INTUG - International Telecommunications Users Group
 ATUG Victoria Branch

Competition and market structures

Ewan Sutherland
11 May 2005

Prepared remarks - check against delivery


Good evening ladies and gentlemen

As ever, it is a pleasure to be back in Melbourne at the ATUG. For those of your seeking charts and tables of data I am afraid you will have to come to Canberra for my presentation tomorrow morning.


Introduction

Australia advances fairly (or perhaps otherwise) towards the final episode in the long saga of the privatisation of Telstra.

Consequently the question of the structure of the market and the means by which some sufficient or even substantial measure of competition is ensured have come into sharper focus. It is a problem similar to that of many countries, namely how to maintain pro-competitive policies when there are few competitors who must face an entrenched incumbent operator. I said on my last visit that the problem is the lack of competitors, a problem that is not easily solved.

A country should be aiming for genuinely competitive telecommunications markets. This is essential in order to provide the services and infrastructure for the economy that delivers productivity gains and economic growth. It is those competitive markets that allow innovation and entrepreneurial activity in other sectors of the economy. Without competition, telecommunications markets are an obstacle to the remaining 97 or 98 per cent of the economy.

It is important to study foreign countries and to extract lessons that can be applied to Australia. Applied after careful consideration and modification for the particular circumstances of Australia. It can be tempting to borrow only from the obvious examples, such as the United Kingdom of Great Britain and Northern Ireland, a subject to which I will return.


United States of America

The approval by the public authorities in the USA of the acquisition by Cingular of AT&T Wireless, triggered a wider consolidation in the sector. In particular it put AT&T and MCI into play, with SBC, Verizon and Qwest lining up to buy them and doubtless other operators if they come their way. With AT&T disappearing into SBC and MCI into Verizon, the level of competition in the USA seems certainly to be significantly truncated, some people speak of an implosion. This gives considerable concern for users there.

This loss of competition and increase in the extent to which the RBOCs are entrenched reduces the policy options for the future. A loss of competition is a process that cannot easily be reversed.

For larger users, the quite excessive profitability of Special Access services indicates the lack of competition and creates a significant additional burden to be carried by US business. It is a burden that regulators seem very reluctant to lift.

The FCC has already conceded on the question of Fibre To The Premises (FTTP), by granting the RBOCs no obligations to unbundle access to the new fibre networks. The FCC and the Bush Administration bought the argument that there would be no investment in fibre networks while the unbundling obligations remain. This leaves the RBOCs a free hand to control access to what will be the exclusive fixed residential network.

The other big area of regulatory activity is in VoIP which is supposed to be lightly regulated. However, for a variety of reasons, the VoIP providers are finding themselves to be under substantial regulatory burdens in the provision of access to emergency services (including the provision of location information, something that has taken many years for mobile operators and is still far from complete), design for wire-tapping and the payment of access charges. Aspirations to light regulation have been lost in regulatory initiatives and litigation.

One area where the USA is doing well is in the availability of mobile data services on both cdma 2000 1X EV-DO and on EDGE networks, with flat rate prices. However, things look complex when we come to streamed entertainment services. XM Radio has already several millions of customers and this satellite-based radio for a flat monthly fee may prove a more attractive business model than streaming over 3G.


Japan

Japan has the most impressive performance in ADSL, with offers of 50 Mbps downstream and 3 Mbps upstream for JPY 4,000, several orders of magnitude more than Bigpond. It is a highly competitive market structure with easy access for retail service providers to the copper network of NTT. There are some 300,000 new subscribers each month, amongst several providers, notably Yahoo! BB (of the Softbank Group) and NTT.

There is also competition in the market for residential Fibre To The Home (FTTH). Japan is adding some 100,000 lines each month. Again NTT is evident, but so are Yahoo! BB and  TEPCO. Again the prices are very low and customers are buying the service.

In 3G both NTT DoCoMo and KDDI Au are powering ahead, with more than twenty million subscribers between them. Customers have been moved painless onto the new services. Such pain as there has been, lies with the operators. NTT DoCoMo initially fell behind KDDI and had to scramble to recover. However, Vodafone is doing very badly and may soon have to give up that market.

Next week there will be the Tokyo Ubiquitous Network Society Conference. One important area of development is the extension of person-to-person communication to machine-to-machine and object-to-machine and object-to-person by means of ubiquitous sensors and RFID tags. While this present some privacy challenges, it offers considerable opportunities for new services and revenues.


India

One of the most recent markets to show explosive growth has been India, a remarkable change from consecutive decades of little or no growth. Certainly with GSM and Wireless Local Loop (WLL) the growth has been impressive, as much as two million new customers per month. However, the growth is less solid than Japan and China, and at times it seems shaky for reasons that are not clear to me. The demand is vast and only the surface has been addressed.

Nokia has announced a new factory in Chenai, formerly Madras. It sees India, after China, as a market that will be central to its business.

One further area of hope is in residential broadband growth. However, here the progress remains disappointing, even if everyone hopes for great things. One problem has been the failure of the National Internet eXchange of India caused, inevitably, by the reluctance of the big operators to participate on non-discriminatory terms.

India continues to be burdened by a regulatory system which sets retail prices in enormous detail, at times it looks like GOSPLAN. It is probably unique in combining price controls with competition.

The last eighteen months have seen important moved in the globalisation of Indian telecommunications operators with the acquisition of Tyco, Global Crossing and the second network operator in South Africa. Indian operators have quickly built on their capital and managerial expertise to move overseas. Whether they can turn this into a success is another matter. As Telstra knows, foreign investments can lose you money.


China

For a remarkably long time now China has been showing stunning growth. A typical month see the addition of about five million GSM customers and one million broadband customers. On top of these must be added the growth of WLL and some other technologies not always very well or very quickly reported. The lack of comprehensive and accurate numbers makes it difficult to state with confidence the scale of the Chinese market.

While there is competition it is of a domestic character in both infrastructure and devices. There is limited foreign presence and this presents obstacles for business users. On the one hand they must make special arrangements for local operators and they have to make do with the quality of service being offered, still substantially below global standards.

The sheer size of the growth of the market will drive the development of new devices such as GSM handsets, ADSL modems, DSLAM equipment for some years into the future. By comparison, Australia is a tiny market with the capacity to absorb only a couple of days production each month. In the future devices will be designed for China and modified for Australia.


Middle East

One area where there was no great expectation of liberalisation was the Middle East. Yet in recent months we have seen dramatic changes, with the creation of regulatory authorities, the issuing of new licences and the launching of new services. Competition has taken hold of the Gulf with corresponding jumps in the use of GSM and broadband.

One of the interesting consequences has been that operators have moved into each other's markets. They have also moved into selected Africa markets, exploiting historic links and their substantial capital base. Again, this was unexpected.


United Kingdom

The United Kingdom, the former colonial power, is making a lot of noise about "operational separation". It is important to realise that this is not yet defined and is, at best, an academic concept. It is underpinned by far from academic and very real legal powers, checks and balances. The UK regulator can divest BT, chop it and dice it, if it considers this to be necessary, by means of an appeal to the Competition Commission. There are also very detailed European legal instruments for local loop unbundling and a series of obligations to analyse a number of crucial markets. If that were not enough, the UK is subject to considerable peer pressure within the European Union.

On a legalistic note, the UK entered the then European Economic Community in the early 1970s, bringing it into a body of jurisprudence on competition law based on the original Treaty of Rome from the 1950s. It thus diverged significantly from the statute and common law of the Commonwealth that followed English legal precepts.

Even if nothing specific emerges from "operational separation" there remains a very much more solid legal basis for pro-competitive policies than is afforded by the Trades Practices Act in Australia.

It is important to set aside the British rhetoric and to look at the legal realities. It is on those that market entrants will make their decisions. It will also be important to see whether the UK can "pull up its socks" in its delivery of a competitive market.


Conclusions

We live in a world in which everything is carried over IP and in which everything, person, device and object has some capability to interface to IP. It creates for us many challenges and opportunities.

We are seeing the beneficiaries of liberalisation coming in countries that are not obvious or at least not predicted. This could well continue.

Each country needs both to aim to be the best in the world and to learn from the best in the world. We must also learn from the mistakes of the worst in the world, or those that are merely not doing so well or, like the United Kingdom, are merely mediocre.

Once again my thanks for the opportunity to speak in Melbourne.


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