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ACMA International Training Program

Liberalisation - the incumbent’s perspective

Danny KotlowitzTelstra Regulatory & Competition Legal Group

5 September 2006 Page 1

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Introduction

Who we are State of the market Regulation Competition policy Social policy Conclusion

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Company information

Telstra is Australia’s leading telecommunications and information services company, with one of the best known brands in the country.

We offer a full range of services and compete in all telecommunications markets throughout Australia:

Total fixed lines in service: 9.94m lines Mobiles: 8.488m customers Online: 2.5m Internet customers Pay TV (bundled): 343,000 subscribers

Telstra has over 1.6 m shareholders

Notes: (i) data from Telstra full year results June 2006; (ii) mobiles customer numbers exclude MVNO customers; (iii) online customer numbers exclude wholesale SIOs; (iv) Pay TV bundle is for Foxtel or Austar

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State of the Market

No limit on foreign investment in carriers and carriage service providers competing with Telstra

Over 160 carriers and 1000 carriage service providers Over 700 ISPs (10 have in excess of 100,000

customers) Four 2G/3G MNOs and numerous MVNOs and MVARs Three mass market wireless broadband network

operators (aside from the MNOs) and several niche operators

Numerous VoIP providers including ISPs and standalone VoIP-over-DSL providers through major retailer channels – numbering over 180 services (see “Aussie VOIP list” at http://www.marketclarity.com.au/voip/)

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State of the Market

Telecoms contributed 2.65% of GDP in June Quarter 2005

The industry employed 185,279 people in August 2005

Between 1997 and 2004, overall telecoms services prices fell by > 18%

Between July 1997 and June 2006 Telstra's labour force declined from 76,585 to 42,507 persons (FTE)

But competitors have employed approximately 60,000 more in same period

Sector Annual Growth

communications services

5.9%

GDP 3.7%

construction 5.6%

manufacturing

2.1%

finance & insurance

4.8%

culture/recreation

3.4%

10 years to June 2005

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71%

Local

63%

Domestic LD

50%

International LD

45%

Mobile****

64%

Data**

59%

Subscription TV13%

Sensis Advertising

(main media)

26%

Narrowband***

20%*

Source: Product Management Estimates* Approx. % of local calls/basic access resold over Telstra’s network. ** Revenue Market Shares based on Dec 2004 YTD revenue. Products in Data and Internet & IP groupings match corporate accounting lines. Data no longer includes ISDN.*** Total market subscriber estimates are based on IDC total market estimates. **** Dec 2004 market share based Telstra Dec 2004 data and competitor data to Dec 2004, Sept 2004 (Hutchison).

Basic Access

18%*

Telstra share Other Resold

41%

Broadband***

73%

Telstra’s Market Share (2004/5)

Internet & IP**

39%

39%

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State of the market: broadband penetration

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TECHNICAL REGULATION

COMMERCIAL INFORMATION

CONSUMER INFORMATION

TELECOMMS COMPETITION

NETWORKFUNCTIONALITY

RETAIL PRICE CONTROL

MISCELLANEOUS

NETWORK COVERAGE

TIO

Certify Cabling

Section 105Part XIB

RKRs Emergency

services

Preselection / pre-paid mobiles

Interception regulation

Number portability

Applies to all carriers and carriage service providers

Specific legislative obligation applying to Telstra only

ACIF Obligations

ItemisedBilling

Untimed Local Calls

Price Caps

Free operator & directory assist for residential

Telephone sex services

Land Access powers and immunities

Equivalent to AMPS network

Integrated public number database

& access

Part 21 Obligations

ACIF Industry Codes

Publish and provide phone

directory

Part XIC TPA(Access Regime)

Part XIB TPA (competitive

conduct)

Operator & Directory

Assistance

SFOA

General TPA Provisions

Preselection and override

codesDivision 12 Reporting Line Caller

Identification

000

Privacy Obligations

National Security

Enforcement

Customer Service

Guarantee

Industry Development

Plan

Defence & disasters

Privacy Commissioner

Numbering Plan

Network Reliability

Framework

Aspirant CUSPs

BSC Tariff

Priority Assistance

QUALITY OF SERVICE

Carrier Access

Universal Service Obligation

OEZ Contract

LIMAC

DDSO

The Regulatory Environment

Local Presence

Plan

Operational Separation

(Red text = new in 2006)

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Economicbenefit

Extent of competition-simulatory regulation

Impact of regulation

At any given point in time the extent of regulation that simulates competition has a 'tipping point' where it becomes pro-competitor not pro-competitive

Judging the appropriate extent of regulation necessary, is the key regulatory challenge

Incumbents are not ‘magic puddings’

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Regulation: a growth industry!

Between July 1997 and October 2005: the number of legislative and regulatory instruments for

telecoms grew from 20 to 348 the total number of pages of these instruments grew from 1,602

to 10,103 In the 2005-6 financial year:

Telstra staff spent 144,600 hours writing reports to regulators a total of 485 reports (206 weekly, 77 fortnightly, 120 monthly,

56 quarterly, 6 half-yearly, 17 annual, 2 triennial) 162,654 pages

Government, regulators and ombuds employ around 550 people in the communications area

Last month the Minister announced a review of telecommunications regulatory reporting with a view to identifying opportunities to streamline reporting and remove redundant or unnecessary industry reporting requirements

This follows the report of the Taskforce on Reducing the Regulatory Burdens on Business (the Banks Report) which acknowledged the concerns of Telstra, Optus, Vodafone and others(See: www.regulationtaskforce.gov.au/index.html for more information)

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Trends in regulation internationally

Trend away from ex ante regulation Retail price controls abandoned even in markets

where incumbents retain 90%+ market share (eg. Germany, Holland, Sweden)

Focus of regulation has moved from retail to wholesale attempt to address source of market power distortions caused by regulation of same services

at both retail and wholesale levels Alignment of telecoms competition regime with

general competition law EU framework requires NRAs to identify markets

where operators have significant market power

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Competition Policy - Australia

Competition law applicable to all participants in all Australian markets says that: A corporation that has a substantial degree of

power in a market is not permitted to take advantage of that power for the purpose of - substantially damaging or eliminating

competitors preventing competitors from entering market deterring or preventing competitive conduct

Telecoms markets have their own special, tougher test: A corporation that has a substantial degree of

power in a market is not permitted to take advantage of that power with the effect of – substantially lessening competition in a

telecoms market

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Competition Policy - Australia

Telstra accepts that some regulation is necessary In a competitively mature market regulation should be

rolled back, not extended as is happening in Australia with new operational separation provisions in our legislation

Telecoms-specific access regulation should be removed

Ill-conceived regulatory settings can distort industry investment

Below-cost access reduces the incentive for industry to invest in network improvements or innovation

Result: bottlenecks are perpetuated investment and innovation are discouraged harm to both society generally and customers

individually Regulatory ‘creep’ into new services and markets

where no legacy bottlenecks exist

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Social Policy

Guaranteeing Universal Service and affordable basic voice call services are fundamental government goals

eg. government has a stated policy of geographic price parity

Historically it made sense for the government-owned monopoly to absorb the cost of this regulation – because the Universal Service fund is perpetually undercosted, Telstra has cross-subsidised the provision of service in non-profitable areas

However, in a competitive market should the burden remain solely with Telstra and its shareholders?

A fundamental principle of effective regulation is competitive neutrality

Social and competition policy must be aligned Inconsistent approaches to pricing e.g. ULLS mean it is

now under threat

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Social Policy: is Australia different?

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Social Policy: USO cost is a Ministerial call

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Conclusion

Telstra has serious concerns as to whether, following recent new legislation and the current round of pricing decisions by the ACCC, Australia can continue to portray itself as an international best-practice regulatory jurisdiction

The dilution of government ownership in T3 (the full sale of Telstra) should help Australia raise its game on regulation

“For too long, the government has had a massive conflict of interest, as the owner and seller of Australia’s largest telco; and as the industry regulator. … The Government does not have to own Telstra in order to regulate it. The government regulates the entire telecommunications industry, regardless of Telstra’s ownership structure.”

- Prime Minister Howard, 25 August 2006Keep up to date with the debate on Australian telecommunications regulation

at: www.nowwearetalking.com.au