Broadband Briefing: How did Telstra end up so powerful?

One of the arguments which Labor uses to justify its NBN policy is that it achieves the ‘structural separation’ of Telstra.

This is argued to be a good idea because it will make Telstra less powerful – and hence increase competition in telecommunications.

It is widely agreed that in the fixed line telecommunications industry, competition is not as strong as it should be – and consumers lose out as a result.

(When I say ‘fixed line’, I am specifically excluding mobile phone and data services.)

We have an unbalanced industry structure – where Telstra is hugely dominant.

Consumers have lots of choices.  If you want a fixed line phone or broadband service, you can call Telstra, or Optus, or AAPT, or Primus, or iiNet, or Internode, or TPG, or many other companies.

But the market is not nearly as competitive as it seems.

Most of Telstra’s competitors do not have their own networks.  Instead, they purchase a wholesale service from Telstra and resell it to their customers.

The idea behind structural separation is to break up Telstra, so that it no longer owns the only network and is also the largest retailer. 

Whether the NBN is the best way to do this is a question for another day.

Today I want to look at just why Telstra is so dominant.

It goes back to a bad decision made in 1990.

The Minister for Transport and Communications, Kim Beazley (who later became Leader of the Opposition) introduced a package of sweeping reforms to the telecommunications industry.

Reform was certainly needed.  At the time there were three major telecommunications companies, all government owned, and it was essentially illegal for anybody else to sell services over telecommunications networks.

The three were Telecom, which provided domestic telephone services; Overseas Telecommunications Commission (OTC) which provided international services; and AUSSAT which operated satellite telecommunications services.

Beazley proposed to combine the two big companies, Telecom and OTC, into one.  Separately, there would be a competitive process to issue a second telecommunications licence, and the winner of the licence would be required to take ownership of AUSSAT. After a period of managed competition, with only two licence holders, Australia would proceed to full deregulation a few years hence.

Beazley’s proposal triggered a battle between him and then Treasurer Paul Keating about the structure of the reforms. Keating proposed a different model: to combine OTC and AUSSAT, and set this company up in competition to Telecom, thus creating two competitors roughly equal in size and market power. By contrast, the Beazley model established a giant which would dominate the industry, much larger than its competitors, with greater financial resources and a much wider range of products.

The outcome of this battle would determine the course of telecommunications competition in Australia for the next two decades. Keating was right. But Beazley won the day. And so Australia ended up with an industry dominated by one enormously powerful company. It was a fundamental policy error which has bedevilled Australian telecommunications for nearly twenty years.