Cook’s Collaborative Edge

Editor’s note:

Paul called it “Australian case study” I have changed the emphasis slightly because i intend to follow it tomorrow with a piece on the emerging private market for IPv4 addresses, and the following day with a piece on RFC 1744. I fully agree with Pau’ls main thrust towards structural separation and open access. Telco facilities should serve the public interest. Would not it be a wretched irony to see in three or 4 years time… or even sooner, the emergence of a new set of telco owned facilities - namely all the IPv4 address blocks in each region.

Paul writes:

Most developed nations are now revisiting their telecoms policies with a view to using telecoms infrastructure as a tool to revive the economy.

And when exploring this it quickly becomes clear that open networks are necessary if we are to achieve the economic benefits that the digital economy has to offer.

The multiplier effect of open infrastructure is obvious. It stimulates developments in healthcare, education, energy, media and Internet – this in stark contrast to the closed (vertically-integrated) networks that are currently operated by most incumbent telcos around the world.

There are several ways to achieve open networks, depending on local circumstances. Some countries have been able to use existing regulations to move in that direction, while others have introduced structural and functional separation. More positive approaches are also possible, depending on the participation of the incumbents in the process. Empowering local communities to develop their own networks would be one of the preferred options.

And, of course, there are combinations of all of the above.

However, in most situations some sort of regulation is required to get the market moving towards open networks – particularly in countries where there are strong vertically-integrated incumbents. In those cases I have not seen any solution other than separation (regulated or voluntary). This certainly is not the end game but it would be quite an achievement to be able to separate the operation of the infrastructure and the services, especially with such powerful players. Separation would certainly eliminate monopolies or duopolies (telco/cable), as these would no longer make sense. Instead new business models would evolve around functionalities (infrastructure, network management facilities, services, content, and distribution).

Lessons learned from Australia

The Australian experience shows how daunting it is to implement any policy activity that will affect the incumbents – even decisions that are less significant than separation. Remember Telstra threatening the Australian government with: You will get the mother of all legal battles.

Having had to deal with the consequences of the wrath of Telstra’s CEO, Sol Trujillo, for over three years I can imagine what kind of battle will lie ahead if separation were to be implemented, for example, in the USA.

Under Trujillo’s leadership Telstra has sued a Federal Minister, has called the national regulatory body untrustworthy, a rogue and maggots (eating its profits away). Its competitors (their major wholesale customers) have been called parasites.

The incumbent has refused all invitations from Ministers (two different governments) to sit down and discuss telecoms from a national interest point of view. It has refused to build a national FttH network in which others would be involved. It wants an ROI on this investment (in their own words, ‘north of 18%’) and it has also indicated that this would mean a wholesale access price of around $65 for something a very basic (1 or 2 Mbs) broadband service.

Digital Economy Industry Group

I am presently leading industry workgroups on three continents, looking at government policies that will lead to open networks.

In Australia this group represents 140 companies. Supported by the Federal Minister for Broadband (Australia has a Minister for Broadband and the Digital Economy) the group has provided input in the broader debate as well as in specific inquiries. They also looked at plans for a combined industry the incumbent to bypass – to ignore it. And, the companies involved in this having spent several million dollars to investigate this, the conclusion was that it would be totally impossible to ignore the incumbent.

The government has put $5bn on the table, but even with that the industry can’t get a viable business plan together without strong regulations to ensure that the incumbent won’t spoil the investment.

Telstra has an ADSL2+/VDSL network rolled out, but it is making this available sparingly (only where it faces competition). Instead it has placed this network on hold in case another consortium gets the federal money to build an alternative network.

Without control Telstra has the market power to undermine any activity.

Fortunately the government has not given in to the incumbent’s bullying and blackmailing – some of Telstra’s threats have included: ‘we are the only ones that can build this network’; ‘national security would be at risk if any foreign company was involved in an alternative network’, and ‘who will maintain such a network – only Telstra can do this and you, the government, had better listen to us.’

Our industry group has set up several workgroups to support the government in its battle with Telstra. Focusing on the social and economic benefits of a national open network we are talking to the Federal Ministers for Healthcare, Education, Energy and Finance. We also have the moral support of the Prime Minister, who made the building of a National Broadband Network (NBN) one of his key election promises.

We fully understand that this has to be a Cabinet decision, not simply a decision made by one Minister, and so we are also engaging the other Ministers. In general, we discuss with them how they could develop policies within their Departments that will remove the impediments to realising the economic and social benefits of an NBN.

For instance, under current healthcare regulations a video consult is not covered under health insurance. And in the energy sector investments in intelligent networks by electricity utilities are being hampered because that is not seen as core to the energy regulator.

So, as well as the telecoms regulatory approach, we are simultaneously operating a very positive campaign promoting the social and economic benefits of the government’s $5bn investment in improved (open access) infrastructure.

Next month the government will make its decision, following an Experts’ Report assessing the tender proposals (Telstra didn’t put in a serious proposal – that’s how confident they are that they will retain their ‘monopoly’).

There are very strong indications (I hope) that the government will support the functional separation of Telstra. I believe this could lead to the departure of Sol Trujillo – it looks like that he is already canvassing for a position in the USA, as has written to President Obama selling the virtues of his work in Australia. And under a new management I believe Telstra will return to the negotiation table and grudgingly accept functional separation, and a lower ROI on its infrastructure. And it may start looking at the many opportunities that this new environment will have to offer.

We realise that it will be years before we see the positive effects (competition, innovation). And we also know that more far-reaching structural changes will then have to be made. But we do believe that forcing Telstra to change and become part of the solution rather than the problem would be beneficial to the country. Positive proof of this is evident in countries like UK, Netherlands, Singapore, New Zealand and even conservative Switzerland.

And so it is against this background that others struggling with similar issues in other countries can learn from the lessons learned in Australia. I fully realise that Australia is not America, Canada, France or Singapore, but as telecoms is one of the most globalised industries there are enough similarities for our experiences to merit attention.

Past events, not just in Australia and New Zealand but in Europe and Asia also, have made me very wary of ‘positive’ action – based on relying the goodwill of the incumbent to either cooperate and/or not to undermine the intent of government policies - unless it is accompanied by a very strong stand against the market powers of incumbents.

Together with a group of American and European experts we are discussing many of the policies that are involved in current developments and the Australian and New Zealand (where the government legislated functional separation – and is making $1.5 billion available for fibre infrastructure) case studies are being analysed.

Paul Budde

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