The need to communicate remains an integral part of the everyday lives of Australian households, businesses and government offices. However, the ways in which people communicate is changing and having a negative impact on the traditional wired telecommunications industry. Australians now place a greater importance on constant connectivity, and as such the mobile phone is now the dominant form of communication in Australia.
In saying that, wired communication services still form an essential role in society; with the vast majority of Australia’s 8.5 million households having a fixed line telephony service. The Wired Telecommunications Carriers industry is dominated by Telstra, which has the largest network in Australia. Technological improvements and advances in telecommunications have driven substitution from wired services to other telecommunications steams, particularly to the wireless sector during the past five years. For 2010-11,
IBISWorld anticipates there will be fewer than 10.3 million fixed lines delivering a variety of voice and data services. Industry participants will collectively generate $11.1 billion in revenue, representing an 8.6% year-on-year contraction – the Wired Telecommunications industry’s eighth successive revenue decline.
The industry’s deteriorating revenue is a result of a continual decline in the total number of access lines in use during the past five years, particularly residential lines, and a decline in usage demand. For the five years to 2010-11, the number of fixed lines has dropped 1.8% per annum while mobile subscribers have grown 8.1% to approach 29.2 million. Since 2008, there have been a greater number of residential households opting to cancel their fixed access line, preferring to rely on their mobile and naked broadband services, thus avoiding the costly fixed access line monthly fee. IBISWorld expects that the number of households cancelling their fixed access lines will increase in the future and fixed lines in use will fall below 10 million by 2013.
The ‘wired’ industry will remain entrenched in the decline phase of its life cycle over the coming five years. Industry revenue is forecast to decline at an average 5.0% per annum during this period; revenue is forecast to fall below $10 billion in 2013. This will represent under-performance relative to the entire telecommunications sector, the sign of an industry in decline. Substitution trends will continue to be the major driver of the decrease in revenue.
Consumers will continue their switch from wired services to wireless services, but there will also be an increased substitution threat from digital data services, particularly VoIP. Prices will also play a part in increased substitution, with the wired telecommunications providers being heavily regulated in terms of call pricing and access pricing through the ULLS.
The Federal Government’s $43 billion NBN could be the initiative to deliver improved competition and innovation within Australia’s entire telecommunications sector. The NBN will provide leading edge services for all fixed line wired services, particular services such as Pay TV, data and long distance and international calls. However, the NBN will also drastically improve substitute services such as VoIP, it is the ultimate view that all communications will become digital and thus VoIP will replace the traditional wired voice call.
Telstra, the dominant industry player, has acknowledged that it has under-invested in its fixed copper network. Significant capital expenditure is required to improve services, but Telstra has been remiss in the past as it would have been investing money in an area of falling industry demand and lower price margins. It made better sense for Telstra to invest in the growing sections of the Australian telecommunications sector and as such Telstra has instead been heavily investing in its Next G wireless network. The NBN will bring an overdue upgrade to Australia’s wired network.
Telstra and the NBN Co. appear to be co-operating and share the same long term view of how the PSTN will be transitioned into the economy. It is now a question of coming to an agreement over the future cash flows, and value, that the PSTN is actually worth. This is still being thrashed out in meetings, with the future spectrum allocations and potential divestment of Foxtel still hovering in the background, no doubt being used as leverage during discussions.
It is important to note that the NBN build is not solely the realm of the telecommunications industry. The Australian Government’s decision to launch the $43 billion NBN is facilitated by the belief that an open broadband infrastructure is essential to the digital economy. The NBN will benefit the entire nation and deliver massive social and economic benefits to health care, education, energy and the environment. The NBN Co. has embarked on a trans-sectoral campaign, convincing other sectors that an open network will give them the tools to save money and improve their service.
In seeking input from other sectors the NBN Co. is at pains to point out that it will not be another telecommunications provider, but simply an infrastructure owner. The NBN Co. will only provide basic ‘level 2’ services, and not perform any services in advanced layers which are involved with switching and routing, connections, security, applications and quality of service. However, current telco participants are concerned with the announcement that the draft legislation provides an exemption to the insistence that NBN Co must not supply any advanced layer 3 and above services. The draft legislation proposes that the Communications Minister may, if appropriate, allow NBN Co. to offer retail services directly to certain end-users, for example government agencies.
Telco participants are of the opinion that if the NBN Co. provides layer 3 services, i.e. the network layer providing an IP stream, would create another ‘Telstra’ type monopoly, which currently enjoys enormous scale benefits and dominates the Australian telecommunications sector. The telco industry are pushing for the NBN Co. to limit its services at the layer 2 level, thus enabling a multitude of providers to offer layer 3 IP services. This is creating some friction, as non-telco participants are raising concerns that the NBN Co. is becoming too telco-centric instead of looking at the large trans-sector picture.
Non-telco participants are expressing concerns that by not offering layer 3 the NBN Co. will actually stifle the majority of trans-sector innovation that is integral in a flourishing digital economy. They raise concerns that by having to rely on telecommunications carriers for the IP infrastructure that a bottleneck scenario will develop. The implementation of the NBN is designed to realise benefits to the entire Australian economy, not just the telecommunications sector. How the NBN Co. decides to position itself to best achieve that goal, whilst also maintaining a hands off approach, is still being hotly debated at conferences.
Household formation provides a natural increase in demand for access lines. While substitution will continue the shift from fixed line services to mobile telephony products, growing household demand for broadband services is stemming the decay in demand for fixed line access. The majority of households still prefer a fixed phone line as the basis for internet access. However, this will soon change with the rapid emergence of naked DSL and faster wireless internet services.
Legislative Compliance Requirements – Wired Telecommunications Carriers
The industry has undergone profound changes in recent years as a result of changes in the government telecommunications policy. Despite the move to an open market regime, the regulatory backdrop is still an important variable influencing the performance of the industry. ACCC pricing regulation and the final outcome of the NBN will have a dominating influence over the future performance of the industry.
Continued technological advancement increases the size of the telecommunications revenue pie, as the emergence of new technologies and advancement of current technologies (e.g. using compression technologies, such as xDSL, to increase the functionality of the copper loop) leads to an increase scope for data and communications service to be applied in new markets.
Barriers to entry in this industry are high and are decreasing.
Following the removal of carrier restrictions in 1997, there was an explosion in the number of licensed carriers from three to just over 100. Self regulation was supposedly one of the main tenants of the new regulatory regime that was theoretically designed to allow and encourage open competition in the industry.
Despite the fundamental changes that have occurred in the regulatory backdrop, there still exist a number of barriers to entry, many of which are associated with the inherent characteristics of the telecommunications sector. The major barrier is the highly capital intensive nature of the telecommunications business with its extremely high level of infrastructure costs. It should be noted that technological innovations are reducing the infrastructure costs of entry.
Other barriers revolve around the established position of the previous statutory monopoly. Telstra still maintains a large market share and enjoys considerable cost advantages arising from economies of scale and scope. Telstra also in effect still maintains control of essential or bottleneck facilities. Telstra and Optus account for approximately 98% of directly connected fixed line services. The issue of access rights and declared services for new entrants is of paramount importance.
The vertically integrated operations of Telstra poses an additional barrier, as it is able to gain a competitive advantage by providing bundled service offerings as well as a wide array of telephony products and services in line with growing consumer demands for ‘one-stop shopping’.
It is important to note that barriers to entry will vary between the various segments within the Wired Telecommunications industry. For example, barriers to entry for switched service providers in the international direct dialling (IDD) market segment are lower than the local call market as a result of lower interconnection costs and more concentrated call patterns. Thus barriers to entry are generally considered to be very high given the nature of the local call market, various geographic constraints and the existence of Telstra’s PSTN as the only ubiquitous fixed local access network within Australia. In comparison, entry barriers are lower in the IDD market segment as evidenced by the entry of a number of new participants in recent years.
The Australian Government’s $43 billion National Broadband Network will dramatically alter the future make up of the Australian Wired Telecommunications industry. The NBN Co. will operate a wholesale only fibre network, in direct competition with Telstra’s PSTN. The NBN Co. will dilute the dominance that Telstra has over the Australian telecommunications sector, by positioning Telstra as an access seeker, just like the other Wired Telecommunications Carriers.
Robert Bryant is the general manager of business information firm IBISWorld.
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