Growth 60: Australia's Broadband Future - Four doors to greater competition

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In recent years, Australians have begun to realise the contribution that telecommunications and competitive media can make to the development of a prosperous and socially viable nation. With that realisation, broadband has moved to the centre of the policy agenda.

Australia's Broadband Future: Four doors to greater competition was first released in December 2008 and focuses on the Australian broadband debate. How do we deliver the best information services to customers in different situations across the country?

Each of the six chapters, written by leading Australian and international experts, reflects alternative views on what is required to achieve this. However, there is broad agreement on promoting infrastructure-based competition and diverse solutions - rather than a single, national solution. The task is to promote real competition across the four infrastructure 'doors' - copper telephone lines, wireless, coaxial cable and fibre - allowing rivals to differentiate their services and compete more vigorously along their supply chains.

CEDA's aim in publishing this research is to continue to inform, influence and raise the standard of debate on the issues affecting Australia's economic development. Media and general business competition is highly dependant on the speed and volume of data obtained through the four digital 'doors' of telecommunications infrastructure. As such, broadband policy and how that will enable optimal supply of information services is a theme that will be at the centre of CEDA's research agenda for some time to come.

CHAPTER SUMMARIES

Chapter 1: The 'Four Digital Doors' - a CEDA Research perspective on digital competition

Dr Michael Porter, Director, CEDA Research, argues that Australia's information policy must be modified to achieve real competition across the 'four digital doors' of telecommunications infrastructure. Broadband competition should come from and within:

• copper telephone lines (ADSL and VDSL)
• wireless systems (mobiles, WiMax, satellite)
• hybrid fibre-coaxial (HFC) cable
• fibre systems (including FTTN).

Each of these digital doors will in the future produce fast broadband and the services that go with it, such as voice, video, TV (including IPTV), data and text on a range of platforms. Porter maintains the current policy debate should be about much more than the FTTN rollout, since existing cable and evolving mobile platforms also present fast and competitive platforms. Yet we seem to be bogged down in a technologically exclusive debate about a 98 per cent rollout of FTTN rather than how to deliver the best information services to customers in differing situations. He argues that the need is to create maximum competition between broadband infrastructure systems. There is less need for regulation of any one door (eg through enforced access regimes) if all four doors are competing. Access pricing and other forms of regulation have to facilitate investment as well as competition. Structural separation of Telstra is undesirable as there are distinct investment coordination advantages and other vertical synergies from owning a network and retail telecommunications business. However, in order to achieve horizontal competition in telecommunications and particularly broadband, he argues in favour of the successful bidder for the tender being required to divest all its shares in its coaxial cable systems. He describes cable as the 'lost opportunity' and says it can be a much more competitive source of broadband as well as cable TV if we do not have common ownership across cable, copper ADSL, wireless and fibre. A subsidised ($4.7 billion) FTTN rollout is unnecessary given the potential of mobile and satellite systems and the chance to blend and extend existing fibre cables with wired and wireless systems in the bush.

Chapter 2: Building the broadband network

Professor Martin Cave, Director of the Centre for Management under Regulation, Warwick Business School, proposes that design of the National Broadband Network (NBN) should apply a different regulatory approach to different geographic areas, differentiated according to population density and commercial opportunity:

a) Forbearance from access regulation where there is existing infrastructure that could compete with the NBN through an upgrade of Optus HFC network.

b) Mandatory access to a dominant Next Generation Access network (NGA) where infrastructure is not currently duplicated.

c) Mandatory access to one or more collectively dominant NGAs where the NBN is uncommercial and would not be built without public funding.

Regulators should be mindful of the desirability of promoting end-to-end infrastructure competition. Cave sees mobile networks as a competitive constraint on fixed networks. There is viable competition from Telstra, Optus, Vodaphone and 3 on wireless broadband. He points to European examples (UK and Netherlands) where decisions of cable companies to upgrade their service offerings have stimulated traditional telecommunications companies to invest in NGAs. He notes this competitive dynamic is lacking in those areas of Australia where Optus has competing cable infrastructure (30 per cent of homes in metropolitan areas of Australia). Regulation must be crafted to provide the right incentives to invest. A generous access regime will not meet this objective. Substantial further investment will be required to possibly take fibre beyond the node to the premises. Finally, Cave argues that structural separation is an unnecessary risk. Integration enhances efficiency while separation is unlikely to confer benefits but likely to impose avoidable costs and delays. Most critically, separation creates challenges in the coordination of operational and investment decisions - a particularly acute problem given the scale and progressive nature of the NBN rollout.

Chapter 3: Creating an efficient national broadband network

Professor Joshua Gans, Professor of Economics, Melbourne Business School, argues against the development of a single national solution. The federal government's tender process involves a clear technological preference. The concern is that the government may be cutting off options for tailoring and economising based on locations. Cable can now deliver speeds up to 40 Mbps and wireless technologies are improving constantly (speeds up to 100 Mbps under development). While non fibre solutions may not be technically superior to fibre, given the cost of a new rollout, they can be economically superior to fibre. Users are also changing their preferred mode of accessing the internet - with a preference for convenience over speed evidenced by inhome choices of WiFi over higher-speed wired access and the popularity of iPhones. He notes that there are clear regulatory issues surrounding broadband that need to be resolved. Any provider proposing a fibre to the node network will also need access to the copper tails of Telstra and backhaul services from the exchange. This means that open access to the conduits that house the fibre along our streets will be needed as will a regulatory structure that allows continued supply of existing basic broadband and ADSL services by their current suppliers ('back-stop' competition). 'Interoperability' between different technologies needs to be built in so that connections by alternative suppliers are possible at the exchange, node and street. Restrictions on competition under the name of preventing over-build should also be resisted. Finally, he reminds us that broadband is not just about the basic infrastructure. To provide value to consumers there are other parts that require attention - most notably, broadband applications.

Chapter 4: A policy framework for a new broadband network

Dr Henry Ergas and Dr Eric Ralph of Concept Economics argue that if efficient investment in next generation broadband networks (NGN) is to be forthcoming, a strong credible commitment to minimal regulation (including regulation of access) is required. The fundamental reason is that NGN deployment requires substantial long-term sunk investments and this leaves investors vulnerable to regulatory holdup - a problem the present regulatory regime makes particularly acute. Despite broad market entry, investment has been weak because investors do not expect to earn a return that would justify the costs and risks of NGN deployment. The ACCC can exercise substantial regulatory discretion, actively exercises that discretion and does so in a manner that commonly leads to underpricing. Ergas and Ralph argue that the risk of regulatory 'opportunism' is reduced if regulatory regimes have relatively broad coverage, rather than being specific to particular industries (like Part XIC of the Trade Practices Act). Access regulation postpones NGN deployment and forbearance encourages it. To concerns that an NBN provider might engage in monopoly practices in a light-handed regulatory environment, the authors argue that wholesale price caps may have some merit in minimising regulatory harm. They conclude that the current tender process is not necessarily the best way and runs the risk of 'picking winners'. The government may be better advised to fix the current regulatory regime and then let investment decisions flow (including the decision about whether to deploy FTTN).

Chapter 5: Broadband in the US - myths and facts

Dr Jeffrey Eisenach, Chairman of Empiris LLC, Washington DC argues that, despite earlier criticisms, the relatively deregulatory American approach to broadband policy is producing highly desirable results including high levels of investment (eg 40 per cent higher investment in communications equipment since 2003 when FCC exempted broadband infrastructures from unbundling requirements), innovation and lower prices. The vast majority of US consumers can choose from at least three infrastructure based broadband suppliers (wireline telephone service, wireline cable providers and mobile wireless broadband). More are on the way - with AT&T and Verizon actively deploying optical fibre networks to compete with cable TV multiple play services. Consumers will be better served by requiring competitors to build their own networks thereby encouraging investment in competing infrastructures. Eisenach suggests that vertically integrated infrastructure competition is working well and would suit Australia.

Chapter 6: The European experience - regulating broadband services

Jim Holmes, Director of Incyte Consulting, conducts a review of European and Asian approaches to provision of infrastructure for broadband service provision. He argues that it is to competition that governments are turning to provide the driver that will ensure investment occurs in the right mix of technologies at the right time and to address social and business demands. Regulators can rely on inter-modal competition (competition between different technologies) or they can rely on intra-modal competition (sustained by an access regime). In Australia, Holmes notes that the opportunity for intermodal competition is reduced by a) the two cable television networks being in the hands of Telstra and Optus, and not controlled by parties independent of the major telecommunications carriers and b) the largely aligned coverage areas of 2.5 million households in aggregate and the decision by Optus to retire its network and deliver broadband services using Telstra's mandated and unbundled local loops (ULLs) service. Optus investment remains underutilised and undeveloped for broadband competition. On the question of structural separation, Holmes notes that there is no completed overseas example of regulated structural separation and therefore no example to show how it would work in practice. He notes the establishment of Openreach as a separate organisational unit in BT in the UK as an example of functional separation. While apparently successful in providing non-discriminatory access to existing network infrastructure, Holmes notes that the increased investment in the UK on ULLs and DSLAMs may be a potential barrier to the commercial adoption and investment in fibre delivery systems needed for higher speed broadband. He concludes that while Australia may take some cues from the experience of other countries, the picture across the board is one of unchartered industry and competition.