Communications, Information Technology and the Arts References Committee
Inquiry into the Australian Telecommunications Network[1]
Preface
The Australian Consumers’ Association (ACA) is a not-for-profit, non-party-political organisation established in 1959 to provide consumers with information and advice on goods, services, health and personal finances, and to help maintain and enhance the quality of life for consumers. The ACA is funded primarily through subscriptions to its magazines, fee-for-service testing and related other expert services. Independent from government and industry, it lobbies and campaigns on behalf of consumers to advance their interests.
Introduction
In this submission we argue the relative failure of competition in the Australian telecommunications marketplace, the need for structural reform of that market and for adequate protection of consumers. An important component of the ‘adequacy’ of Australian telecommunications is the offer made to consumers. In the view of the Australian Consumers' Association, the adequacy of this offer is compromised in two ways; firstly in the competitive structure and operation of the market, and secondly in the state of consumer protection in that market. We also share the concerns of many with the state of rural telecommunications and consider it imperative that an ongoing and sustainable footing be found for rural and regional telecommunications policy. In our view a critical issue is how to engineer the future of Telstra, since this has profound relevance for future consumer outcomes in telecommunications. It must happen in a sensible way that recognises financial, commercial and political complexities, but that delivers real benefits for consumers in the street. It must maximise the opportunities for competitive markets and minimise bottlenecks and choke points, wasteful capital expenditure and consumer abuse in the marketplace, such as unfriendly contracts and selling practices. In our opinion, the aim should be to produce consumer power in an active telecommunications marketplace, combined with adequate consumer protection, both at street level from predatory market behaviour, and at the network level, from monopoly practices and pricing.
There should be a policy focus on consumer-oriented outcomes related to competition where it works (in urban retail environments) and management of market failure (rural Australia) and natural monopoly (the core network) when necessary.
Summary of suggested recommendations
Suggested recommendation 1: That the Committee recognise the lack of competition in the Australian telecommunications industry, particularly in local access area, the dominance of Telstra in that market and the potential for consumer detriment flowing from these.
Suggested recommendation 2: That the Long Term Interests of End users test (LTIE) should not be abolished from Australian telecommunications regulation.
Suggested recommendation 3: That price caps and controls be continued, at a Telstra retail level but preferably at a network wholesale level, with particular reference to network access fees (line rentals) and key consumer services.
Suggested recommendation 4: That the complexity and confusing nature of the current telecommunications marketplace be recognised, and consumers be protected by regulation of unfair contract terms and poor selling practices.
Suggested recommendation 5: That Australia requires a statutory body to oversee and in the final analysis supply telecommunications services to regional and rural consumers appropriately comparable to urban services on a sustainable basis.
Suggested recommendation 6: That the broadband enterprise be conceived as an infrastructure investment to extend digitalisation to the last mile of the telephone network, to provide the retail consumer with bandwidth should fit various purposes, particularly low cost voice telephony.
Suggested recommendation 7: That the powers of the ACCC be extended to improve the ability of the regulator to intervene in market processes in a transparent, independent, timely and efficient way.
Suggested recommendation 8: That Government undertake the work to split Telstra into separately owned portions, one of which has custody of the critical core network and will remain in public ownership.
Suggested recommendation 9: The Australian Communication Authority is directed to include Dealers and Agents into the telecommunications industry and create Telecommunications Selling and Contract Practices Code.
Suggested recommendation 10: The co-regulatory framework for telecommunications in Australia should be reformed into one that is less industry dominated and more focussed on consumer outcomes.
Competition and adequacy
We’ve only just begun?
Recently Australia celebrated the 10th anniversary of competition in the telephone industry – Optus connected its first customer on June 15, 1992[2]. It is also the fifth anniversary of the Telecommunications Act 1997. It is certainly timely for Australia to take a look at how the experiment in telecommunications deregulation and competition is progressing.
From the consumer perspective, telecommunications has been at the heart of changes to overall household expenditure. This has been as part of the overall shift from expenditure on services rather than goods during the last four decades, driven by growth in overall household expenditure. The share of household expenditure on communication has increased by over 200 per cent - communications services achieving the highest growth in value added in that period. However, it is important to note that the growth is from a low base. ABS statistics comparing household expenditure from 1959-60 with 1999-200 show a growth in communications share from 0.7 per cent (sharing lowest place of goods and services with educational services) to 2.2 per cent (sharing lowest place of services with personal care and eclipsing only three of ten goods categories.[3] Therefore, communications is a vital and growing sector of consumer spending – but it is not the most important one. This latter point is important to bear in mind when assessing the complexity imposed by the telecommunications market that has emerged in Australia.
There has been a massive expansion of the telecommunications industry during the last five years. It accounts for 5 per cent of gross domestic product - or around $25 billion dollars. Since 1997 the sector's growth has been more than double overall GDP growth (GDP 4.2 per cent, telco sector 10 per cent). Mobile penetration has soared onwards and upwards. Internet connections have multiplied as the number of registered telecommunications carriers has burgeoned. SMS messages are flying thick and fast. The number of players in the market has risen from two in 1997 - Telstra and Optus - to more than 60. Some prices have dropped. Between 1998 and 1999, international call prices dropped by 28 per cent, local calls by almost 10 per cent and mobile services by almost 13 per cent.[4]
However there is a sense in which this consumer apple has some rot at the core. It is instructive to note the results reported in the Deloitte Telecommunication Competition and Outlook Survey - Fourth Edition (2001) survey of industry opinion that “a majority of respondents felt the Act has not been successful in its stated objective. A majority of respondents (44%) indicated that the provisions of the Act are not in the long-term interests of end-users. Furthermore, 16% of respondents indicated that the Act has had 'no effect'”[5]. Analysts are suggesting that the industry may well need to get used to growth rates a lot closer to GDP than over the last decade, returning perhaps to utility status rather than being a high-tech engine of growth. It is also sobering to note industry estimates of declining numbers of participants in key aspects of the industry. Once more to cite the Deloitte’s survey:
The number of operators seriously expected to survive in the long term is anticipated to be less than the number currently trading and is lower than previous years. This is possibly due to the more difficult economic environment and, consequently, further rationalisation in the industry is expected. Of note, the number of ISPs is expected to increase. The number of full service carriers expected to survive in the longer term has reduced to three with similar reductions to five fixed line/data carriers and three wireless/mobile carriers.[6]
As will be discussed late in the submission, there have been market setting price controls with a sinking CPI-minus cap on Telstra, and so non-market forces have driven a considerable proportion of price drops. While there is a froth of competitive behaviour in the market place, the bulk of the profit in the industry is earned by one company. Telstra, the former monopoly incumbent is still dominant player in many telecommunications markets. To cite one of their competitors, Optus:
Telstra - by its own boast - retains 75 per cent of the market. Three out of every four dollars spent on telecommunications goes to Telstra. But even worse, they scoop up 90 per cent of the industry's profits.[7]
Much of the traffic handled by the new entrant companies must at some time pass through the Telstra Customer Access Network, typically on the last mile journey into the home. This extensive copper wiring system is too expensive for another player to duplicate. This is ‘call termination’. If you want to talk to someone by phone, chances are, whomever you choose as carrier for long-distance, mobile, or international components of the call, Telstra will clip the coupon somewhere in transit. Having such a dominant and all pervasive player in the market in the view of the ACA continues to undermine competition.
Is the Australian telecommunications industry competitive?
In view of Australian Consumers' Association, what we have in the Australian telecommunications marketplace is the appearance, rather than the substantial reality, of competition. We have companies contesting vigorously - advertising, marketing, selling in shops and on the streets, and concocting ever more complex confections of product and service bundling. The only thing missing is clear, unambiguous customer value from the plethora of choice. We are certainly getting the negative effects of a hotly contested marketplace – poor selling practices from ill disciplined and inadequately trained staff, consumer hostile contracts with lock-in terms and conditions, advertisements with bold aspirational claims and fine print qualifications following the asterisk. The Telecommunications Industry Ombudsman is kept busy with a constant flow of complaints as phone companies and ISPs constantly explore the boundaries of acceptable behaviour towards consumers. We have even have the spectacular collapse of entrepreneurial participant one.Tel, which over stretched in its efforts to build market share and customer numbers without reference to return on investment.
However, it the view of the ACA that the dominance of the market by Telstra, particularly in terms of revenue and profit, based on ownership of the vital core network, means that economically persuasive offers to consumers are hard to find. A discussion of marketplace complexity follows later in the submission. Our perspective is that if greater economic depth existed in the competition, there would be scope for this complexity and confusion to be squeezed out more effectively by market forces. In the shallow, contesting market, consumers confront market forces that conspire to increase complexity, giving rise to what some analysts have dubbed the ‘confusopoly’. There would doubtless be significant kudos to be gained for various interests in declaring the migration of Australian telecommunications to a competitive marketplace done. It would enable the regime of specific regulation to be wound back. It may smooth the way for further privatisation. It would endorse the principles of co-regulation and so forth used to govern the sector. It would be a pat on the back for government and industry. In our opinion, the way to get the required economic depth to the telecommunications market is better access by competitors to Telstra’s network. The access regime administered by the ACCC has failed to deliver this in a timely or affordable way. As discussed further in the submission, we believe a structural solution is required, the equity separation of Telstra into wholesale, network based components and retail businesses.
Unfortunately, effective competition has not emerged across the whole telecommunications landscape of Australia. That telecommunications are insufficiently competitive was confirmed in the Productivity Commission Inquiry Report into Telecommunications Competition Regulation released in 2001. This was consistent with the view we expressed in our submission to their Inquiry. Subsequently to the substantive work of that Inquiry we have seen high profile and lesser players exit the telecommunications market and substantial retrenchment by others. There are no signs of new players entering the market. These developments are coupled with the global capital drought for telecommunications (As the excesses of the tech boom such as the 3G prices paid in Europe are worked out of the system and back bone fibre over supply in the US) and the maturation of markets such as mobiles and dial-up Internet access.
Telstra remains a huge, vertically integrated incumbent supplier that retains near monopoly control over essential and pivotal infrastructure. The key consumer area that is not being contested is the local loop. In the estimation of the ACA the restraining hand of competition has a particularly faint influence in the local call market, although other telecommunications markets have far from robust competition. Recent pricing decisions from Telstra suggest that for the foreseeable broadband will be ‘dial-up plus’ rather than the brave new world of broadband for all (this will be explored more fully in the bandwidth section of this submission). With regard to mobiles for instance, it was recently reported that:
One analyst at a global merchant bank, who declined to be named, said pricing power was certainly swinging back to Telstra, particularly in the retail mobile phone sector. "Although they do have more control in retail, there is still more competition in the business and small-to-medium sector, and I think Telstra will try to claw back some of its revenue from retail customers to compensate its price-cutting for business," he said.[8]
Indeed as the Bulletin noted:
Telstra should regain some pricing power. Indeed, it is doing so already with the removal of mobile handset subsidies, higher SMS charges and a hike in broadband fees. It would dearly love to do more. That raises a further unpalatable issue for Telstra customers, many of whom remain shareholders. The company is bound to push through more price increases where it can. It could become an issue of robbing Paul to pay Peter. [9]
It seems that telecommunication prices are going back up; to a level determined by what telecommunications companies (one in particular) decide the consumer can or will pay.
We may in fact have seen the topping out of this contesting marketplace. Companies have phased out handset subsidies, slashed capital expenditure and have sold up branded retail stores. In 2001 Optus noted that:
The number of key players with revenues of more than $100 million had fallen from 11 in 1999 to six in 2001. One analyst predicts there will be only three by 2002. Telstra has had to issue a revenue and profit downgrade. Telecom New Zealand has just posted a $140 million slump in their profits. Optus has had to revise forecasts. [10]
Other observers have noted:
The grand promise of telecommunications deregulation and competition has turned into something far more modest. Countless small telephone companies have failed or fizzled, with billions of dollars of investment capital down the gurgler. Although the gains from competition came thick and fast in the early days, the pace of competition (measured by falling prices and market share shifts) appears to have slowed in the past year. And former monopolist Telstra's stranglehold on the whole industry – evidenced by operating profit margins of almost 52% – seems almost as firm as it was in 1992.[11]
These times may well suit Telstra. There has been a global crisis for the telecommunications industry, which is ongoing – as Dow Jones reports from the USA:
With over 60 bankruptcies to date, it is clear that the sector sank under too much capacity and debt. Telecoms have now shed half a million jobs abd about $US 2 trillion in market cap.[12]
This is the ‘telco bust’, which has specific implications for Australia given the already dominant position of Telstra. With a firm grasp on the relatively safe income streams of domestic household and business communications, Telstra is poised to weather the storm well. Ironically for a company that was characterised as being left behind in the global telecommunications industry, Telstra has been a performer among its global peers in the past year. However, even Telstra has quite a bit of financial ground to recover.
While Telstra's competitors are screaming, Telstra's shareholders are miserable. [At May 2002 valuations] The 1.5 million mums and dads who pumped $10bn worth of hard-earned savings into the T2 second-tranche privatisation sale have seen the value of their nest eggs slashed by $3.9bn.[13]
Public shareholders have seen their combined wealth edge up by $5.7bn in just four months, but that hardly makes up for the $30bn they lost when Telstra tumbled from its November 1999 peak of $9.16.[14]