State of the Competitive Nation

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1 Competitive Carriers Coalition State of the Competitive Nation Background Paper Telecommunications is transforming our lives and our economies. It is the foundation for the success of the digital economy and Australia s future success and wellbeing. To take full advantage of the opportunities that the telecommunications revolution requires a policy framework focused on ensuring that competition promotes innovation and investment. Competitive market structures deliver: Lower prices and lower costs; Increased quality; More choice; Innovation and productivity; and Greater economic dynamism. Governments must focus on ensuring that Australia has a level competitive playing field in all markets. Regulation should facilitate the market playing the key role in driving innovation and investment. Direct intervention should only be undertaken to overcome areas of market failure. Australian policy makers of all political persuasions have embraced the need for robust policies to promote competition and improve efficiency. The Competitive Carriers Coalition is calling for continued vigilance and bold action to continue to build on the successes of the last 20 years. Over the past five years we have seen the most far reaching and fundamental reforms to communications policy since the introduction of competition in These reforms were motivated by the recognition that Australia s weak competition in domestic communications markets was directly responsible for higher prices and poorer services than should be expected. On a range of international benchmarks, Australians were paying too much for too little compared to consumers in other developed countries. A solution has been put in place to address over time the crucial problem caused by Telstra s ownership of the monopoly fixed line access network. Structural separation is now bipartisan policy, as is the building of the NBN as the instrument of this reform. Fundamental flaws in the regulatory arrangements, that meant the ACCC could not effectively regulate access to its monopoly network elements, have now been addressed. For the first time, the ACCC has powers that allow it to set these prices in a reasonable time frame. 1

2 These have been huge, epoch-shaping reforms. In terms of structural separation, Australia is now putting in place a world-leading solution to the problem of fixed line anti-competitive incentives and actions by the network owner. In the sphere of regulated pricing powers, the ACCC is no longer the most toothless of telecommunications regulators in the developed world. Understandably, there has been resistance to these reforms which have demanded the full focus of policy makers and regulators. However, we are here today to warn that there is a danger that the bigger picture, to which policy makers were responding by implementing these big changes, is at risk of being lost. To know if we are on the right track, we need not to lose sight of the fact that it is consumers who benefit from competition by enjoying better services and lower prices. In the mid-2000s, there were a number of metrics that convinced Australia that there was a competition crisis happening in communications. This was important not simply because competition is an end in itself. It was - and remains - important because competition leads to maximum consumer and economic welfare. Seven years ago, the experience of Australian consumers, compared to consumers in other developed countries had fallen behind and was still slipping. Australians paid the highest or near highest prices, and the penetration of broadband into the Australian community was falling on international comparison tables. Today, despite the efforts of recent years to put in place structural reforms and fix holes in the regulator s arrangements, there has not been a turnaround in consumer outcomes. In fact, looking at those same markers that caused such anguish in 2007, we appear to have gone backwards, or to have been treading water. In the global broadband penetration stakes, Australia has fallen to 21 st in 2011, and again in 2012, from 17 th in (See graph on following page) 2

3 In the latest OECD comparison of fixed line voice costs, Australians continue to pay the highest, or near-highest, prices in every usage category measured. For example, businesses making 260 fixed lines calls a month were paying FIVE TIMES as much as Norway, and almost twice the OECD average. Australian consumers are also paying the highest, or near-highest, prices for fixed line services in the developed world. In every usage basket published by the OECD that compares incumbent prices, Australia has either the highest prices, or is placed well into the bottom half of the OECD price tables. 3

4 The trajectory of prices is not what it should be. This is most evident in those services where Telstra remains the only supplier for most consumers. Basic line rental prices fell 1.4% in the year to June 2012, after falling 4.2% in ; Average real prices for fixed voice services were down 4.9% to June This represented a slowing from 7.3% in the previous year; and The fall in prices for internet services of 2.7 % was the smallest drop in five years. Even in mobile markets, where competition has been most robust, concentration has been going in the wrong direction. Telstra has increased its market share from 37% of handsets in 2010 to 42% in The underlying problem remains the same. Despite the bipartisan commitment to structural separation, Telstra s integration is unparalleled in the world and is the source of persistent market power. Structural separation of the monopoly fixed line access network from Telstra has only begun to occur, so the issue of Telstra s vertical market integration endures. In addition, Telstra s integration across fixed line, mobile, Pay TV and content or horizontal integration provides it with the ability to advantage itself by offering customers bundled services - a rapidly growing part of its business. The number of Telstra customers on bundled services almost tripled to 1.4 million from 2010 to The evidence of an uneven playing field and the cost to Australian consumers is apparent everywhere. Telstra s fixed line voice profit margin of 50% plus far outstrips that of its international peers; Telstra dominates industry revenue with 60% of the spend; This translates into an extraordinary 85% of fixed line profit; Telstra has 45% of revenue in mobile; and Its mobile profit share is even greater at 59% 4

5 Australia Germany US UK Japan NZ Industry profit share 100% 80% 15% 41% Industry Telstra 60% 40% 20% 85% 59% 0% Fixed Mobile Source: CCC calculations Clearly, Telstra is able to leverage its advantages and monopoly profits in some markets to subsidise its activities in other, more competitive markets. The payments it continues to receive under its deal with the NBN Co simply means it has even more cash to splash. Incumbent fixed voice EBITDA 60% 55% 50% 45% 40% 35% 30% 25% 20% 15% 10% Source: Bank of America Merrill Lynch, Global wireless matrix 1Q12, 19 April 2012,;Credit Suisse, European Telecoms Factsheet, 15 May

6 As Australia sees the mining boom beginning to retreat, we are here today to remind policy makers that the most efficient, competitive and modern communications sector needs to be the priority. At the moment, prices are a sheet anchor on Australian national business competitiveness. The priority for the Government after the election needs to be to ensure that the benefits of the historic investment in the NBN and the regulatory regime are maximised. There are areas of unfinished business in mobile competitiveness, ongoing structural market power, and efficient regulated pricing that are once again due for examination. We need to scrutinise what competition can, and should, look like in a post-nbn world, and begin working toward making that a reality. These are not new issues. In fact, those of you who have read what the CCC has published over many years will know that we always argued that both vertical and horizontal integration needed to be addressed. The ACCC advised the Government in its emerging markets report in 2003, that the issue of Telstra s market power (in its HFC network and Foxtel content) needed to be resolved. We have also argued that even in a world where the network is separated from retail businesses, it is crucial that the monopoly network is strictly regulated. The regulatory arrangements need to seamlessly transition from the issues of today to deal with the market power NBN Co will soon be able to exercise. Conclusion The advancements in technology and the massive upgrade in our broadband that next generation fixed and mobile networks presents Australia with one the most important opportunities to secure our ongoing economic success. But technology alone will not deliver the best outcome. What we need is a vibrant and competitive telecommunications sector to deliver better offers, better service, more choice and greater innovation. The policy decisions of the past few years have put in place some big pieces of the puzzle, and now it is time to identify and address these other issues in a comprehensive manner. It is recognised that NBN structural reform will take time and, accordingly, in the meantime there needs to be continued focus on creating a level playing field in the sector. Failure to do so, in a timely manner, risks losing the full competition benefits which the NBN was designed to provide. What is needed in the next review is a set of recommended actions to overcome the competition roadblock in the fixed/mobile converged market. This review should look at the ways to overcome problems in the residential, business and content markets, and in regional areas 6