Australia's great broadband disaster: after a decade of political in-fighting over the ownership of Telstra, Australia faces the prospect of being a broadband desert. The incumbent needs to get out of cable TV—but first the government has to get out of denial - Cover Story

Telecom Asia, April, 2003 by Robert Clark

This is the story how a single mistake can turn into a multi-layered catastrophe. About how industry structure can drive government policy. About how the powerful will drive players in a market to their own ends. About how monopolies will thrive despite the most rigorous of regulators.

This then is the story of the great broadband disaster Down Under.

To a casual observer, it might seem an unlikely tale--Australia has been one of Asia's pioneers in telecom deregulation as well as in the adoption of new technology.

Australia introduced the first full service competition regime in the Asia-Pacific in 1992 and the first totally liberalized market in 1997. It boasts very respectable ownership rates for mobiles and PCs of around 70%, and around 60% for the Internet. It has far and away the strongest competition watchdog along with a well-resourced and experienced industry regulator. It has 600 ISPs, 80 long distance providers and four mobile operators, each of the latter with an international footprint.

As much as any other market in Asia-Pacific has set the pace for telecom reform since the late 1980s.

Yet the story of Australian telecommunications in the decade since full competition began is that of a never-ending trench war between politicians, regulators, media magnates, new telcos and diverse groups ranging from farmers to pro-privatization lobbies.

More than anything else, they are arguing about the future of 50.1% government-owned Telstra--the country's biggest company, the most widely-held stock, the incumbent telco and the dominant cable company.

Yet amid the political thrust and parry, few have noticed that the industry structure has since lost the ability to deliver competitive outcomes.

No alternative

One long-standing Telstra critic is Professor Alan Fels, chairman of the national competition regulator the Australian Competition and Consumer Commission (ACGC), who describes Telstra as one of the world's "most horizontally and vertically integrated telecommunications companies."

It is Fels who points out that Telstra controls the local loop, is the largest mobile carrier with two digital networks, is the largest retail ISP, the largest wholesale data and Internet provider, and is a 50% shareholder in the biggest pay TV company.

And, almost uniquely in the world, it has been allowed to build a hybrid fiber coax (HFC) cable network which has been leased all but exclusively to its own pay TV company, a joint venture with the country's two most powerful media tycoons, Rupert Murdoch and Kerry Packer.

"In the local call services market competition has had very little impact," Fels says, adding that Telstra's competitors have virtually no alternative but to use the incumbent's network--even the main rival, Optus, relies heavily on the Telstra local loop.

"The clear message from this analysis is that Telstra has overwhelming dominance across the telecommunications market and in almost every segment of that market," Fels told an industry event in early March.

The impact of Telstra's sway in the market shows up most clearly in what has become the most critical aspect of the "last mile"--the growth of broadband.

The figures tell the story. With less than 2% of the population using a broadband connection, Australia now ranks 23rd on the global league table of broadband connectivity, behind 18 OECD countries as well as Hong Kong, Taiwan, Singapore and Estonia. And it is sinking.

Ewan Sutherland, chief executive of the International Telecommunications Users' Group (INTUG), says that even if Telstra meets its target of 1 million users by 2005, this will put the country somewhere between 30th and 40th. He notes that Japan, by comparison, has added more than 1 million users since the start of the year.

A decade behind

"Australia's target is so far down the world ranking it's just not true, and I'd say you were running a decade behind world leaders like Korea," Sutherland says. "So if your target is world-class mediocrity, then Australia seems to have made that target."

Australia's broadband crisis is the result of two decades of failed telecommunications policy.

The first step was the establishment of a dedicated company, Aussat, in 1980, to run the national satellite project. By the end of the 1980s, Aussat had launched two birds, was preparing for a third, and had run up nearly A$1 billion in debts.

The then Labor government, which had resisted the idea of allowing Aussat to compete more broadly with the incumbent, hit on the idea of privatizing Aussat and throwing in a set of licenses.

After an intense debate, it rejected the idea of turning the then international monopoly, OTC, into a competitor, and instead bundled it into the domestic monopoly to create Telstra. Aussat was sold to a consortium that included by Cable & Wireless and BellSouth and became Optus, the second carrier with exclusive fixed network rights for five years.

Thus was born the region's sole telecommunications duopoly, setting a platform for "convergence"--not of technologies, but of competition.