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The transition from monopoly to competition in Australian telecommunications
Telecommunications Policy, Vol. 20, No. 5, pp. 311-323, 1996
Pergamon S0308-5961(96)00009-2
Copyright © 1996 Elsevier Science Ltd Printed in Great Britain. All rights reserved 0308-5961/96 $15.00 + 0.00
The transition from monopoly to competition in Australian telecommunications Marina C van der Vlies
An effective telecommunications infrastructura is of vital importance for the economical and social growth of a geographically Isolated country such as Australia. The reform policy chosen by Australie Introduces competition in the supply of network facilities for public network services by licensing a second end-to-end facility carrier under a duopoly arrangement. The Australian approach to the introduction of competition can be seen as a learning experience for other countries still dominated by national PTTa. Little is known in Europe about the Australian telacommunicatlons environment and the effects of the recent telecommunicationa reforms on the telecommunlcations Infrastructure in Australia. These factors combined to make the Australian telecommunlcstions environment an interesting and dynamic subject for research. Copyright © 1996 Elsevier Science Ltd The author received her MA in September 1995 in Communication Studies from the University of Amsterdam for Political and Social Sciences. She is currently working with Station 12 (Satellite Communications Division), PTT Telecom in the Hague, the Netherlands. She may be contacted at Waterloostraat 115 a, 3062 TJ Rotterdam, the Netherlands (Tel: +31 70 412 7777; fax: +31 70 343 4644). The views expressed in this article are those of the author and do not necessarily represent those of Station 12 (PTT Telecorn). continued on page 312
Telecommunications reform in Australia Until 1989, there was a government monopoly over the provision of telecommunications networks and services. The monopoly consisted of three government owned carriers: Telstra Australia responsible for domestic telecommunications, the Overseas Telstra Commission (OTC) responsible for international communication, and AUSSAT responsible for national satellite operations. The first telecommunications reform took place in 1989 with the implementation of the Telecommunications Act 1989. The establishment of an Australian Telecommunications Authority, Austel, as an independent regulator for the telecommunications industry formed a central part of the new regulatory arrangements. Problems with the financial viability of AUSSAT, soon after the 1989 reforms, resulted in a government review and led to a second wave of telecommunication reforms implemented by the Telecommunications Act 1991. A new regulatory framework was established with the following main elements: • a network duopoly based on two general carriers; • competition in the provision of Public Mobile Telephone Services (PMTS) with the licensing of three mobile carriers; • open competition in the provision of other telecommunications services (eg voice and data), including third-party resale of carrier line capacity; and • increased regulatory responsibilities for Austel, including jurisdiction over interconnection arrangements between the duopoly carriers. 1 The most important element of these reforms was the intention of the Australian government to introduce 'full network competition' into the telecommunications industry by mid 1997. The network duopoly was established through the merger of two of the existing carriers, Telstra and OTC, into a new full service government-owned carrier: the 311
Telecommunications transition in Australia: M C van der Vlies
Australian and Overseas Telecommunications Corporation (AOTC). This name has been changed to 'Telstra' for all company trading since mid 1993. AUSSAT was sold for approximately US$600 million, through a tender process, to Optus Communications Limited: a consortium of Bell-South of the US and Cable & Wireless of the UK, each owning 24.5%, and the major 51% share held by Australian investment companies. Telstra and Optus were licensed to operate as 'general carriers' as well as 'mobile carriers'. In late 1992 a third mobile carrier, Vodafone, from the UK was licensed. 2 In the run-up to the next federal election the privatization of Telstra is the subject of much debate. The popular opposition party are strongly in favour of privatization, whilst the ruling Labour Party have always been fierce opponents of privatizing Telstra.
The Australian regulatory framework To clarify the current regulatory approach in Australia, its principle factors can be placed under the following headings. Structural arrangements
There are currently three fundamental structural divisions in the Australian telecommunications industry. Service providers are divided into carriers or non-carriers. Carriers are either general (line and satellite) or public mobile carriers. Services can be either basic carriage (BCS) or higher level (HLS). Until 1997, two general carriers (Telstra and Optus) and three mobile carriers (Telstra, Optus and Vodafone) are the primary suppliers of telecommunications infrastructure and services in Australia. The carriers Telstra and Optus offer analogue as well as digital mobile services. Vodafone exploits its own GSM (Global Systems for Mobile Communications) digital network. General carriers have specific rights and advantages in the supply of basic carriage services. Non-carriers are permitted to resell services in competition with carriers. Competition
Besides the above structural arrangements, industry-specific conduct rules are provided to supplement the general competition law, thereby promoting overall competition. The Telecommunications Act 1991 supplements the general competition law in the areas of refusal to deal (access and interconnection), price discrimination and anti-competitive tariffing, misuse of market power by foreign operators, and by providing pricing and cost transparency mechanisms. 3 continued from page 311 1Melody, W H 'The waltz to administered duopoly in telecommunications' paper presented at the IDATE '94 conference, Montpellier (1994) 2Northfield, D Australian Telecommunications Commercial and Regulatory Environment 1994 Centre for International Research on Communication and Information Technologies (CIRCIT), Melbourne (1994) 3Department of Communications and of the Arts (DOCA) Beyond the Duopoly: Australian Telecommunications Policy and Regulation Australian Government Printing Service (AGPS), Canberra (1994) 33
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Social objectives
The Telecommunications Act 1991 ensures that the basic telephone service remains a universal service, reasonably accessible to all of the Australian population on an equitable basis. The cost of delivering this universal service is shared among the carriers. Residential customers will continue to have access to untimed local calls. Most of Telstra's prices are subject to 'price-caps' to protect consumers and other carriers from monopoly pricing. Another social objective compels Telstra to provide a number of consumer services such as intemized billing and directory services. Consumer protection responsibilities are shared between Austel, the Australian Competition and Consumer Commis-
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sion (ACCC), Telecommunications Industry Ombudsman (TIO) and the Commonwealth Ombudsman. National interest
The government has a policy stimulating strong Australian participation in carrier ownership. Foreign acquisitions are subject to the Foreign Acquisitions and Takeovers Act 1975. To become a general carrier a firm must be a corporation formed within the Commonwealth (this does not apply for service providers). Technical regulation
Austel has the responsibility for technical regulation and represents Australia on international standards bodies. Industry policy
Carriers are required to develop industry development plans outlining the basis of their commercial agreements with suppliers. The government has implemented industry arrangements that have encouraged links between carriers, service providers and local suppliers of hardware and software, and helped suppliers to establish themselves locally and to seek domestic and export marketing opportunities. The Telecommunications Industry Development Authority (TIDA) is responsible for their implementation. Overseas marketing of Australian Telecommunications expertise is supported by the Telecommunications Export Task Force (TETF). Institutional arrangements
Austel is responsible for the industry-specific regulation of telecommunications, together with TIO and TIDA to a lesser degree. The ACCC still holds extensive jurisdiction over the whole industry. In general, regulation in Australian telecommunications focuses on the industry providing carriage of communication services and arrangements that stimulate the development of effective competition. In the current structural regulatory arrangements a clear distinction can be made between core telecommunications activities, where restrictions to entry applies until 1997, and other activities where competition is open. 4
The Australian competitive framework The Australian government recognized that the incumbent carrier, Telstra, would have very strong advantages in its former monopoly areas compared to the new competitor, Optus. Therefore, a form of structural regulation was introduced that tilted the playing field in Optus' favour, introducing so called 'pro-competitive safeguards'. To provide for a firm foundation for the transitory period from a monopoly market structure to competition in the telecommunications market, the following important competitive and consumer safeguards have been put in place by the Telecommunications Act 1991:
4DOCA op cit Ref 3 SAustralian Telecommunications Authority (Austel) Competitive Safeguards and Carrier Performance Australian Government
Printing Service (AGPS), Canberra (1994)
• interconnection arrangements; • equal customer access; • non-discrimination provisions; • price control arrangements. • transparency mechanisms; and • universal service obligations (USOs). 5 313
Telecommunications transition in Australia: M c van der Vlies Interconnection arrangements
Interconnection plays a fundamental role in establishing the competitive relationships between the dominant carrier, Telstra, and the new entrants Optus and Vodafone. Experience in other countries shows that a large amount of the new competitor's costs, especially during the initial stages of competition, are related to interconnection charges. 6 "The example of Australia has shown that an important requisite for new entry can be the existence of an interconnection framework. ''7 Australian government policy was aimed at developing an open, accessible environment for the potential second network provider. Therefore, an interconnection charging scheme (IRCP) was revealed by Austel before the tender process for AUSSAT had commenced. "Australia took strong steps to ensure its duopoly competition is more effective in the early years. The primary vehicle for promoting it are the Optus interconnection agreements. Australia has provided the most generous conditions of market access to a second carrier of any country. Optus has full interconnection rights at very low prices during its establishment phase. Consumers can access Optus service on a call-by-call basis, simply by dialling '1'. ''8 The overall framework for establishing interconnection charges was presented by Austel in a report in June 1991 and was incorporated in the Ministerial pricing principles (IRCP) announced in November 1991. There are three different ways to establish interconnection charges defined in the overall framework: • initial interconnection and access charges based on the directly attributable incremental cost (DAIC) concept; 9 • initial interconnection and access charges, which are negotiated between the carriers (charges must at least recover costs of providing the particular service, including a commercial return on the assets used to provide that service); and • subsequent interconnection charges, which replace initial interconnection charges when the incumbent carrier loses its market dominance.
6Australian Telecommunications Authority (Austel) 'The importance of telecommunications in Australia's economic development and the likely effects of telecommunications reform' occasional paper Economics 1, Australian Government Printing Service (AGPS), Canberra (1992) 7Organization for Economic Coordination and Development Communications Outlook 1995 OECD, Paris (1995) 8Melody, W H 'The ballot-telecommunications beauty test' Australian Communications, 1993 August 63 eAustel equated the DAIC concept with long-run incremental costs, including in it fixed capital costs of relevant assets and directly attributable incremental recurring non-capital costs such as operating costs and maintenance. l°Austel op cit Ref 6 11Gerrand, P 'Fostering a competitive environment' Australian Communications 1994 November 57-60
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The above charges are designed to ensure that competitive advantage can only be achieved through efficiency improvements, while at the same time inefficient duplication of facilities by the second carrier is prevented. 10 This interconnection framework was only meant to function as a transitory policy in parts of the market in which Telstra was dominant. A trigger mechanism was developed so that that initial pre-established charges could be replaced by commercially negotiated charges when the defined trigger thresholds or market conditions were met. In late 1993 Telstra requested negotiations with Optus to replace the initial (Austel determined) charges with commercially negotiated charges. These negotiations led to a new interconnection agreement between Telstra and Optus in 1994 and an increase of about 10% in the average charge of interconnection. Austel has recently developed a new interconnection model 11 that is to function as a basis for the introduction of new services in a future multi-service deliverer environment. E q u a l c u s t o m e r access
Equal access for customers to both carriers, Telstra and Optus, has been introduced through a national preselection ballot. The purpose of the ballot is to allow customers to preselect Optus as their basic long-
Telecommunications transition in Australia: M C van der Vlies
distance carrier without having to dial the overriding prefix '1'. The ballot has been conducted in all the major metropolitan areas of Australia and must be completed by June 1997 when full network competition will be introduced. Ballot results show that Optus has reached a national long-distance market share of 8-10% and an international market share of 13-15% .12 Non-discrimination prov&ions
The telecommunications regulatory framework has been redefined by the Telecommunications Amendment Act 1994. The Telecommunications Act 1991 restricted price discrimination by a dominant carrier in general, but discrimination was allowed under specific circumstances; for example, volume discounts or lower charges for services supplied at lower bit rates could be justified under the Act. As a result of the unclear boundary between discriminatory and non-discriminatory pricing, Austel has developed a 'Decision Making Framework' (DMF) to administer the amendments and assist it to form an opinion on whether tariffs by the dominant carrier are likely to have an anti-competitive effect. Austel has hereby taken a very pro-competitive approach aiming for clear, independent tariffs and product offerings for access, switching and interconnect. It is expected that this new ruling will result in an increase in the degree of competition on the resale market. 13 Price control arrangements
The price control system introduced in Australia is based on the concept of price-capping. Price-caps provide incentives for productivity growth, as the carrier whose productivity increase exceeds the norm will enjoy higher rates of return than the carrier with a decrease in productivity. The price-cap mechanism is applied to Telstra's business and residential rentals, local, national and international calls and cellular mobile telephone services. A second element of the price control arrangement is Telstra's obligation to notify the Minister of changes in price, which may consequently be disallowed. 14 Transparency mechanisms
12Austel op cit Ref 5; Budde, P Telecommunications Strategies 1994/95 Paul Budde Communications Pty, Sydney (1994) ~3Budde op cit Ref 12; DOCA op cit Ref 3; Leonard, P 'Unintended (and other) consequences' Australian Communications t 994 May 67-70 14Austel op cit Ref 6; DOCA op cit Ref 3 ~SAustel op cit Ref 6; DOCA op cit Ref 3
The two main transparency mechanisms, tariffing and accounting separation, are fundamental to competition regulation. The Telecommunications Act 1991 requires carriers to make the tariffs for basic carrier services (BCS) public. The only exception is that non-dominant carriers may charge off-tariff. Accounting separation is a central reform in the Australian competitive framework. The separation of the carrier's different business activities and products provides Austel with data to identify anti-competitive practices (eg cross-subsidization) that can threaten the promotion of effective competition. This accounting system also provides Austel with financial information to enable it to undertake informed regulatory decisions, such as the calculation of interconnection charges and universal service obligation (USO) levies. 15 Universal service obligations
Universal service obligations (USOs) ensure universal access by all Australian residents to standard telephone services. The Australian framework for the delivery of USOs comprises an administrative system that spreads the cost of funding USOs equitably among the carriers 315
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(Telstra, Optus and Vodafone) and a methodology for calculation of the cost of USOs. USOs are funded in direct proportion to each carrier's share of interconnect time on the domestic and international network. Carriers are required by Austel to submit areas that are loss-making or 'net cost' as a result of USO. The sum of the net costs in each area represents the total cost of providing the USOs (eg US$112 million in 1992-1993). The USO cost calculation methodology involves comparing avoidable costs and foregone revenues for different levels of the telecommunications network. 16
The Australian telecommunications market
16Austel op cit Ref 6; DOCA op cit Ref 3 17Northfield op cit Ref 2 18Austel op cit Ref 5 19Australia currently has a total of nearly 7 million households. 2°Broadband Services Expert Group (BSEG) Networking Australia's Future interim report Australian Government Printing Service (AGPS), Canberra (1994) 21The Age 29 October 1994 22Lindsay, D 'When cultures collide: regulating the convergence of telecommunications and broadcasting' policy research paper no 29, Centre for International Research on Communication and Information Technologies (CIRCIT), Melbourne (1993); Northfield op cit Ref 2
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Telecommunications is one of the largest industries in Australia; the telecommunications market, including equipment, network and valueadded services (VAS) was worth US$13.2 billion in 1993/94, which represents 4.3% of Australia's gross domestic product 17 and therefore occupies a central position within the Australian economy. The main reason that Australia is a promising country for the implementation of new telecommunications services is that the Australian telecommunications infrastructure is one of the more advanced in the world; 96.3% of Australian households have a telephone, 18 50% of Australian households 19 are within 700 metres of optical fibre (a total of 1.8 million kms of optic fibre has been laid) and 51% of the telecommunications lines are digital. 2° The main drawback is the lack of cable television networks (CATV), which could leave Australia behind in the race to the electronic superhighway. This is largely due to the fact that, during the late 1980s, the introduction of CATV was prohibited by the Australian government for a four-year period to protect the debt-laden commercial television stations from further competition. It wasn't until 1991 that CATV was finally permitted. At the same time the Australian government decided to sell its unprofitable domestic satellite AUSSAT to Optus. Optus was guaranteed the exclusive rights to carry pay TV services by satellite. 21 The fact that Australia's regulatory framework allows telecommunications carriers to deliver video material unlike many other countries with a higher cable penetration is quite unusual. This particular fact may stimulate the development of broadband networks and new telecommunications services, as telecommunication carriers could make full use of economies of scope by offering telephony and video services. The fact that Telstra and Optus have recently started the roll out of their own cable networks shows that the carriers are recognizing this opportunity. 22 Mobile markets
In January 1995 there were approximately 1.7 million phone users in Australia (population of 17 million) with the majority using analogue rather than digital services. Telstra's analogue mobile network, Mobilenet, started up in 1987 and is available to 86% of the population. Plans have been made to gradually phase it out by the year 2000. Telstra's digital GSM network was introduced in 1993 and has now reached a coverage of 71%. Optus entered the mobile communications market in June 1992 reselling Telstra's analogue capacity. Optus also started a GSM mobile service in 1993, which now covers more than 60% of the population and is planned to reach 80% of the population by
Telecommunications transition in Australia: M C van der Vlies
1997. Optus reached a 34% mobile communications market share in 1994. Vodafone entered the mobile market in October 1993 when it commenced supplying mobile services on its own GSM network. It expects to cover 80% of the population by 1996 and currently has 20 000 subscribers. Vodafone is developing a network of service providers (expected to reach 20) to sell its mobile services directly and develop its own services and set tariffs. Optus and Telstra use a mixture of both direct distribution and third-party resellers. Australia has a high (the second highest in the world) mobile penetration rate of 10% as of January 1995,23 compared to other countries (mobile penetration in the Netherlands was approximately 2.2% in 1994). Optus and Telstra also have satellite-based mobile services, which enable people living in isolated areas in particular to communicate. Telstra has predicted that 60% of all telephone calls will be made or received on a mobile phone by the year 2000. 24
Telecommunications services markets There are currently more than 140 companies involved in Australia's telecommunications services market, offering approximately 462 information services and communications networks. Telstra is by far the largest player in the domestic market. One can distinguish three main telecommunications services markets: the resale market, the valueadded services/networks (VAS/VAN) market and the broadband services markets. 25 The resale m a r k e t
This market has grown rapidly since the deregulation of third-party resale in 1991. Resale can be of over-capacity of private networks or resale of Telstra/Optus capacity. The only restriction is that resellers are not permitted to build a separate telecommunications network for voice services, bypassing Telstra and/or Optus. There are several major resellers or service providers (SPs) operating in the domestic market under a Service Provider's Class Licence issued by Austel. The main reseller is AAP Telecommunications (Australian Associated Press, MCI and Todd Corporation), which is the only service provider that receives discounts, based on a negotiated tariff, from Telstra. All other resellers or SPs have no formal rights to special interconnection arrangements. 26 The V A S / V A N s market
23The Economist 30 September 1995 24Northfield op cit Ref 2; Telstra Annual Report Telstra Corporation Limited, Sydney (1994); Optus Annual Report Optus
Communications, Sydney (1994) 2SBudde op cit Ref 12 26Budde op cit Ref 12; Northfield op cit Ref 2 27Northfield op cit Ref 2
In general, value-added services (VAS) are difficult to define as the distinctions, as a result of digitization, between basic voice services and other telecommunications services are becoming increasingly difficult. Generally speaking, the VAS market is defined as all services except basic voice services. The main VAS markets are: videotex, audiotex, teletext, EDI, EFT-POS, facsimile and on-line data communication. The value-added networks (VANs) market is dominated by large multinational suppliers including GE Information Services, BT Tymnet, Sprint International, IBM Information Network, Singcom and AT&T Easylink. These providers operate under an International Service Provider's Class Licence (ISPCL) issued by Austel. Telstra and Optus also provide VAN services. 27 317
Telecommunications transition in Australia: M C van der Vlies The broadband services m a r k e t
At the moment there is a lot of activity around the implementation of broadband networks in Australia. Telstra and Optus plan to offer pay TV by cable initially and use the revenue to upgrade the network so that interactive services such as video-on-demand can be offered in the near future. Telstra has passed 650 000 homes with cable already and plans to pass 4 million homes by June 1999. z8 Optus plans to pass 3 million homes by mid 1998 with its broadband network. 29 The increase in market activity was initiated by the amendments made to the Broadcasting Services Act in 1992. A legislative framework has been established for the introduction of pay TV, allowing pay TV to be delivered directly to the home by an Optus satellite (until July 1997), by microwave multipoint distribution systems (MDS), by the fixed telephone network or by cable. The key players in the Australian pay TV market are: • Telstra/Cable television services: planning cable services on Visionstream network starting in 1995; • Telstra/Newscorp (Foxtel): Telstra has invested in a content-based venture with Newscorps. Foxtel launched a competitive line-up of pay TV programming in October 1995; 30 • Optus/Continental Cablevision/Seven Network: planning cable and satellite services; and Australis/Continental Century/ABC; they are already offering pay TV services, plan to launch satellite services in 1995 and have a major share of the MDS licences. 31
The effects of competition The Australian government introduced competition into telecommunications to improve the quality and diversity of services and to reduce the costs to residential as well as business consumers. At the same time the government developed a competitive framework with competitive safeguards so that the benefits of competition would be felt by all consumers. So far competition has shown significant benefits to consumers in different market segments. Besides price reductions, there have also been benefits from new investments in better equipment and increased exports. Since the introduction of competition a wider choice of new products and services is available, carrier performance has improved and more emphasis is being placed on quality and customer service. The outcomes to date in areas like market growth, investment and modernization, product prices, product range and quality, customer services and exports underline this positive development. M a r k e t growth
The total telecommunications services market grew by 9% from US$11.9 billion to US$12.9 billion in 1993-1994. The cellular mobile market has grown by 200% since the introduction of competition to more than 1.25 million customers in 1994. 2e'l'elstra Multimedia Pty Ltd Making Multimedia a Reality Telstra (1995) 29Optus Vision Broadband Deployment in Victoria advocacy subcommittee presentation (1995) 3°Telstra op cit Ref 28 31Lindsay op cit Ref 22; Northfield op cit Ref 2
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Increased expenditure and investment
The entry of new players into the telecommunications sector has resulted in increased expenditure. Telstra, for example, announced to invest US$7.5 billion from 1994-1997 in its Australian operations, including the digitalization of the network and the construction of a
Telecommunications transition in Australia: M C van der Vlies
residential fibre-coaxial broadband network. Optus plans to invest US$3 billion in developing its network over a five-year period from 1992. Liberalization has also stimulated non-carrier service providers to greater investments. 32 P r o d u c t prices
Australia now has some of the cheapest international and long-distance calls of any OECD country, although the local call charges remain relatively high. Telstra's average prices, for example, for mobile, internation and domestic long-distance calls fell by 9%, 11% and 4%, respectively, in the period 1992-1993. Telstra's price reductions represented a benefit of US$225.5 million to users of its services, with the largest reductions being in those areas where Optus has entered the market. It should be noted, however, that the 1992-1993 financial year only saw a little over seven months of limited long-distance and international sevices competition between Optus and Telstra, while there was a full year of competition in mobile services. 33 In the period 1993-1994 the pace of reductions in standard prices slowed down considerably, as Telstra and Optus attempted to consolidate their position in the telecommunications services market. Telstra's average prices for mobile and international calls fell by 7-8%, while prices for domestic long-distance calls fell by 5.5% during the 1993-1994 year. These price reductions by Telstra represent a benefit to customers of about US$236.8 million in 1993-1994. The greater reductions in 1993-1994 were available through various discount plans, which focus on customers with high usage of long-distance services. For example, while only 22% of Telstra's customer base had subscribed to a discount plan, the proportion of revenue generated by these plans was 40% .34 P r o d u c t range
Several new products have been introduced since the liberalization of the telecommunications market. These include GSM digital mobile telephone services, mobile data services, satellite-based mobile services, high-speed data services, calling cards and in the near future satellite and MDS-delivered subscription television broadcasting services and broadband cable services. 35 Universal service
Since the introduction of competition there has been a 2% growth in the number of Australian households with a telephone connection, from 94.4% in 1991 to 96.3% in 1994. 36 P r o d u c t quality
3ZDOCA op cit Ref 3 33Austel op cit Ref 5 3"Austel op cit Ref 5; DOCA op cit Ref 3 3SDOCA op cit Ref 3 38Austel op cit Ref 5 3~Austel op cit Ref 5
Austel has collected certain performance information from Telstra. Two interesting performance indicators are: directory assistance performance and public payphones operating performance. Directory assistance performance (calls answered within 10 seconds) has increased from an average of 45% in 1993 to an average of 60% in 1994. Public payphones operating performance has improved from 86% in 1989 to 98% in 1994. 37 C u s t o m e r service
High quality customer service has become an important tool for carriers
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in giving them a competitive edge. For example, itemized billing is now available to 99% of metropolitan customers. This is due to digital switching technology being widely available. The most important result of competition for customers is that they have a choice of carriers and service providers. In areas not subject to competition, the quality of customer service has not always been up to standard. Domestic and export industry Exports of telecommunications equipment have increased dramatically, which indicates an increase in the international competitiveness of the Australian telecommunications industry. Telecommunications equipment exports increased from US$218 million in 1991 to US$413.5 million in 1993. 38
Issues for future regulation The Australian government has undertaken a number of initiatives to assist in developing a post-1997 regulatory framework for the telecommunications sector. In August 1993 the Communications Futures Project (CFP) was established to study the implications of the emerging information services and technologies including convergence. In December 1993 the Broadband Services Expert Group (BSEG) was set up to report to the government on the technical, economic and commercial preconditons for the delivery of broadband services in Australia) 9 Recently, the Australian Commonwealth government carried out a 12-month review of the telecommunications industry to examine what changes in policy, legislation and regulation should be introduced from 1997 when the duopoly will be ended. The review, undertaken by the Department of Communications and the Arts (DOCA), was conducted on the basis that the government's role should be to facilitate the development of effective competition while safeguarding consumers and creating a fair society. An issues paper for the review, Beyond the Duopoly, was released in October 1994. An important aspect of the review was the extent to which a national competition regime can replace the current telecommunications-specific regulation. The main question in this context was: should all competition regulation in telecommunications be regulated under the general competition law or will a certain degree of industry-specific regulation still remain necessary? The Hilmer Committee's report, A National Competition Policy for Australia, concluded that "the greatest impediment to enhanced competition in many key areas of the economy are the restrictions imposed through government regulation". 4° The committee therefore proposed the establishment of two new institutions: a National Competition Council formed by Australian state governments for the legislation and an Australian Competition Commission to administer the competition conduct rules. 41 The most important aspects, concerning competition policy, discussed in the review were: • access to facilities and services--the main issue is whether there is a ~DOCA op cit Ref 3 SgDOCA op cit Ref 3 4°Austel op cit Ref 5, 24 41DOCA op cit Ref 3
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need for an industry-specific access regime after 1997; anti-competitive conduct--the main issue is whether dominant carrier regulation is required after 1997; • transparency mechanisms--tariffing and accounting separation are
•
Telecommunications transition in Australia: M C van der Vlies
currently used to stimulate the development of competition. Tariffing can be useful but is also a resource-intensive activity that may no longer be necessary after 1997. A separate review is being carried out regarding accounting separation; 42 • universal s e r v i c e - - t h e r e has been a wide-ranging debate in Australia over many years about how universal service in relation to telecommunications should be defined and how it can best be delivered. The review re-examines the definition of universal service in an open market environment. Important issues for the future in relation to the universal definition include: how should the standard telephone service be defined, and how can universal service be delivered and funded post-1997? 43 On 1 August 1995 the Minister for Communications and the Arts, Mr Lee, presented the recommendations of the review to Cabinet. A total of 99 recommendations were made on the policy, legislation and regulation of telecommunications. These have been accepted by Cabinet, and new legislation is currently being formulated to endorse these changes. The main policy principles, to be introduced on 1 July 1997, are the following:
42DOCA op cit Ref 3 43DOCA op cit Ref 3
• the distinction between carriers and service providers will be made, for the purposes of regulation, on the basis of the control over facilities used to provide services to the public. The current distinction between mobile carriers and general carriers will cease and carriers will be able to operate in all fields of communication; • a policy of open access will be introduced. Carriers controlling access to facilities that provide services to the Australian public will be required to interconnect all other carriers and service providers and guarantee access to customer equipment and subscriber management systems; • the new competition regulator, the Australian Competition and Consumer Commission (ACCC), formerly known as the Trade Practices Commission (TPC), will hold the sole responsibility for the administration of competition policy. The telecommunicationsspecific provisions of the Trade Practices Act will therefore no longer be the responsibility of Austel. Austel will retain its other responsibilities for technical regulation, consumer issues and licensing and will merge with the Spectrum Management Agency (SMA); • the regulation of the prices of telephone services will be maintained through price-caps applying to Telstra, and local and payphone prices will remain unchanged until December 1998. Untimed local calls are also to be retained; • the current definition of universal service will be replaced by a new concept of the standard telecommunications service, which would include fax and data services and will be subject to further review every four years; • carriers and service providers licence conditions will generally continue after 1997, with requirements for all carriers to make industry development plans detailing their proposed involvement with Australian industry; • carriers will no longer be favoured through having particular rights in relation to basic carriage services; and • to enhance competition, current arrangements continue or new provisiolas will be implemented, which will include accounting
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separation, equal access for customers to competing carriers (preselection) and supplementary access (sharing of information). The central element of the new arrangements will be the introduction of full and open competition in the provision of services without limitation on the number of carriers and no barriers to entry for new carriers. An amended Trade Practices Act will provide the framework for competition policy. 44
Conclusion Australia has realized that if it wants to be competitive internationally, its domestic market must be efficient. To achieve efficiency, competition has been introduced and at the same time an interim regime has been established to facilitate the move from monopoly to competition. This regime was set up to be deliberately interventionist as the only way to give Optus and Vodafone a reasonable start. It did this by giving Government the power to force Telstra to quickly deliver an equal access interconnection regime. The legislation was thus very intrusive on Telstra, and this was appropriate. 45 The benefits of increased competition in the telecommunications industry flow on to other sectors of the economy, resulting in the growth and development of the Australian economy. The competitive framework has had a positive influence on the development of the telecommunications infrastructure in different ways such as:
44DOCA 'A new era in telecommunications: telecommunications policy principles' press release (1995) 45Beare, C 'Converging on 1997' Austra/ian Communications 1994 May 79 4eDOCA op cit Ref 44
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• ensuring an open, accessible environment for the potential second network provider by establishing an interconnection framework, before the tender process for government-owned AUSSAT has commenced, and providing customers easy access to Optus' service by dialling the overriding prefix '1'. This gave the potential bidders more certainty about their position on the telecommunications market and opened the door to almost immediate effective competition. The interconnection framework gave the second competitor full interconnection rights at very low prices to ensure that the duopoly network competition would be effective in the early years. "After only three years, we are starting to see the benefits of competition and we have a competitor to Telstra which has a greater share of the market than we predicted"; 46 • ensuring equal access for the new network competitor, Optus, by introducing a national pre-selection ballot. The purpose of the ballot was to allow customers to preselect Optus as their basic long-distance carrier so that they can be automatically served by this carrier when dialling trunk telephone services (long-distance). This ballot is to be completed by June 1997. Ballot results show that Optus has now reached a long-distance national market share of 8-10% and an international market share of 13-15%; • allowing the full resale of domestic and international capacity, making it possible for resellers to provide public switched telecommunications services using their own switching facilities. Austel implemented a class system to regulate the resale market. The resale market has grown rapidly since the restrictions on resale were removed. • introducing significant competition in the public mobile services market by implementing a three-licence structure. The use of mobile
Telecommunications transition in Australia: M C van der Vlies
services has surged since the introduction of competition, and the competition behaviour has been vigorous. Optus has already obtained a market share of 34%; • establishing an independent industry regulator, Austel, to function as arbitrator between the carriers during the transitional period towards full network competition in 1997. Austel has functioned effectively encouraging market entrants and the dominant carrier to face each other as they would if genuine competitive conditions were present. It has also succeeded in implementing the provisions under the Telecommunications Act 1991 effectively, while retaining a neutral role in the policy implementation process. This is the result of the distinction between the Minister's work and Austel's tasks. The Minister works through the legislative process, while Austel can give directions to carriers and has the power to make determinations.
47Melody op cit Ref 1
There are also certain risks involved with the Australian competitive framework, however. These include technology and service-based regulation, and administered competition. Examples of technology and service-based regulation are the exclusive rights handed to Optus by the government to operate satellite networks for pay TV services until July 1997 and the structural distinction made by the Telecommunications Act 1991 between BCS and HLS. These forms of regulation impede the development of new telecommunications services, as they are preventive measures rather than stimulating ones. It is, therefore, important that future regulation of technology and services be neutral, creating an open and fair environment for all players. W H Melody points out the risks of administered competition. One of the results has been "the primary concern for the protection of the designated competitors rather than the promotion of vigorous market competition". 47 These risks may lead to competitive success on the telecommunications market determined by administrative decisions instead of market place efficiency.
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Pergamon S0308-5961(96)00009-2
Copyright © 1996 Elsevier Science Ltd Printed in Great Britain. All rights reserved 0308-5961/96 $15.00 + 0.00
The transition from monopoly to competition in Australian telecommunications Marina C van der Vlies
An effective telecommunications infrastructura is of vital importance for the economical and social growth of a geographically Isolated country such as Australia. The reform policy chosen by Australie Introduces competition in the supply of network facilities for public network services by licensing a second end-to-end facility carrier under a duopoly arrangement. The Australian approach to the introduction of competition can be seen as a learning experience for other countries still dominated by national PTTa. Little is known in Europe about the Australian telacommunicatlons environment and the effects of the recent telecommunicationa reforms on the telecommunlcations Infrastructure in Australia. These factors combined to make the Australian telecommunlcstions environment an interesting and dynamic subject for research. Copyright © 1996 Elsevier Science Ltd The author received her MA in September 1995 in Communication Studies from the University of Amsterdam for Political and Social Sciences. She is currently working with Station 12 (Satellite Communications Division), PTT Telecom in the Hague, the Netherlands. She may be contacted at Waterloostraat 115 a, 3062 TJ Rotterdam, the Netherlands (Tel: +31 70 412 7777; fax: +31 70 343 4644). The views expressed in this article are those of the author and do not necessarily represent those of Station 12 (PTT Telecorn). continued on page 312
Telecommunications reform in Australia Until 1989, there was a government monopoly over the provision of telecommunications networks and services. The monopoly consisted of three government owned carriers: Telstra Australia responsible for domestic telecommunications, the Overseas Telstra Commission (OTC) responsible for international communication, and AUSSAT responsible for national satellite operations. The first telecommunications reform took place in 1989 with the implementation of the Telecommunications Act 1989. The establishment of an Australian Telecommunications Authority, Austel, as an independent regulator for the telecommunications industry formed a central part of the new regulatory arrangements. Problems with the financial viability of AUSSAT, soon after the 1989 reforms, resulted in a government review and led to a second wave of telecommunication reforms implemented by the Telecommunications Act 1991. A new regulatory framework was established with the following main elements: • a network duopoly based on two general carriers; • competition in the provision of Public Mobile Telephone Services (PMTS) with the licensing of three mobile carriers; • open competition in the provision of other telecommunications services (eg voice and data), including third-party resale of carrier line capacity; and • increased regulatory responsibilities for Austel, including jurisdiction over interconnection arrangements between the duopoly carriers. 1 The most important element of these reforms was the intention of the Australian government to introduce 'full network competition' into the telecommunications industry by mid 1997. The network duopoly was established through the merger of two of the existing carriers, Telstra and OTC, into a new full service government-owned carrier: the 311
Telecommunications transition in Australia: M C van der Vlies
Australian and Overseas Telecommunications Corporation (AOTC). This name has been changed to 'Telstra' for all company trading since mid 1993. AUSSAT was sold for approximately US$600 million, through a tender process, to Optus Communications Limited: a consortium of Bell-South of the US and Cable & Wireless of the UK, each owning 24.5%, and the major 51% share held by Australian investment companies. Telstra and Optus were licensed to operate as 'general carriers' as well as 'mobile carriers'. In late 1992 a third mobile carrier, Vodafone, from the UK was licensed. 2 In the run-up to the next federal election the privatization of Telstra is the subject of much debate. The popular opposition party are strongly in favour of privatization, whilst the ruling Labour Party have always been fierce opponents of privatizing Telstra.
The Australian regulatory framework To clarify the current regulatory approach in Australia, its principle factors can be placed under the following headings. Structural arrangements
There are currently three fundamental structural divisions in the Australian telecommunications industry. Service providers are divided into carriers or non-carriers. Carriers are either general (line and satellite) or public mobile carriers. Services can be either basic carriage (BCS) or higher level (HLS). Until 1997, two general carriers (Telstra and Optus) and three mobile carriers (Telstra, Optus and Vodafone) are the primary suppliers of telecommunications infrastructure and services in Australia. The carriers Telstra and Optus offer analogue as well as digital mobile services. Vodafone exploits its own GSM (Global Systems for Mobile Communications) digital network. General carriers have specific rights and advantages in the supply of basic carriage services. Non-carriers are permitted to resell services in competition with carriers. Competition
Besides the above structural arrangements, industry-specific conduct rules are provided to supplement the general competition law, thereby promoting overall competition. The Telecommunications Act 1991 supplements the general competition law in the areas of refusal to deal (access and interconnection), price discrimination and anti-competitive tariffing, misuse of market power by foreign operators, and by providing pricing and cost transparency mechanisms. 3 continued from page 311 1Melody, W H 'The waltz to administered duopoly in telecommunications' paper presented at the IDATE '94 conference, Montpellier (1994) 2Northfield, D Australian Telecommunications Commercial and Regulatory Environment 1994 Centre for International Research on Communication and Information Technologies (CIRCIT), Melbourne (1994) 3Department of Communications and of the Arts (DOCA) Beyond the Duopoly: Australian Telecommunications Policy and Regulation Australian Government Printing Service (AGPS), Canberra (1994) 33
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Social objectives
The Telecommunications Act 1991 ensures that the basic telephone service remains a universal service, reasonably accessible to all of the Australian population on an equitable basis. The cost of delivering this universal service is shared among the carriers. Residential customers will continue to have access to untimed local calls. Most of Telstra's prices are subject to 'price-caps' to protect consumers and other carriers from monopoly pricing. Another social objective compels Telstra to provide a number of consumer services such as intemized billing and directory services. Consumer protection responsibilities are shared between Austel, the Australian Competition and Consumer Commis-
Telecommunications transition in Australia: M C van der Vlies
sion (ACCC), Telecommunications Industry Ombudsman (TIO) and the Commonwealth Ombudsman. National interest
The government has a policy stimulating strong Australian participation in carrier ownership. Foreign acquisitions are subject to the Foreign Acquisitions and Takeovers Act 1975. To become a general carrier a firm must be a corporation formed within the Commonwealth (this does not apply for service providers). Technical regulation
Austel has the responsibility for technical regulation and represents Australia on international standards bodies. Industry policy
Carriers are required to develop industry development plans outlining the basis of their commercial agreements with suppliers. The government has implemented industry arrangements that have encouraged links between carriers, service providers and local suppliers of hardware and software, and helped suppliers to establish themselves locally and to seek domestic and export marketing opportunities. The Telecommunications Industry Development Authority (TIDA) is responsible for their implementation. Overseas marketing of Australian Telecommunications expertise is supported by the Telecommunications Export Task Force (TETF). Institutional arrangements
Austel is responsible for the industry-specific regulation of telecommunications, together with TIO and TIDA to a lesser degree. The ACCC still holds extensive jurisdiction over the whole industry. In general, regulation in Australian telecommunications focuses on the industry providing carriage of communication services and arrangements that stimulate the development of effective competition. In the current structural regulatory arrangements a clear distinction can be made between core telecommunications activities, where restrictions to entry applies until 1997, and other activities where competition is open. 4
The Australian competitive framework The Australian government recognized that the incumbent carrier, Telstra, would have very strong advantages in its former monopoly areas compared to the new competitor, Optus. Therefore, a form of structural regulation was introduced that tilted the playing field in Optus' favour, introducing so called 'pro-competitive safeguards'. To provide for a firm foundation for the transitory period from a monopoly market structure to competition in the telecommunications market, the following important competitive and consumer safeguards have been put in place by the Telecommunications Act 1991:
4DOCA op cit Ref 3 SAustralian Telecommunications Authority (Austel) Competitive Safeguards and Carrier Performance Australian Government
Printing Service (AGPS), Canberra (1994)
• interconnection arrangements; • equal customer access; • non-discrimination provisions; • price control arrangements. • transparency mechanisms; and • universal service obligations (USOs). 5 313
Telecommunications transition in Australia: M c van der Vlies Interconnection arrangements
Interconnection plays a fundamental role in establishing the competitive relationships between the dominant carrier, Telstra, and the new entrants Optus and Vodafone. Experience in other countries shows that a large amount of the new competitor's costs, especially during the initial stages of competition, are related to interconnection charges. 6 "The example of Australia has shown that an important requisite for new entry can be the existence of an interconnection framework. ''7 Australian government policy was aimed at developing an open, accessible environment for the potential second network provider. Therefore, an interconnection charging scheme (IRCP) was revealed by Austel before the tender process for AUSSAT had commenced. "Australia took strong steps to ensure its duopoly competition is more effective in the early years. The primary vehicle for promoting it are the Optus interconnection agreements. Australia has provided the most generous conditions of market access to a second carrier of any country. Optus has full interconnection rights at very low prices during its establishment phase. Consumers can access Optus service on a call-by-call basis, simply by dialling '1'. ''8 The overall framework for establishing interconnection charges was presented by Austel in a report in June 1991 and was incorporated in the Ministerial pricing principles (IRCP) announced in November 1991. There are three different ways to establish interconnection charges defined in the overall framework: • initial interconnection and access charges based on the directly attributable incremental cost (DAIC) concept; 9 • initial interconnection and access charges, which are negotiated between the carriers (charges must at least recover costs of providing the particular service, including a commercial return on the assets used to provide that service); and • subsequent interconnection charges, which replace initial interconnection charges when the incumbent carrier loses its market dominance.
6Australian Telecommunications Authority (Austel) 'The importance of telecommunications in Australia's economic development and the likely effects of telecommunications reform' occasional paper Economics 1, Australian Government Printing Service (AGPS), Canberra (1992) 7Organization for Economic Coordination and Development Communications Outlook 1995 OECD, Paris (1995) 8Melody, W H 'The ballot-telecommunications beauty test' Australian Communications, 1993 August 63 eAustel equated the DAIC concept with long-run incremental costs, including in it fixed capital costs of relevant assets and directly attributable incremental recurring non-capital costs such as operating costs and maintenance. l°Austel op cit Ref 6 11Gerrand, P 'Fostering a competitive environment' Australian Communications 1994 November 57-60
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The above charges are designed to ensure that competitive advantage can only be achieved through efficiency improvements, while at the same time inefficient duplication of facilities by the second carrier is prevented. 10 This interconnection framework was only meant to function as a transitory policy in parts of the market in which Telstra was dominant. A trigger mechanism was developed so that that initial pre-established charges could be replaced by commercially negotiated charges when the defined trigger thresholds or market conditions were met. In late 1993 Telstra requested negotiations with Optus to replace the initial (Austel determined) charges with commercially negotiated charges. These negotiations led to a new interconnection agreement between Telstra and Optus in 1994 and an increase of about 10% in the average charge of interconnection. Austel has recently developed a new interconnection model 11 that is to function as a basis for the introduction of new services in a future multi-service deliverer environment. E q u a l c u s t o m e r access
Equal access for customers to both carriers, Telstra and Optus, has been introduced through a national preselection ballot. The purpose of the ballot is to allow customers to preselect Optus as their basic long-
Telecommunications transition in Australia: M C van der Vlies
distance carrier without having to dial the overriding prefix '1'. The ballot has been conducted in all the major metropolitan areas of Australia and must be completed by June 1997 when full network competition will be introduced. Ballot results show that Optus has reached a national long-distance market share of 8-10% and an international market share of 13-15% .12 Non-discrimination prov&ions
The telecommunications regulatory framework has been redefined by the Telecommunications Amendment Act 1994. The Telecommunications Act 1991 restricted price discrimination by a dominant carrier in general, but discrimination was allowed under specific circumstances; for example, volume discounts or lower charges for services supplied at lower bit rates could be justified under the Act. As a result of the unclear boundary between discriminatory and non-discriminatory pricing, Austel has developed a 'Decision Making Framework' (DMF) to administer the amendments and assist it to form an opinion on whether tariffs by the dominant carrier are likely to have an anti-competitive effect. Austel has hereby taken a very pro-competitive approach aiming for clear, independent tariffs and product offerings for access, switching and interconnect. It is expected that this new ruling will result in an increase in the degree of competition on the resale market. 13 Price control arrangements
The price control system introduced in Australia is based on the concept of price-capping. Price-caps provide incentives for productivity growth, as the carrier whose productivity increase exceeds the norm will enjoy higher rates of return than the carrier with a decrease in productivity. The price-cap mechanism is applied to Telstra's business and residential rentals, local, national and international calls and cellular mobile telephone services. A second element of the price control arrangement is Telstra's obligation to notify the Minister of changes in price, which may consequently be disallowed. 14 Transparency mechanisms
12Austel op cit Ref 5; Budde, P Telecommunications Strategies 1994/95 Paul Budde Communications Pty, Sydney (1994) ~3Budde op cit Ref 12; DOCA op cit Ref 3; Leonard, P 'Unintended (and other) consequences' Australian Communications t 994 May 67-70 14Austel op cit Ref 6; DOCA op cit Ref 3 ~SAustel op cit Ref 6; DOCA op cit Ref 3
The two main transparency mechanisms, tariffing and accounting separation, are fundamental to competition regulation. The Telecommunications Act 1991 requires carriers to make the tariffs for basic carrier services (BCS) public. The only exception is that non-dominant carriers may charge off-tariff. Accounting separation is a central reform in the Australian competitive framework. The separation of the carrier's different business activities and products provides Austel with data to identify anti-competitive practices (eg cross-subsidization) that can threaten the promotion of effective competition. This accounting system also provides Austel with financial information to enable it to undertake informed regulatory decisions, such as the calculation of interconnection charges and universal service obligation (USO) levies. 15 Universal service obligations
Universal service obligations (USOs) ensure universal access by all Australian residents to standard telephone services. The Australian framework for the delivery of USOs comprises an administrative system that spreads the cost of funding USOs equitably among the carriers 315
Telecommunications transition in Australia: M C van der Vlies
(Telstra, Optus and Vodafone) and a methodology for calculation of the cost of USOs. USOs are funded in direct proportion to each carrier's share of interconnect time on the domestic and international network. Carriers are required by Austel to submit areas that are loss-making or 'net cost' as a result of USO. The sum of the net costs in each area represents the total cost of providing the USOs (eg US$112 million in 1992-1993). The USO cost calculation methodology involves comparing avoidable costs and foregone revenues for different levels of the telecommunications network. 16
The Australian telecommunications market
16Austel op cit Ref 6; DOCA op cit Ref 3 17Northfield op cit Ref 2 18Austel op cit Ref 5 19Australia currently has a total of nearly 7 million households. 2°Broadband Services Expert Group (BSEG) Networking Australia's Future interim report Australian Government Printing Service (AGPS), Canberra (1994) 21The Age 29 October 1994 22Lindsay, D 'When cultures collide: regulating the convergence of telecommunications and broadcasting' policy research paper no 29, Centre for International Research on Communication and Information Technologies (CIRCIT), Melbourne (1993); Northfield op cit Ref 2
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Telecommunications is one of the largest industries in Australia; the telecommunications market, including equipment, network and valueadded services (VAS) was worth US$13.2 billion in 1993/94, which represents 4.3% of Australia's gross domestic product 17 and therefore occupies a central position within the Australian economy. The main reason that Australia is a promising country for the implementation of new telecommunications services is that the Australian telecommunications infrastructure is one of the more advanced in the world; 96.3% of Australian households have a telephone, 18 50% of Australian households 19 are within 700 metres of optical fibre (a total of 1.8 million kms of optic fibre has been laid) and 51% of the telecommunications lines are digital. 2° The main drawback is the lack of cable television networks (CATV), which could leave Australia behind in the race to the electronic superhighway. This is largely due to the fact that, during the late 1980s, the introduction of CATV was prohibited by the Australian government for a four-year period to protect the debt-laden commercial television stations from further competition. It wasn't until 1991 that CATV was finally permitted. At the same time the Australian government decided to sell its unprofitable domestic satellite AUSSAT to Optus. Optus was guaranteed the exclusive rights to carry pay TV services by satellite. 21 The fact that Australia's regulatory framework allows telecommunications carriers to deliver video material unlike many other countries with a higher cable penetration is quite unusual. This particular fact may stimulate the development of broadband networks and new telecommunications services, as telecommunication carriers could make full use of economies of scope by offering telephony and video services. The fact that Telstra and Optus have recently started the roll out of their own cable networks shows that the carriers are recognizing this opportunity. 22 Mobile markets
In January 1995 there were approximately 1.7 million phone users in Australia (population of 17 million) with the majority using analogue rather than digital services. Telstra's analogue mobile network, Mobilenet, started up in 1987 and is available to 86% of the population. Plans have been made to gradually phase it out by the year 2000. Telstra's digital GSM network was introduced in 1993 and has now reached a coverage of 71%. Optus entered the mobile communications market in June 1992 reselling Telstra's analogue capacity. Optus also started a GSM mobile service in 1993, which now covers more than 60% of the population and is planned to reach 80% of the population by
Telecommunications transition in Australia: M C van der Vlies
1997. Optus reached a 34% mobile communications market share in 1994. Vodafone entered the mobile market in October 1993 when it commenced supplying mobile services on its own GSM network. It expects to cover 80% of the population by 1996 and currently has 20 000 subscribers. Vodafone is developing a network of service providers (expected to reach 20) to sell its mobile services directly and develop its own services and set tariffs. Optus and Telstra use a mixture of both direct distribution and third-party resellers. Australia has a high (the second highest in the world) mobile penetration rate of 10% as of January 1995,23 compared to other countries (mobile penetration in the Netherlands was approximately 2.2% in 1994). Optus and Telstra also have satellite-based mobile services, which enable people living in isolated areas in particular to communicate. Telstra has predicted that 60% of all telephone calls will be made or received on a mobile phone by the year 2000. 24
Telecommunications services markets There are currently more than 140 companies involved in Australia's telecommunications services market, offering approximately 462 information services and communications networks. Telstra is by far the largest player in the domestic market. One can distinguish three main telecommunications services markets: the resale market, the valueadded services/networks (VAS/VAN) market and the broadband services markets. 25 The resale m a r k e t
This market has grown rapidly since the deregulation of third-party resale in 1991. Resale can be of over-capacity of private networks or resale of Telstra/Optus capacity. The only restriction is that resellers are not permitted to build a separate telecommunications network for voice services, bypassing Telstra and/or Optus. There are several major resellers or service providers (SPs) operating in the domestic market under a Service Provider's Class Licence issued by Austel. The main reseller is AAP Telecommunications (Australian Associated Press, MCI and Todd Corporation), which is the only service provider that receives discounts, based on a negotiated tariff, from Telstra. All other resellers or SPs have no formal rights to special interconnection arrangements. 26 The V A S / V A N s market
23The Economist 30 September 1995 24Northfield op cit Ref 2; Telstra Annual Report Telstra Corporation Limited, Sydney (1994); Optus Annual Report Optus
Communications, Sydney (1994) 2SBudde op cit Ref 12 26Budde op cit Ref 12; Northfield op cit Ref 2 27Northfield op cit Ref 2
In general, value-added services (VAS) are difficult to define as the distinctions, as a result of digitization, between basic voice services and other telecommunications services are becoming increasingly difficult. Generally speaking, the VAS market is defined as all services except basic voice services. The main VAS markets are: videotex, audiotex, teletext, EDI, EFT-POS, facsimile and on-line data communication. The value-added networks (VANs) market is dominated by large multinational suppliers including GE Information Services, BT Tymnet, Sprint International, IBM Information Network, Singcom and AT&T Easylink. These providers operate under an International Service Provider's Class Licence (ISPCL) issued by Austel. Telstra and Optus also provide VAN services. 27 317
Telecommunications transition in Australia: M C van der Vlies The broadband services m a r k e t
At the moment there is a lot of activity around the implementation of broadband networks in Australia. Telstra and Optus plan to offer pay TV by cable initially and use the revenue to upgrade the network so that interactive services such as video-on-demand can be offered in the near future. Telstra has passed 650 000 homes with cable already and plans to pass 4 million homes by June 1999. z8 Optus plans to pass 3 million homes by mid 1998 with its broadband network. 29 The increase in market activity was initiated by the amendments made to the Broadcasting Services Act in 1992. A legislative framework has been established for the introduction of pay TV, allowing pay TV to be delivered directly to the home by an Optus satellite (until July 1997), by microwave multipoint distribution systems (MDS), by the fixed telephone network or by cable. The key players in the Australian pay TV market are: • Telstra/Cable television services: planning cable services on Visionstream network starting in 1995; • Telstra/Newscorp (Foxtel): Telstra has invested in a content-based venture with Newscorps. Foxtel launched a competitive line-up of pay TV programming in October 1995; 30 • Optus/Continental Cablevision/Seven Network: planning cable and satellite services; and Australis/Continental Century/ABC; they are already offering pay TV services, plan to launch satellite services in 1995 and have a major share of the MDS licences. 31
The effects of competition The Australian government introduced competition into telecommunications to improve the quality and diversity of services and to reduce the costs to residential as well as business consumers. At the same time the government developed a competitive framework with competitive safeguards so that the benefits of competition would be felt by all consumers. So far competition has shown significant benefits to consumers in different market segments. Besides price reductions, there have also been benefits from new investments in better equipment and increased exports. Since the introduction of competition a wider choice of new products and services is available, carrier performance has improved and more emphasis is being placed on quality and customer service. The outcomes to date in areas like market growth, investment and modernization, product prices, product range and quality, customer services and exports underline this positive development. M a r k e t growth
The total telecommunications services market grew by 9% from US$11.9 billion to US$12.9 billion in 1993-1994. The cellular mobile market has grown by 200% since the introduction of competition to more than 1.25 million customers in 1994. 2e'l'elstra Multimedia Pty Ltd Making Multimedia a Reality Telstra (1995) 29Optus Vision Broadband Deployment in Victoria advocacy subcommittee presentation (1995) 3°Telstra op cit Ref 28 31Lindsay op cit Ref 22; Northfield op cit Ref 2
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Increased expenditure and investment
The entry of new players into the telecommunications sector has resulted in increased expenditure. Telstra, for example, announced to invest US$7.5 billion from 1994-1997 in its Australian operations, including the digitalization of the network and the construction of a
Telecommunications transition in Australia: M C van der Vlies
residential fibre-coaxial broadband network. Optus plans to invest US$3 billion in developing its network over a five-year period from 1992. Liberalization has also stimulated non-carrier service providers to greater investments. 32 P r o d u c t prices
Australia now has some of the cheapest international and long-distance calls of any OECD country, although the local call charges remain relatively high. Telstra's average prices, for example, for mobile, internation and domestic long-distance calls fell by 9%, 11% and 4%, respectively, in the period 1992-1993. Telstra's price reductions represented a benefit of US$225.5 million to users of its services, with the largest reductions being in those areas where Optus has entered the market. It should be noted, however, that the 1992-1993 financial year only saw a little over seven months of limited long-distance and international sevices competition between Optus and Telstra, while there was a full year of competition in mobile services. 33 In the period 1993-1994 the pace of reductions in standard prices slowed down considerably, as Telstra and Optus attempted to consolidate their position in the telecommunications services market. Telstra's average prices for mobile and international calls fell by 7-8%, while prices for domestic long-distance calls fell by 5.5% during the 1993-1994 year. These price reductions by Telstra represent a benefit to customers of about US$236.8 million in 1993-1994. The greater reductions in 1993-1994 were available through various discount plans, which focus on customers with high usage of long-distance services. For example, while only 22% of Telstra's customer base had subscribed to a discount plan, the proportion of revenue generated by these plans was 40% .34 P r o d u c t range
Several new products have been introduced since the liberalization of the telecommunications market. These include GSM digital mobile telephone services, mobile data services, satellite-based mobile services, high-speed data services, calling cards and in the near future satellite and MDS-delivered subscription television broadcasting services and broadband cable services. 35 Universal service
Since the introduction of competition there has been a 2% growth in the number of Australian households with a telephone connection, from 94.4% in 1991 to 96.3% in 1994. 36 P r o d u c t quality
3ZDOCA op cit Ref 3 33Austel op cit Ref 5 3"Austel op cit Ref 5; DOCA op cit Ref 3 3SDOCA op cit Ref 3 38Austel op cit Ref 5 3~Austel op cit Ref 5
Austel has collected certain performance information from Telstra. Two interesting performance indicators are: directory assistance performance and public payphones operating performance. Directory assistance performance (calls answered within 10 seconds) has increased from an average of 45% in 1993 to an average of 60% in 1994. Public payphones operating performance has improved from 86% in 1989 to 98% in 1994. 37 C u s t o m e r service
High quality customer service has become an important tool for carriers
319
Telecommunications transition in Australia: M C van der Vlies
in giving them a competitive edge. For example, itemized billing is now available to 99% of metropolitan customers. This is due to digital switching technology being widely available. The most important result of competition for customers is that they have a choice of carriers and service providers. In areas not subject to competition, the quality of customer service has not always been up to standard. Domestic and export industry Exports of telecommunications equipment have increased dramatically, which indicates an increase in the international competitiveness of the Australian telecommunications industry. Telecommunications equipment exports increased from US$218 million in 1991 to US$413.5 million in 1993. 38
Issues for future regulation The Australian government has undertaken a number of initiatives to assist in developing a post-1997 regulatory framework for the telecommunications sector. In August 1993 the Communications Futures Project (CFP) was established to study the implications of the emerging information services and technologies including convergence. In December 1993 the Broadband Services Expert Group (BSEG) was set up to report to the government on the technical, economic and commercial preconditons for the delivery of broadband services in Australia) 9 Recently, the Australian Commonwealth government carried out a 12-month review of the telecommunications industry to examine what changes in policy, legislation and regulation should be introduced from 1997 when the duopoly will be ended. The review, undertaken by the Department of Communications and the Arts (DOCA), was conducted on the basis that the government's role should be to facilitate the development of effective competition while safeguarding consumers and creating a fair society. An issues paper for the review, Beyond the Duopoly, was released in October 1994. An important aspect of the review was the extent to which a national competition regime can replace the current telecommunications-specific regulation. The main question in this context was: should all competition regulation in telecommunications be regulated under the general competition law or will a certain degree of industry-specific regulation still remain necessary? The Hilmer Committee's report, A National Competition Policy for Australia, concluded that "the greatest impediment to enhanced competition in many key areas of the economy are the restrictions imposed through government regulation". 4° The committee therefore proposed the establishment of two new institutions: a National Competition Council formed by Australian state governments for the legislation and an Australian Competition Commission to administer the competition conduct rules. 41 The most important aspects, concerning competition policy, discussed in the review were: • access to facilities and services--the main issue is whether there is a ~DOCA op cit Ref 3 SgDOCA op cit Ref 3 4°Austel op cit Ref 5, 24 41DOCA op cit Ref 3
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need for an industry-specific access regime after 1997; anti-competitive conduct--the main issue is whether dominant carrier regulation is required after 1997; • transparency mechanisms--tariffing and accounting separation are
•
Telecommunications transition in Australia: M C van der Vlies
currently used to stimulate the development of competition. Tariffing can be useful but is also a resource-intensive activity that may no longer be necessary after 1997. A separate review is being carried out regarding accounting separation; 42 • universal s e r v i c e - - t h e r e has been a wide-ranging debate in Australia over many years about how universal service in relation to telecommunications should be defined and how it can best be delivered. The review re-examines the definition of universal service in an open market environment. Important issues for the future in relation to the universal definition include: how should the standard telephone service be defined, and how can universal service be delivered and funded post-1997? 43 On 1 August 1995 the Minister for Communications and the Arts, Mr Lee, presented the recommendations of the review to Cabinet. A total of 99 recommendations were made on the policy, legislation and regulation of telecommunications. These have been accepted by Cabinet, and new legislation is currently being formulated to endorse these changes. The main policy principles, to be introduced on 1 July 1997, are the following:
42DOCA op cit Ref 3 43DOCA op cit Ref 3
• the distinction between carriers and service providers will be made, for the purposes of regulation, on the basis of the control over facilities used to provide services to the public. The current distinction between mobile carriers and general carriers will cease and carriers will be able to operate in all fields of communication; • a policy of open access will be introduced. Carriers controlling access to facilities that provide services to the Australian public will be required to interconnect all other carriers and service providers and guarantee access to customer equipment and subscriber management systems; • the new competition regulator, the Australian Competition and Consumer Commission (ACCC), formerly known as the Trade Practices Commission (TPC), will hold the sole responsibility for the administration of competition policy. The telecommunicationsspecific provisions of the Trade Practices Act will therefore no longer be the responsibility of Austel. Austel will retain its other responsibilities for technical regulation, consumer issues and licensing and will merge with the Spectrum Management Agency (SMA); • the regulation of the prices of telephone services will be maintained through price-caps applying to Telstra, and local and payphone prices will remain unchanged until December 1998. Untimed local calls are also to be retained; • the current definition of universal service will be replaced by a new concept of the standard telecommunications service, which would include fax and data services and will be subject to further review every four years; • carriers and service providers licence conditions will generally continue after 1997, with requirements for all carriers to make industry development plans detailing their proposed involvement with Australian industry; • carriers will no longer be favoured through having particular rights in relation to basic carriage services; and • to enhance competition, current arrangements continue or new provisiolas will be implemented, which will include accounting
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separation, equal access for customers to competing carriers (preselection) and supplementary access (sharing of information). The central element of the new arrangements will be the introduction of full and open competition in the provision of services without limitation on the number of carriers and no barriers to entry for new carriers. An amended Trade Practices Act will provide the framework for competition policy. 44
Conclusion Australia has realized that if it wants to be competitive internationally, its domestic market must be efficient. To achieve efficiency, competition has been introduced and at the same time an interim regime has been established to facilitate the move from monopoly to competition. This regime was set up to be deliberately interventionist as the only way to give Optus and Vodafone a reasonable start. It did this by giving Government the power to force Telstra to quickly deliver an equal access interconnection regime. The legislation was thus very intrusive on Telstra, and this was appropriate. 45 The benefits of increased competition in the telecommunications industry flow on to other sectors of the economy, resulting in the growth and development of the Australian economy. The competitive framework has had a positive influence on the development of the telecommunications infrastructure in different ways such as:
44DOCA 'A new era in telecommunications: telecommunications policy principles' press release (1995) 45Beare, C 'Converging on 1997' Austra/ian Communications 1994 May 79 4eDOCA op cit Ref 44
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• ensuring an open, accessible environment for the potential second network provider by establishing an interconnection framework, before the tender process for government-owned AUSSAT has commenced, and providing customers easy access to Optus' service by dialling the overriding prefix '1'. This gave the potential bidders more certainty about their position on the telecommunications market and opened the door to almost immediate effective competition. The interconnection framework gave the second competitor full interconnection rights at very low prices to ensure that the duopoly network competition would be effective in the early years. "After only three years, we are starting to see the benefits of competition and we have a competitor to Telstra which has a greater share of the market than we predicted"; 46 • ensuring equal access for the new network competitor, Optus, by introducing a national pre-selection ballot. The purpose of the ballot was to allow customers to preselect Optus as their basic long-distance carrier so that they can be automatically served by this carrier when dialling trunk telephone services (long-distance). This ballot is to be completed by June 1997. Ballot results show that Optus has now reached a long-distance national market share of 8-10% and an international market share of 13-15%; • allowing the full resale of domestic and international capacity, making it possible for resellers to provide public switched telecommunications services using their own switching facilities. Austel implemented a class system to regulate the resale market. The resale market has grown rapidly since the restrictions on resale were removed. • introducing significant competition in the public mobile services market by implementing a three-licence structure. The use of mobile
Telecommunications transition in Australia: M C van der Vlies
services has surged since the introduction of competition, and the competition behaviour has been vigorous. Optus has already obtained a market share of 34%; • establishing an independent industry regulator, Austel, to function as arbitrator between the carriers during the transitional period towards full network competition in 1997. Austel has functioned effectively encouraging market entrants and the dominant carrier to face each other as they would if genuine competitive conditions were present. It has also succeeded in implementing the provisions under the Telecommunications Act 1991 effectively, while retaining a neutral role in the policy implementation process. This is the result of the distinction between the Minister's work and Austel's tasks. The Minister works through the legislative process, while Austel can give directions to carriers and has the power to make determinations.
47Melody op cit Ref 1
There are also certain risks involved with the Australian competitive framework, however. These include technology and service-based regulation, and administered competition. Examples of technology and service-based regulation are the exclusive rights handed to Optus by the government to operate satellite networks for pay TV services until July 1997 and the structural distinction made by the Telecommunications Act 1991 between BCS and HLS. These forms of regulation impede the development of new telecommunications services, as they are preventive measures rather than stimulating ones. It is, therefore, important that future regulation of technology and services be neutral, creating an open and fair environment for all players. W H Melody points out the risks of administered competition. One of the results has been "the primary concern for the protection of the designated competitors rather than the promotion of vigorous market competition". 47 These risks may lead to competitive success on the telecommunications market determined by administrative decisions instead of market place efficiency.
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