Senator the Hon Helen Coonan Minister for Communications, Information Technology and the Arts

A legacy to be proud of A decade of investment and reform in telecommunications

Address to ATUG Conference

Sydney

7 March 2006

Introduction

I would like to begin by wishing ATUG a very happy 25th birthday. The Government has recently celebrated a very significant milestone of our own - 10 years in Government.

The past 12 months may well be the most memorable in the decade of the Howard Government, as we achieved many of our long standing policy goals – including the passage of legislation to allow the full privatisation of Telstra.

We settled necessary reforms to the regulatory framework and secured $3.1 billion to underpin improved services in rural and regional Australia – the single biggest investment in telecommunications services in history.

It was also a watershed year for the industry.

Telstra announced it would roll out a national 3G network and is considering investing in a fibre to the node network; Optus and Vodafone launched their 3G services;

• we have seen the emergence of Voice over IP services in the residential market; 40 new carrier licences were issued; and
• broadband subscriptions are about to break through the three million barrier.

And while so much has happened in the telecommunications industry in the last 12 months, it’s worth reflecting for a moment on what has been achieved in the Government’s milestone 10 years.

When we first came to Government there were only three telecommunications companies – now there are 153 carriers.

In 1996 the value of the communications sector was around $13 billion. Today, it is almost twice that at around $25 billion. The Australian economy has grown by an additional $12.4 billion since 1997 as a direct result of the liberalisation of the market.

Under Labor, customers in remote areas could wait up to 27 months for a new telephone connection. Now the Customer Service Guarantee mandates minimum service levels for customers by all telecommunications carriers.

The Government’s competition reforms have also resulted in significant price reductions. For instance, a three minute call to China in 1996 would cost $7. The same call today can be made for as little as 56 cents.

And since 1996 the Government has invested more than $4 billion in telecommunications services in regional, rural and remote Australia.

As Minister I am proud of this Government’s achievements in telecommunications over the past 10 years and appreciative of the industry’s willingness to embrace these reforms and continue to invest in the Australian market.

Next 12 months: Broadband and T3

So where to for the next 12 months?

Along with the very obvious issue of T3, encouraging the roll out of next generation broadband infrastructure will be a principal focus over the course of this year.

Only a few countries in the world have widely-deployed genuine next generation broadband networks - Japan and Korea are the stand-out examples.

When I entered the portfolio we had around 1 million broadband subscribers in Australia and were lagging in the OECD for increased take-up. Now, with nearly 3 million subscribers take-up has close to tripled in a little over a year and we are in the top ten of the OECD for growth.

As the broadband market in Australia continues to grow, the forecasts are that take-up will hit four million this year and grow to six million by 2009.

So the trends are positive and the forecasts are good and we have a real opportunity to build on the significant investment Government and industry have made in rolling out next generation broadband services.

The trick with encouraging investment in next generation infrastructure is to ensure that it fosters competition and the development of innovative services, lest we lose the significant gains of the last ten years.

And where there is a need for targeted investment by taxpayers then the Government must ensure this funding goes to areas of clear market failure, rather than paying companies to make decisions that make commercial sense.

I have long been a proponent of technology neutral and competitively neutral models for Government investment. While fibre is the technology of today, wireless is also taking off. If we had mandated a technology five years ago then the Government would have done its dough on dial-up.

Promoting facilities based competition

So what will the future competitive market look like as next generation networks are rolled out and what, if any, regulatory impediments are there to new network investment in Australia?

While the economic benefits of competition are clear, sustainable competition is not yet assured in Australia. Yes, the economy has grown by an additional $12.4 billion since 1997 as a direct result of the liberalisation of the market and in the same time period prices have fallen by 18 per cent.

But as the ACCC made clear in its last report on the state of competition, competition in some markets remains fragile. Furthermore, the ACCC outlined the danger of reverting to a wholly re-sale competitive market, rather than moving to greater facilities-based infrastructure competition.

I agree with the ACCC about the importance of encouraging facilities-based competition as it promotes service innovation and real choice for consumers. It also gives the Government the opportunity to wind back telecommunications-specific regulation over time - but we are obviously not there yet.

The ACCC has identified the growth of the Unbundled Local Loop – or ULL – market as a crucial stepping-stone to the development of full infrastructure competition.

While not full facilities-based competition, the ULL does mean that competitors are not locked into resale only, and are able to differentiate their service and offer new pricing constructs.

Recent research released by Gartner shows that those European countries that have implemented strong unbundling requirements are experiencing service innovation, lower prices, and accelerated take-up of broadband services.

France , for example, now has six major DSL service providers, each with over 200,000 subscribers. A no-frills corporate 8 megabits per second ADSL service can cost as little as 12 euros a month.

Already in Australia we have seen companies like iiNet and Internode providing residential services up to 24 Megabits per second using ADSL2+ over ULL – providing faster broadband speeds that enable innovative services such as Voice over IP.

This is why ULL pricing is clearly such an important issue, and reinforces the emphasis that competitors place on getting access to the service at a reasonable rate.

The Government has asked the ACCC to provide advice on how it marries the Government’s policy of retail price parity across Australia with its deliberations on ULL pricing.

But what is clear from the ULL debate raging across the telecommunications community – while copper is the only ubiquitous network, it is an essential building block for competition.

But if there is investment in a new fibre to the node network, any discussions about the ULL may well become less important and eventually redundant over time. Although the Government will look at the interplay between price parity and the ULL – we may well also be having a discussion about access to fibre well before the ULL begins to make serious in-roads on Telstra’s profits.

Regulatory certainty

As part of the T3 process the Government undertook a considered adjustment of the regulatory framework and one of our major priorities for the foreseeable future will be to maintain that settled framework.

A settled regime going forward is critical, not just in the context of the full privatisation of Telstra, but to provide certainty for all competitors and investors in markets that are seeing increasingly rapid service and technology innovation.

The regulatory regime has long been a whipping boy for those who claim we are in period of regulatory uncertainty and change.

However, the Government went through an extensive process of review and reform during 2005 to ensure that there was certainty for industry when making new investments and to finetune the access arrangements.

The Parliament passed legislation in September 2005 that made these changes law. It is our objective to ensure that there is certainty going forward, in terms of the rules and their impact on stakeholders, until we review the system again in 2009.

While the ACCC is currently reviewing the existing fixed access declarations and other increasingly critical services, such as the DSL broadband services and prospective services over Telstra’s proposed fibre-to-the-node network, the Government considers that this demonstrates the ongoing operation of the regime rather than any inherent uncertainty in how that regime operates.

In many cases the ACCC is required by statute to examine particular matters – for instance its current review of fixed services – while in other cases its activities are in response to specific conduct by industry participants – such as the recent consultation notice issued to Telstra in response to an increase in the wholesale price for line rental.

Certainty for new investments

The ACCC’s review of fixed services may well give us further insight into how the regulator would treat Telstra’s proposed $3 billion upgrade of its copper network to a fibre to the node network.

Ensuring confident ongoing investment in telecommunications infrastructure, by Telstra and indeed by others in the industry, is a key policy objective. To this end the regulatory regime must flexibly accommodate a variety of proposed investments, regardless of the technologies they may involve.

In both 2005 and 2002 the Government made moves to ensure that the costs and risk associated with new investments are taken into account by the ACCC when making access decisions.

I am sympathetic to Telstra’s desire to minimise the risk inherent in major new investments, however, the logic of exempting such networks completely from the access regime is not compelling.

There cannot be automatic exemptions from the regime for investments if they result in new bottlenecks or extend existing ones. This is a principle that would apply equally to all investments – not just ones that Telstra is planning.

Given the acceptance by all stakeholders, including Telstra, that bottlenecks exist on the current network, it is difficult to see how bottlenecks would not continue to exist on an upgraded network.

Estimates suggest that while Telstra’s competitors have 60 per cent of the broadband market, Telstra still claims nearly 73 per cent of the revenues in broadband.

If bottlenecks are likely on a new fibre to the node network then any regulatory exemption would ultimately result in a reduction in competition and, potentially, a slow re-monopolisation of fixed line services in Australia.

An exemption may also have precedent-setting implications for the way new investments are treated in other regulated industries.

Internationally, there is no clear trend on the regulation of fibre networks.  Most countries are continuing to apply their existing regulatory regimes to fibre.  There is some limited support for less regulation, but this has not been implemented anywhere except in the US where there is extensive infrastructure competition from cable networks.

For instance in Canada, two companies are currently undertaking a staged fibre roll-out but it is being done under a regulatory regime similar to Australia’s, where regulation is only imposed on services when competition problems become apparent.

The UK operates under the EU framework and regulates services where an operator is found to have significant market power.

Like Telstra, British Telecom has been found to have significant market power in the fixed access market and has been required to unbundle its local loop since 2000.

In fact the international evidence, particularly from the EU, clearly demonstrates that unbundling the local loop does promote broadband competition and increased take-up.

I will be the first to acknowledge that Telstra’s fibre to the node proposal would be good news for the deployment of next generation broadband in Australia. But if it came at the cost of a regulatory holiday that allowed Telstra to re-monopolise – then it could be terminal for competition in Australia and, ultimately, consumers would suffer.

Although there have been suggestions of other companies being prepared to invest in a new network or even a structurally separated network, the reality is that Telstra clearly has the capacity and preparedness to roll out a major upgrade of the existing network and should be encouraged to do so.

Such a network would likely exhibit natural monopoly characteristics and be economically unsuitable for duplication. In those circumstances third party access would be critical.

Of course, Telstra must have the incentive to make an investment of this magnitude and to get a proper return on capital. It needs certainty in advance of making its investment and confidence that the regulatory framework is flexible enough to allow it to obtain competitive advantage from innovative products and to deal with the pricing of third party access fairly and expeditiously.

But I think before naysayers declare the Australian system incapable of delivering such an outcome, the current provisions must be tested. I would encourage all investors to use the special undertaking process under part XIC which provides certainty for new generation network investments.

I am confident that the special undertaking process can provide certainty to investors about the terms of access (including the access price) that will apply to services provided through new infrastructure – before they invest in building the infrastructure.

So long as the provider is willing to allow access to the services provided over the new infrastructure, the undertaking can give it certainty as to the terms of access that will apply, and the access price it will be able to charge.

A special access undertaking can last for any length of time specified – there is no upper limit.  The undertaking can even provide for the ACCC to agree to its extension when the expiry time approaches.

The services covered by an undertaking can also be described in very wide terms to include any or all of the services that will be provided over the infrastructure.

There is a six month time limit applying both to the initial decision of the ACCC to accept or reject the undertaking and to any merits review by the Australian Competition Tribunal.

Once accepted by the ACCC, the undertaking can only be varied on the application of the party who gave the undertaking.  In short, the special undertaking procedure offers the necessary certainty to telcos that want to invest in new generation networks to which they are willing to give access.

I am encouraged that since I last spoke on this issue in December, Telstra has made moves to discuss its specific proposal with the ACCC to see how the current arrangements can accommodate Telstra’s legitimate desire to get a reasonable return on its $3 billion investment.

Broadband in Australia

Just as I do not subscribe to the view that the regulatory system in Australia is overly burdensome, I also do not subscribe to the view that the broadband that already exists in Australia is tantamount to what some have described as ‘fraudband’. I agree that speeds could be faster, I would also argue they could be faster now with the current copper infrastructure.

Currently Telstra’s ADSL network is only capable of providing 1.5 Megabits per second. However, even using the existing infrastructure this could operate at much faster speeds – up to 8 Megabits per second.

If Telstra turned on the ADSL2 capability of a large number of their DSLAMs this could turn into 12 Megabits per second or more. Telstra has also recently upgraded its HFC Cable network to provide up to 17 Megabits per second extra broadband capacity to the 2.5 million homes that this cable passes.

With the growth in demand for higher speeds, it would be a welcome move if Telstra could develop a business case for not holding back its ADSL network.

It can hardly be attractive for someone on a 256 Kilobits per second service to spend up to 12 hours to download a movie over its new Bigpond movie download service.

But we all know that it is competition, not some inappropriate directive from the Australian Government, that will produce the impetus for Telstra to act. And we also know that it is the industry, not the Government which sets the level of Internet speeds in Australia.

As people start downloading more music, movies and even television shows – if they can do it faster and cheaper elsewhere then they will take up a competitor’s offer. This is already happening.

As I mentioned earlier, there are alternative DSLAM networks operating in metropolitan areas at up to 24 Megabits per second.

There is a Broadband over Powerline network run by Aurora Energy in Hobart - and in network trials with other utilities elsewhere - providing commercial services at 12 Megabits per second and the capacity to go much faster.

Silk Telecom’s fibre-optic network already extends through Melbourne and Adelaide. Silk has also rolled out in Geelong, Bendigo and Ballarat in Victoria and is now connecting Port Lincoln, Port Augusta and Whyalla in South Australia.

There is even a wireless network being rolled out by ‘Chariot’ in parts of regional Victoria and Adelaide that will provide a 13 Megabits per second service.

But where the Government does have a legitimate role in fostering greater investment to deliver Australians the services they want,
is in targeted investment packages like the
$3.1 billion Connect Australia package.

As part of the planning for Connect Australia I have asked my department to undertake an audit of broadband infrastructure around Australia to understand its capacity and any current or emerging gaps.

A consultancy – Ovum - has also been investigating the capacity of services currently available in the marketplace and the potential of services and standards that are emerging. I am expecting to receive this report shortly.

My department is also undertaking research on the rollout of next generation networks in the public sector, investigating how aggregating Government spend and utilising this significant investment could lead to broader outcomes.

It is important that there is a strategic approach and careful planning when rolling out new broadband infrastructure – particularly with the Government’s new regional funding programs.

I aim to raise the bar on regional broadband infrastructure towards faster speeds and improved services. But this has to be done in a coordinated fashion, leveraging additional sources of support and encouraging innovative, long-term and competitive infrastructure.

As I will shortly outline, the new Broadband Connect program will aim for infrastructure able to support speeds of megabits and more.

Commitment to Rural and Regional Services

Broadband Connect is the evolution of recommendations stemming from the Regional Telecommunications Inquiry – or the Estens inquiry.

It is bigger, it is bolder and the Government investment is perpetual. We have $1.1 billion for services now and a $2 billion Communications Fund to bankroll services into the future.

With Broadband Connect we have a real opportunity to get this country moving – to revitalise country communities, to allow more people to work remotely or from home, to ensure small businesses thrive.

I take very seriously this Government’s commitment to services in the bush. I am personally committed to ensuring that important safeguards remain in place to deliver both current and future services to rural and regional Australians.

In many ways, advanced communications services can have a more profound impact on people in the remotest parts of Australia.

A recent ABS statistic on farm use of IT – found that those farmers in the most remote parts of the continent were more likely to have an Internet connection than their counterparts closer to metropolitan areas or major regional centres.

For these people an Internet connection provides more than just a stream of information – it is an essential tool to manage their property and finances, pay their bills, maintain links with what is happening around the globe and to educate their children.

Despite some criticism of the Government’s $158 million HiBIS program, it has made a significant and noticeable difference on regional broadband access.

Firstly, in two years it has extended the reach of terrestrial broadband services to an additional 700,000 people.

Secondly, nearly 100,000 households or small businesses are now connected to a HiBIS-subsidised broadband service either through satellite, ADSL, wireless or even cable.

And finally, it has encouraged competition where previously there was none. There are now more than 40 providers that have moved on to the Broadband Connect scheme from HiBIS.

The satellite broadband market is at its most competitive ever.

And smaller wireless providers are increasing their share of broadband funding to the point where we have spent $25 million under HiBIS providing subsidised wireless connections.

Connect Australia

But it is time to move on. My vision for telecommunications is fuelled by the opportunity that the $3.1 billion Connect Australia package presents for both industry and the community.

It provides opportunities to encourage the market to be a lot more innovative and leading edge than they would be on purely commercial terms. Encouraging this approach in regional areas should also benefit the major metropolitan markets by demonstrating proof-of-concept.

Key findings from the public consultation process were the lack of access to competitively-priced backhaul; a need for a more coordinated and strategic approach to infrastructure investment; and the need for scalability and sustainability.

To ensure that Connect Australia is a long term, sustainable investment in scalable infrastructure – both the Government and the industry will need to do things a little differently this time around.

For example, this may not be done best by a per-customer incentive payment in all areas and I am looking at ways in which Broadband Connect can evolve from the HiBIS model. It will look and feel very different to its predecessor.

I am considering setting aside a large part of the funding to stimulate the development of a competitive wholesale access network in regional Australia that will provide a broad basis for ongoing infrastructure-based competition in regional Australia.

Government funding support for such infrastructure would contain some basic requirements, including guaranteed wholesale access for service providers at fair competitive prices, and a key focus on providing full access where regional terrestrial coverage is not complete.

This means that a new network would not replicate the exact coverage (and lack of coverage) of Telstra’s existing broadband fixed network.

If we are to achieve access and competition objectives from such an investment, it would be essential that the new network overcomes the access restrictions currently applying to ADSL.

The new network will also be a network for the future not a legacy network. While many providers under the first phase of Broadband Connect already provide far greater speeds than the minimum of 256 Kilobits per second – our expectation will be for higher capacity infrastructure able to provide faster broadband speeds, with the ability to scale-up when the market moves forward.

We will make this expectation explicit under the terms of the new program. This is undoubtedly challenging and this is where I want industry to think both strategically and cooperatively.

A consortium approach that builds scale and combines the strengths of different industry partners is attractive. Already we have seen some partnering on the roll out of next generation infrastructure.

Most notably this has occurred in the roll-out of the 3G networks and the partnerships on infrastructure between Optus and Vodafone; and Telstra and Hutchison.

Elsewhere, Soul Converged Communications has partnered with Country Energy to lay fibre as part of its whole-of-government broadband contract in NSW.

The attractiveness of this approach is that it delivers both competition from a retail perspective and scale and sustainability on the infrastructure side.

I strongly encourage those carriers considering taking part in Broadband Connect and the broader Connect Australia package to think proactively about partnering opportunities.

These partnerships don’t necessarily need to be confined within the carrier community. Service providers, Local Government, State Governments and even other infrastructure providers like the utilities all have an interest in improving broadband connectivity in regional areas, and may well have a part to play in bringing their various strengths to a partnership approach.

We know that this is the case from the 105 submissions we received on the Broadband Connect/Clever Networks discussion paper.

The Government will use the significant funding set aside for Connect Australia to assist the industry to make linkages, form partnerships and roll out necessary infrastructure.

Expressions of Interest

I am attracted to an expressions of interest process before determining the final shape of a call for applications under the Connect Australia package.

This will be a call for industry to express its willingness to be part of this vision, and to put forward well developed ideas about what could be achieved with this funding. I am also attracted to looking at Connect Australia as a broad package rather than four separate programs.

The funding programs do have four distinct, but still very complementary aims. We need to think about how these elements can be combined for maximum leverage.

Broadband Connect at $878 million is obviously the most significant element and improving access to affordable and advanced broadband services remains the biggest issue in regional communications.

However, there are obvious synergies between this program and the $113 million Clever Networks program that is aimed at improving service delivery. This is the very reason why I issued a joint discussion paper.

The potential benefits from Clever Networks in leveraging the support of key services sectors such as health and education to roll out additional infrastructure should also have a benefit in improving the delivery of retail and small business services in regional areas.

Given the increasing movement of mobiles into offering higher speed data services – then there is also no reason why capacity provided for either Clever Networks or Broadband Connect could not also be utilised to extend 3G coverage - under the $30 million Mobile Connect program.

So my message to you today on Connect Australia is to think big. Think consortiums of interest. Think scalability. Think sustainability.

I will be announcing further details on the Connect Australia programs within the coming months and the finalised guidelines will be out well and truly before 1 July 2006.

Metro Broadband Connect

And finally, one massive unmet need in broadband provision in Australia is in outer metropolitan areas across Australia.

I do not shy away from defending the need to provide necessary support in rural and regional Australia to roll out broadband. But this Government also saw the need to encourage immediate investment in technologies that will overcome the difficulties in providing broadband to outer metro areas.

We have committed $50 million to the Metropolitan Broadband Connect program – this money will grease the wheel for the industry to connect outer metro areas more quickly.

Today I am releasing the final guidelines for this program. This is only the first step, the rest is up to industry. I look forward to hearing about your innovative plans for connecting areas of Adelaide, Perth and Brisbane and ensuring people living in the outer areas of Sydney and Melbourne will soon be able to connect to affordable broadband.

Conclusion

So after 10 years, $4 billion of investment, a myriad of technologies and, now finally, legislative authority for the full privatisation of Telstra, I think I can confidently say we have achieved an enormous amount.It has been quite a journey but, as you could have garnered from my thoughts today, we must continue to build on these achievements – we must keep up the momentum!

In charting the future of telecommunications in Australia – industry will play a critical role. It is not for Government to instruct you how, when and where to invest.

It is not for Government to pick technologies or for the taxpayer to fund commercial investments. It also not for Government to unnecessarily impede or inhibit what you are trying to achieve.It is our role to keep a close eye on what is needed to provide equitable telecommunications services irrespective of where you live in Australia.

I look forward to working with you all over the coming year as we roll out Connect Australia and as we head towards T3. Thank you.