Incumbent cedes control of local network services - Telstra - Company Business and Marketing

CommunicationsWeek International, June 4, 2001 by Adrian Lynch

A major national telecoms operator could soon be losing control of part of its local network, in possibly the first example of a strategic withdrawal from local loop ownership by an incumbent.

Australia's Telstra Corporation, which is being asked to test the scheme, is unhappy that in the long term it could be forced to give up control over local access systems.

The move follows a recent announcement by the Australian government that its plans to complete the privatization of Telstra have been put on hold until 2003-2004, which reveals how edgy the government is about voter dissatisfaction with telecoms service delivery in the run-up to a federal election.

Analysts say that Telstra could become the first incumbent in a liberalized telecoms market to give up significant control of the local network.

Prominent Australian telecoms market commentator, Stewart Fist, agrees: "The move to have competitive tendering for the supply of the universal service obligation (USO) will lead initially to bigger companies going for USO work even if they have little in the way of local infrastructure."

He added that in the longer term, regionally-based access companies will win USO work. "The regional access companies could be run by local shires or groups of shires working together," he said. "They will become dominant in low population density areas such as western New South Wales."

Fist's comments come as the Australian government readies it self to introduce a pilot scheme under which carriers will be able to compete with Telstra in two designated areas to become universal service obligation (USO) providers.

Competing carriers met in Melbourne last week to discuss draft guidelines from the Australian Communications Authority (ACA) on how to prepare their USO tender applications.

The federally-mandated USO, which until now has been supplied by Telstra, aims to ensure reasonable and equitable access to standard telephone services and payphones for all Australians.

From July, other carriers will be able to compete with Telstra to supply USO service in two designated rural areas.

The pilot USO-competitive areas are the Greater Green Triangle of southwest Victoria to southeast South Australia, and northwest New South Wales to Queensland's Darling Downs.

Any carrier can apply to compete in either of the two areas or specific portions of a designated area such as a local government district.

To attract carrier competition for USO servicing in the two areas, a 50 million Australian dollars ($25.5 million) subsidy is being offered by the Australian government. Michael Smith, managing director (Asia Pacific) for the Stratos Global Corporation, said, "when you do the math on the government's plan and its pro posed subsidy for USO service de livery, it is quite attractive for a carrier to bid." Smith believes that opening up the USO to contest will see many new carriage technologies such as satellite introduced to rural Australia.

Telstra cries foul of entrants

Despite the fact that the feasibility studies have only just begun, Telstra has already cried foul over aspects of the USO subsidy.

Rival carriers should be pre pared "to get dirt on their boots" if they won the right to supply the USO, said Doug Campbell, Telstra's head of its recently created division for rural services delivery.

Campbell said carriers competing for subsidized rural services might profit unfairly after making only minimal infrastructure in vestments.

He argued that a recent pricing determination by the anti-competitive watchdog, the Australian Com petition and Consumer Com mission, could allow a rival carrier to buy wholesale capacity from Telstra, then supply it to subscribers in the USO pilot areas while attracting a USO subsidy for call traffic.

Because of this threat, Campbell wants the pilot scheme modified before its 1 July inception so that rival USO carriers are compelled to use their own infrastructure wherever possible.

ACA manager of the USO pilot scheme Bruce Matthews says bid ding contestants can offer to pro vide their own network services, resell Telstra connections or some thing in between. "They have to be able to connect all eligible customers. This covers new and carrier switching customers," he said. "The mechanism by which they do that is up to them. They can do it by providing their own infra structure or resale of other provider services."

Dominant Telstra presently holds 95% of the Australian local call market, 85% of the data market, 77% of the long-distance market, 50% of mobile revenues and 47% of international traffic.

Political pressure for access

An Australian general election must be held before the end of this year and the ruling conservative Liberal Party/National Party coalition, headed by embattled prime minister John Howard, knows it could be tipped from power if regional area voters switch their allegiances.

The government has said it will not consider privatization until regional services delivery meets standards set in a report it commissioned last year.