1. National Broadband Network: Some Big Policy Issues

2. 7 April 2009: a very significant announcement Substantial increase in spend Government committed to $43 bn project Previous proposal cost approx $15 bn Under previous proposal Government spend was $4.7 bn Govt to start new business Majority Govt owned NBN co to compete with Telstra and others Reversed previous direction of policy – under which Govt capital withdrawn from telecoms industry Major regulatory measures foreshadowed Telstra to be subject to substantially tougher regulation Biggest change in over 12 years 1.How has the current system failed to meet its objectives? 2.How important is the growth of broadband? 3.What are the priority issues to turn the announcement into reality?

3. Has the current system met its objective – of driving competition? 3 MobileFixed Line Opening Market Structure (1992) Telstra with small presence Optus, Voda given same GSM licence as Telstra Telecom and OTC combined to create massive Telstra New entrant Optus started from zero Regulatory Mechanisms AMPS phase out 2000 Competitors given legal right to ‘access’ Telstra network Closing Market Structure (2009) Competitive 3 players (formerly 4) all with own networks Market shares ~ 41%, 32%, 27% Telstra still dominant Market share > 70% in most services Fixed line EBITDA margin > 50% Results for Consumers Innovation: GSM, 3G, content services etc Falling prices, high take up Less innovation Price falls mainly due to regulation

4. Telstra’s Vertical Integration is a particular problem in today’s market Retail customers Telstra’s retail competitors eg Optus Telstra Telstra Networks Telstra Retail Telstra Wholesale Sells retail services Sells wholesale services Because Telstra is vertically integrated, it can undermine retail competition in a way that the current regulatory system cannot control effectively Telstra can refuse to sell services to its retail competitors – eg Business Grade DSL – Telstra refused to sell to Optus for a year Telstra can provide higher performance standards to its retail customers than wholesale customers – eg connection times Telstra can impose retail-wholesale price squeeze – eg (1) when Optus entered residential DSL market in 2004, Telstra reduced its entry level package price from $59.95/month to $29.95; eg (2) in December 2005 Telstra increased wholesale line rental prices by $3.45 while not changing its retail line rental prices

5. Case study: Telstra’s use of its market power to suppress the take up of broadband Optus enters DSL market, TLS drops price High retail prices until Optus’ entry in 2004 Retail-wholesale DSL price squeeze in 2004 Capped speeds at 1.5 Mbps for ADSL1 No ADSL2+ except where competitors had initiated, until Feb 08 How Telstra choked off take-up:

6. Today’s broadband market still dominated by Telstra – but unbundling is a bright spot Total Broadband Market ~6.5 million Broadband on Telstra’s network 4.9 m Telstra retail broadband (HFC, DSL, wireless) 3.2 m DSL via reseller 1.7 m DSL via unbundled service ~ 1m Other (Optus HFC, Unwired etc) ~ 0.6 m Broadband Market mid 2008

7. Transition to fibre based networks Today Copper from exchange to home With unbundling, either Telstra or competitor can install DSLAM in exchange and use copper to deliver DSL FTTN Fibre from exchange to node Copper from node to home Telstra Exchange Telstra DSLAM Competitor DSLAM Fibre Copper wire Distribution Pillar Copper wire Customer Home Telstra network Competitor Network Telstra Exchange Fibre Node Copper wire Customer Home Telstra network Competitor Network Fibre

8. Telstra sought to use transition to secure a new monopoly Aug 05 Telstra offers first deal: 6 Mbps network to 98% (no technology specified) Nov 05 Telstra offers second deal: 12 Mbps FTTN network to 4 m premises (~46%) Mar-Aug 06 Telstra-ACCC negotiations re ‘special access undertaking’ – fail Mar 07 Labor announces policy: $4.7 bn for 12 Mbps to 98% Mar-Jun 07 Telstra-Coonan negotiations re NBN price – fail Nov 07 Labor comes to power Apr 08 Conroy commences NBN RFP process Nov 08 RFP closes – Telstra fails to lodge compliant bid Apr 09 Govt announces RFP abandoned, it will build $43bn FTTP network

9. Private Secto Investors The way forward: structural separation of NBNCo National Broadband Network (NBNCo) Government Own < 50% initially Individual caps at 20% 51%+ owner initially Will sell down after 5 years Sells services Other Retailers Private Sector Investors

10. Key aspects of pre NBN regulation remain to be resolved  Will Telstra be subject to ‘functional separation’ or even ‘structural separation’?  Will Telstra be required to divest itself of  HFC network?  Stake in Foxtel?  Will price setting process be streamlined?