the era of competition?

This page covers the shape and history of telecommunications in Australia and New Zealand since the beginning of competition in the 1980s.

It covers -

• introduction
• deregulation in New Zealand
• and in Australia
• pay-tv and infrastructure developments
• Telstra and beyond
• policy challenges and pork barrels

     introduction

The period since 1982 has been marked by -

• introduction of competition in the provision of landline and mobile telephone services
• associated privatisation of the publicly-owned (and still dominant) carriers in Australia and New Zealand
• substantial deregulation of the telecommunications sector, with major legislative changes and a move to industry self-regulation (often characterised as co-regulation)
• widespread adoption of the net by Australian consumers, businesses, government agencies and other entities (along with concerns about digital divides and expressions of irrational exuberance in both the public and private sectors)

It has also been marked by a blurring of the PSTN, with differing expectations about ownership, revenue models, directory services, critical information infrastructure, accessibility and the emergence of private networks.

Overall, many Australians - particularly households - still face an oligopoly, with the dominant operators echoing St Augustine - 'give me competition, but not quite yet, and not in a way that will seriously inhibit me'.

     deregulation in New Zealand

In 1987 Telecom Corporation of New Zealand Limited (Telecom NZ) was formed from the telecommunications arm of the NZ Post Office as a 'state owned enterprise' (ie a government business with a commercial focus).

Full deregulation of the New Zealand telecommunications market was introduced in April 1989 and Telecom NZ was fully privatised in 1990 through sale to wholly owned subsidiaries of Bell Atlantic and Ameritech for NZ$4.25 billion. Those companies sold down their stake (by NZ$1.45 billion) in 1991 and further reduced their shareholding in 1993 to a combined 49.6% before exiting in 1998.

In 1990 Clear Communications became the first network to compete with Telecom NZ, with BellSouth New Zealand launching the first competing mobile network in 1993. Vodafone New Zealand acquired BellSouth NZ in 1998.

Telecom NZ launched the XTRA ISP in 1996: Xtra signed up its 300,000th customer in 2000. In 1999, facing stagnant markets and competition concerns at home it expanded across the Tasman by acquiring 78% of AAPT, Australia's third largest telco. It increased that holding to 100% the following year. During 2001 it took a 19.9% stake in Hutchison 3G Australia, set up to develop 3G services in Australia.

As in Australia, there is widespread disagreement about privatisation and deregulation processes and outcomes. In 2000 for example a report (PDF) for a Telecom NZ competitor commented that

After 10 years of deregulation, Telecom continues to dominate the telecommunications sector. In particular Telecom accounts for 75% by revenue of the total market for telecommunications services, and over 90% of the local voice, interconnection and directories sectors. Telecom's profitability has improved steadily since 1989, the company achieving a return on equity of 77% in 1999. Telecom enjoys significantly higher margins than any other major company in New Zealand.

     and in Australia

In Australia the 1982 Davidson Enquiry regarding private sector involvement in delivery of existing/proposed telecommunications services recommended ending Telecom Australia's monopoly. In the preceding year Aussat Pty Ltd, another government agency, had been established to operate domestic satellite telecommunication and broadcasting services.

In practice Aussat's charter restricted it from acting as a competitor to Telecom, including a prohibition on interconnecting public switched traffic with Telecom's network. Aussat's viability was undermined through restrictions on raising capital, of critical importance given tepid government support and increasing costs. It was not until 1985 that Australia's first geostationary communications satellite was operational; by late 1990 it had debts of about $400 million.

The Australian Telecommunications Commission was restructured as the Australian Telecommunications Corporation, trading as Telecom Australia, in 1989. That year saw the last domestic telegram handled by Telecom, with responsibility for telegram operations handed over to Australia Post.

Proposals for a merger of Aussat and OTC (thereby permitting national delivery of telecommunication services in competition with Telecom) were rejected in favour of disposal of the satellite operator to a nongovernment entity that would be allowed to compete with Telecom.

OTC and Telecom were accordingly merged as Australian & Overseas Telecommunications Corporation Ltd (AOTC) in 1992, immediately following the decision that Optus Communications - a private sector entity owned by a consortium that included BellSouth - would be given Australia's second general carrier licence.

Cable & Wireless, privatised after several decades of UK government ownership, took a controlling stake in Optus in 1998 (under the banner Cable & Wireless Optus) before control passed to SingTel in 2001.

Optus was initially allowed to enter the Australian telecommunications marketplace for national long distance and international telephone calls, with other players prevented from entering the general telephone market until 1997 and 'pro-competition' mechanisms - such as guaranteed access to Telecom's existing infrastructure on reasonable terms - meant to ensure its viability.

Telstra also faced competition in market niches such as long distance corporate voice and data services, with AAPT (a spinoff of the local AAP financial data/news service) active from 1991. MCI Communications, later absorbed by the ill-fated WorldCom, was an early major shareholder of AAPT but departed in 1994. New Zealand's Todd Corporation took a 24.5% stake in AAPT in 1992. In 1995 AAPT launched a mobile phone service, using Vodafone as its network supplier, acquired a 50% of Australian ISP connect.com.au Pty Ltd and bought NewsNet ITN. In the same year SingTel acquired a 24.5% shareholding in AAPT.

In 1996 AAPT bought 40% of Cellular One Communications, followed by QNET Communications. In that year it gained a carrier licence, offering long distance services to the residential market and building communications networks for the South Australian and Victorian governments. It subsequently moved to 100% of CorpTEL Communications, its AAPT Sat-Tel satellite joint venture, connect.com.au and Cellular One. US operator Primus acquired Axicorp (rebadged as Primus Telecom) in 1997, gaining a carriers license and expanding into internet services.

In 1999 Telecom New Zealand became the major shareholder (subsequently moving to full ownership); a year later it acquired an Australian national high bandwidth network from Optus and sold AAPT Sat-Tel.

Optus began using its own infrastructure in 1993. On the recommendation of industry regulator Austel UK-based Vodafone was permitted to enter the mobile phone market with an exclusively digital licence in 1992, competing with Optus and Telecom (offering mobile services from 1987). By the end of 1999 Telecom's share of the GSM mobile market had declined to around 50%.

     Pay-tv

In contrast to the US, where the cable television industry was actively challenging the three major free to air broadcast networks by the mid 1980s and possessed a substantial infrastructure, at the beginning of the 1990s Australia had only a handful of cable sites - generally servicing small geographical areas where aerial transmission was poor.

Establishment of a domestic pay-tv sector - with program delivery by cable, satellite and microwave - was seen as a way of satisfying media barons, dealing with embarrasments such as Aussat and potentially providing new telecommunications infrastructure in the major urban centres.

Australian legislation for the introduction of pay-television passed in 1992. Over 1,300 licences had been issued to pay-tv operators such as Galaxy and Australis by 1997 but underwhelming financial performance had seen the industry consolidate around two majors - Optus Vision (a consortium of Optus and various media interests) and Foxtel (a consortium of Telstra, Murdoch's News and Packer interests).

During 1996 Telecom NZ began rollout of a fibre-coax cable network in parts of Auckland and Wellington under its First Media pay television plan. First Media was abandoned in 1998, the year in which the company claimed 500,000 mobile customers connected to its network (climbing to one million in 2000).

     Telstra and beyond

AOTC was rebadged as Telstra Corporation in 1993, trading internationally as Telstra from that year and domestically as Telstra from 1995. Expansion into Indonesia and other Asian markets was not strikingly successful, with the group winding back overseas involvements in 1997-98. In 1996 Telstra recorded the largest profit in Australian corporate history, some $3.8 billion and was partly privatised in November 1997 through sale by the Commonwealth of around 33.3% of its shareholding.

Privatisation followed formal opening of Australia's telecommunications markets to full competition in July 1997. A further 16.6% was sold by the Commonwealth in September 1999; sale of the government's 50.1% stake involves legislation. The new regime featured a single national phone numbering scheme and any-to-any connnectivity requirements, with the expectation that mobile, phones, fixed-line phones and other devices would be able to communicate with each other irrespective of whether the service was provided by Telstra or one of its competitors.

In 1996 Telstra moved across the Tasman by offering services in the New Zealand business market. In 1999 it merged its New Zealand operations with those of Saturn Communications (offering residential connectivity in competition with Telecom NZ since 1997) to form TelstraSaturn. In 2001 TelstraSaturn in turn acquired Clear to form TelstraClear NZ.

In July 1997 the Australian telecommunications sector was opened for full competition with removal of restrictions on the number of licensed operators and anti-competition mechanisms (replaced by general competition law under the oversight of the Australian Competition & Consumer Commission).

By the end of 1998 there were over 20 licensed telecommunications carriers controlling facilities in Australia; several hundred other entities used those facilities to provide services. That had climbed to 99 by May 2002 (with 11 licences surrendered); the Australian Communications Authority estimated that the benefits to consumers of telecommunications services from competition in 2000/1 were between $5.5 billion and $12 billion.

Telstra's recurrent overseas adventures had proved unsuccessful, with withdrawal from some South East Asian markets and major writedowns of joint venture investments such as the $2.7bn Reach undersea cable with Hong Kong-based PCCW. Recurrent takeovers in the software/services sector (eg Solution 6, Sausage Software) have proved disappointing, with Telstra buying Kaz Group in 2004 for over $250 million. In 2004 Telstra paid $636 million for the Australian operations of Trader Classified Media NV: two classified ad print publications, five complementary online sites, two automotive inserts and the Trading Post brand.

     policy challenges

Telstra however retained a dominant position - particularly in the residential market, through ownership of infrastructure - and much public debate centred on

• the advisability and timing for disposal of the Commonwealth government's remaining stake
• definitions of 'basic service' (to be provided by Telstra and competitors, in some circumstances on a subsidized basis).

Telstra management encouraged sale, others called for retention of the stake (or even purchase of private holdings), still others called for various splits of services and assets (with for example public ownership of the infrastructure, to be substantially enhanced to bring broadband to all Australians - regardless of cost).

Industry specialists noted the difficulties facing Telstra's smaller competitors, often perceived to be undercapitalised (or with uncertain support from ailing overseas parents), poorly managed and without much scope for the national introduction of compelling new services.

Optus for example sold its ailing Dingo Blue arm to utilities group AGL for $22 million in 2000; AGL shuttered that acquisition two years later. One.Tel was founded in 1995, attracted high profile investment from the Packer and Murdoch families, expanded overseas and collapsed ingloriously in 2001.





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