Not even the US sustains rural telco competition, notes David Roffey

The great Telstra debate

Yes, divest as John Quiggin says, argues David Roffey.

What role for Telstra? - Certainly not its current rapacity

By David Roffey

Introduction

John Quiggin has already addressed some of the issues in Ros Eason's paper around the question of ownership of Telstra. It is not my purpose in this further response to add significantly to that debate, but to question some of Eason's assumptions about the nature of Telstra as a competitor in the current market, and the more general question of whether the current arrangements are broken and need fixing.

The biggest single problem I have with the Eason paper is its implicit attempt to want to argue from inherently opposed axioms. For the Communications, Electrical and Plumbing Union (CEPU), there is much merit in arguing that Telstra is in many respects a natural monopoly, while simultaneously holding that it is also non-dominant. In practice, a natural monopoly has to be appallingly badly run not to be dominant - and if that were the case, there would be strong arguments for looking for new ownership arrangements to fix that problem!

Although Telstra's management has indeed made some questionable decisions, most of these questions come from 20:20 hindsight, not from bad judgement on the facts available at the time of decision.

Competition in the bush?

It is my contention that Telstra is indeed a natural monopoly in supplying the local loop everywhere outside the main CBDs, and particularly so in rural areas. Eason's aside that for "competition to take root in the more thinly populated areas of Australia, at least some retail prices (i.e. line rentals) would have to be allowed to rise" is at best disingenuous. There is no recorded case of sustained competition in any similar area in the world, even in rural areas of the United States, where connection and rental costs to customers can be orders of magnitude above Telstra's pricing.

The government's recent attempt to get competition for the universal service obligation (USO) predictably foundered. The government itself defined competitive areas that were too small for what its own commissioned studies had already suggested was the only viable technology for an alternative provider: a national satellite-based service.

We should also be fair to Telstra, and point out that it does in fact provide very good high-speed data connections in the bush, using the only viable technology, satellite delivery. It would be utter folly to require telstra to spend billions on upgrading rural cable networks from one inadequate transmission rate to a slightly less inadequate rate. True high-speed technologies(such as DSL*) are simply technically incapable of working at rural distances, and there is no case in sight for running fibre to homes in CBDs, let alone in the bush. In any event, the market dominance engendered by the natural monopoly will only be increased by the widespread use of technologies such as DSL, enhancing a historically tried and true Telstra weapon against its competitors.

The case of cable TV

The specific contrary case that Eason quotes is pay-TV, but in fact the example is one of the strongest examples of Telstra's dominance in action. Optus certainly made some poor pay-TV decisions, but the overwhelmingly worst one was to assume that Telstra would not use its dominance if that would cause Telstra enormous cost.

It is clear from every market in the world that overbuilding two parallel cable TV systems is uneconomic for both parties. Optus therefore believed that it was in a race to build first, and that no rational competitor would build the same just streets behind them. If Foxtel had been a stand-a-lone pay-TV company, that would indeed have been the case. However, Telstra controlled Foxtel's network build.

Overbuilding the Optus network certainly cost Telstra (and Foxtel) hundreds of millions of dollars in losses over the ensuing years, but the net impact was to dent Telstra's multi-billion dollar profits, whilst simultaneously completely destroying the viability of Optus's main local loop network play. You don't need to get to the Nash equilibrium levels of game theory to realise that, in a two-player game, you don't have to necessarily do well to win, you only have to do better than your opponent.

As has been seen in similar situations on other countries, there is no obvious locus for a regulator to intervene in this sort of 'slash-and-burn' competition from the dominant player, since they can always plead a genuine belief in the original business plan (see, for example, OFTEL's judgement on British Telecom's similar tactics in the UK paging market).

With the weak regulatory regime in Australia, it wasn't even worth Optus crying foul, and the current situation of the proposed merger is just the final playing out of a highly successful and rapacious piece of anti-competitive manoeuvring.

Experience elsewhere

It's interesting to see a union pleading its case from some of the arguments of true economic rationalists, like the FCC and Alfred E Kahn. The US case, however, is very different from that in Australia. The AT&T break-up bore no resemblance whatsoever to the Tanner proposed options. The 'reversal' embodied in the 1996 Communications Act came after AT&T and the three remaining regional Bell companies had spent 15 years building the capability to truly compete with each other in the main US cities. You can't build any argument from that with relevance to the current Australian market.

Quoting the Norwegian example, as Ros Eason does, also doesn't get us very far. The Norwegians are notorious mavericks on telecoms subjects, maintaining a wholly government-owned dominant player in Telenor, and serially rejecting a whole range of possible changes.

The more interesting current examples are those that are indeed breaking themselves up in attempts to release shareholder value, such as British Telecom and Telia. When judging what might be right for Telstra, we should be looking for best practice, not the average of what other countries do.

[On a similar basis, the fact that Telstra's access prices are amongst the lowest in the Productivity Commission sample is to be applauded and improved on, not moved back into the middle of the pack.]

A policy for broadband investment that also helps the bush?

Ros says that 'Tanner's arguments ... are ... based not only on his (flawed) analysis of Telstra's dominance, but on the contention that [the] access regime has failed.' I'd say the analysis is nowhere near as flawed as Ros thinks. More importantly, I think Tanner's case can equally be founded on the theory that the access regime has succeeded to the point where most competitors (and all new broadband competitors) rely on the natural monopoly network for final delivery of their products. The structural separation of the monopoly network infrastructure provider - and taking the network into government control so that it can be directed to better provide for social obligations in the cities as well as the bush - is a strong candidate proposal for a better future, and the argument for it can't be dismissed as easily as Ros Eason would like.

Also on the Evatt site:

• Telstra: the case for renationalisation and divestiture", by John Quiggin;
• What role for Telstra? by Ros Eason;
• Trade wars in the information economy: Telecommunications, by Ros Eason.

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