Macquarie Telecom's Matt Healy

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Macquarie Telecom's Matt Healy at CommsDay Melbourne Congress 2013

Macquarie Telecom's Matt Healy at CommsDay Melbourne Congress 2013

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  • If you had spent the last 6 years or so on Mars and then landed here today, you’d be forgiven for thinking that the only telecoms issues of note where those that had the initials N. B. N. in them. And FTTN and FTTP. DSL. VDSL. Likewise, when we talked about “Convergence”, it was generally around over the top providers, content and carriage demarcations, streaming, IPTV and the free to air models etc.What I’m going to talk about today will posit some likely controversial views around why there is a need to intervene in the market and regulate aspects of mobile services in Aust.Because in the last 6 years or so, whilst NBN obsessed (me too), rarely did we fold mobility into these discussions. Broad Band was discussed, but the question of “where we are at” in terms of a competitive framework to deliver strong consumer outcomes wasn’t really in the mix. We looked more at the problems of competition in fixed – vertical integration , incumbent, rise of BB…. If we did look at Mobile, in some ways it looked pretty healthy:It hurts me to say it, but no matter what I might think of his impact of the Australian scene, you have to admit that the NextG network was one (only) positive legacy for the amigos at Telstra. Also during that time, we had 4 MNO. Each seemingly ‘deep pocketed” (SG Govt, HK $, EU incumbent, T).But if you did land from Mars today , what would you see?Well as I hope I demonstrate over the next 15 or 20 mins, we don’t see a healthy market at all. We don’t see the kinds of competition outcomes that we expected and we see a section of the sector that has suffered from the impact of market power and a regulator with a blind spot. But first, as ever, lets dive a bit deeper into the history and context.
  • Why do we even consider regulation on mobile networks I here you ask?A set of arrangements that balance public resource (spectrum) going to private interests (MNO), need to ensure that public interests protected. Also small matter of $ from selling spectrum so framework involves regulation. ACMA type regie we heard about from Chapman but also access reg – what I will be talking about ACCC.As with every developed or in deed developing telecommunications market, because of the importance of communications to the broader society, policy makers have ensured that their relevant regulatory authorities have oversight of mobile telephony markets. This flows fromthe “public good” notion of the use of “our” spectrum, the need to have licensing and the objective of promoting good consumer welfare outcomes through privatisation of the spectrum the introduction of sustainable competition and rivalry between firms. Also reflects the fact that there is a certain number of networks that are sustainable. An issue I’ll return to. Nothing really new here and I doubt that any of you would have a significant problem with this – unless Carlos Slim is in the room?So in terms of the Aust experience, after a very significant review 2003, MTAS was declared. Just covered voice calls. Mapped every other country. Series of glide path rate reductions put in place that apply up to mid next year, established a pricing methodology and model. Did some competition analysis around the VHA and Hutch deal as well as around some infra sharing etc.But I think a lot of the more recent market crystal balling that the ACCC has done is already looking really out of whack. And I don’t mean WACC….What was expected and what was predicted and was has unfolded. ON the fwd looking front, ACCC and many others got it wrong.Check some of these stats:Subs? Way outUsage expectations? Way out.Revenue?IS this COMPETITION AT WORK????
  • Absolutely not.The land grab for mobile customers is almost coming to an end and it doesn’t look good for consumer choice going into the future. Reports today in a competitor journal to our beloved commsday which will remain nameless suggests that Subs have plateau and indeed may be dropping. So if we have arrived at a “stable” mkt structure what does it look like?So as at today, Telstra’s market power, measured any way you like, has been entrenched. Unlike other countries, MVNOs are finding it very difficult to provide an “interim level of competition” and choice here. Consolidation is occurring. Investment is lacking and prices are going up. I’ll come back to MVNOs and their importance later.Lets check the facts.
  • Hopefully this is readable. Some more facts. On the dstraight up mobile situation:The picture it paints is of Telstra having 50% of the market – revenue or profit and climbing – perhaps pickin up 25,000 subs a month leaking from other operators.30% to Optus and 20% to VHA.Lets dive in to some recent trends:
  • Lets take it up a level to include ALL revenues. This is where the landscape looks really uncompetitive.And lets fold in other revenues like fixed. After the decade of DSL competition and regulation of the fixed network, we see a bleak picture where Telstra has 82%of the NPAT of the 3 main operators.It has rising profit margins, increasing revenues increasing shares of the pool and margins that are not akin to any other “competitive” consumer market. If we then fold in all other operators and look at Telsrta’s share of the profit pool, it get higher – touching 90%.
  • It has used these un-parralled resources to get greater coverage and a bigger slice of the available spectrum.In deed, it saw off the possibility of it being precluded from buying significantly more spectrum than anyone else after the digital dividend spectrum and 4G auctions were flagged. It did this through good luck more than anything else.It flagged its interest in 4G when it did the NBN deal. A component being that it could line up for 4G auctions. And here is another sad tale of poor consumer outcomes despite good policy intentions. In this instance the outcome of trying to undo vertical integration and mkt power on the fixed networks, looked to ensure greater participation in the 4G auctions. Didn’t pan out.But good policy around who could bid for what was undermined by political fiscal necessity. Ie a budget black hole to fill. So a competition “wind back” occurred right there.
  • Some more statsWhilst we have been NBN fixed line obsessed, fiddling, mobile has crept up the revenue charts.A bit hard to read this ACMA slide but essentially says that the mobiles part of telco consumer bundle is now the largest by revenue.
  • But not surprisingly, the punters love mobility. And because they love it, policy makers, ie Canberra, have felt obliged to ensure that the city folk get just as good as the city people. And this has led to yet another wrinkle in the policy and competition framework. Regional mobile tower funding has more recently only gone to Telstra. Worst eg is in WA. The Country and bush divide can only be bridged by subs. unachievable without subsidy. So we have our “mobile black spots:” federal Govt funding initiatives…
  • Interesting that one of the first policy proposals from LNP during the election was actually mobilesNationals have an interest here. Sick of no choice in the regions.But Telstra recipient of funding Network effect kicks in – the bigger you are the cheaper it is for you to upgrade,WA regions Govt built. But no choice.Major floor.
  • 4G/LTE networks which will soon be upgraded to LTE-A networks will provide services even more comparable to the fixed network. We understand that Telstra no longer making 3G investmentsSo whats to be done?Wholestic look at mobiles – partly underway with ACCC review, but need more.Compelling arguments that:regulatory focus must shift from the circuit switched fixed network to the all IP wireless networkwireless networks are under-regulated
  • We think 3 things need to be looked at.Mandated MVNO resale offerings. Current data/wireless broadband carrier offerings are deprecated and DO NOT include 4G/LTE except in limited circumstances. Foreign precedents in a range of markets including EU, China, Asia support MVNO frameworks to increase competition with consolidation in infrastructure players. Such frameworks provide quality exemplars for access, pricing, QoS, numberingDeclaration of mobile bitstream.Strong case for new mandated service offerings including mobile bitstream/wholesale unbundlingEquivalence of access. Service oriented interconnection (SOIX) to mobile networks to be provided to MVNOs/resellers rather than inferior connectivity oriented interconnection (COIX)
  • So this is the nub of it, the Telstra mobile network outside of concentrations of population, exhibits monopoly characteristics. It is a botte neck - built via subsidy because not economic to have competing networks given scale. And look at those past slides re deep pockets, sunk costs, customer share, bundling options…no one in a rational state of mind is going to take it up to Telstra. Lets not forget that the Gov was prepared to pay some $11M to shut Telstra out of a monopoly position and that was with the “Stick” of saying it no 4G.And indeed, the new Govt policy proposal on black-spots funding only noted a “preference” for open access.The door is well and truly open for the Govt to bequeath T with further $ to expand its network, entrench its market power all in the name of insuring the LNP people get city quality service.What happened to Competition? Regulator needs to step in.MVNOs provide an important choice Eg bundle with other offerings (just like T)Re-cut price offeringsPlenty of functionality- monitor usage, control costs, diff handsets…This is actual choice.
  • So MVNO is a “simple” resale offering that is part of reg framework in other jurisdictions – acknowledges brings service choice, HK mandate for 3G and 4G.Whats the next rung of infrastructure competition?If MVNO is a bit like DSL resale (ie reselling an underlying Telstra copper service), whats and the next rung of, competition in the fixed sphere is ULL and installing DSL for your own BB. What’s the mobile equivalent? mobile bit stream. did you know that when you acquire a wholesale MNMVNO service from an operator at the moment, its “end to end”. So if I buy MVNO, I cant use any of my existing fixed network. I might have international capacity, content, applications hosted onshore, billing functionality…But they are not able to be used – I have to buy the the service from the MNO and re-badge it.In the car world, I might just need the engine and the gearbox, but I’ve got the chasis and wheels and power steering. But I cant use it. I have to by the MNO jallopy.That’s not compettiive.A mobile bit stream reg would solve this.
  • What does it look like?Key messages:Transition to NBN makes competing with Telstra even harder!* No threat to Telstra’s NBN payments under Coalition’s policy* Telstra already using its “NBN war chest” e.g., tech funds
  • With any overarching reg framework, when you are dealing with T, you need to have an equivalence frameworkThis is to ensure that the objective of the reg – that operators have equal opportunity to participate in the market, is there.We’ve learnt that from the SSU and NBN work.Underpins effective access reg.
  • In a technical sense, it ensures ability of competitors can access inouts that allow for differentiation all beit with the MNO receiving adequate compensation.No easy feat, but must be tackled.
  • Key messages:We are calling for a review of industry policy and regulation to protect and promote competition and maximise consumer benefits in the transition period.Must get the structure right up front.Lets do 2 things:Recognise the reality of mobile’s importance and relevance to competition.Develop a competitive market for NATIONAL competition just as we are doing for NBN.If we ignore the Mobile component, then through consumer demand for bundling and 1 bill, we will see fixed and mobile linked by T in a manner that undermines comp.To undo this “after the fact’ is too hard.If we know anything from the privatization of T it is that you have to get it right “up front”. Otherwise we are doomed to replay the competition failiures of the past.


  • 1. 0 Future Mobile Regulation Matt Healy, October 2013
  • 2. 1 • Fixed network, NBN centric last 6 years • “convergence” seen through eyes of carriage/content or video/TV/internet. Not so much “fixed and wireless” • Trujilo – “done good” with NextG • 4 years ago 4 operators – “surely that’s infrastructure competition!?” • Regulatory forbearance on mobiles punctuated by delayed MTAS regulation • But where have we arrived at? The context
  • 3. 2 Underestimating mobile and the need for mobile regulation • ACCC decision on VHA in 2009 - estimated 4m mobile broadband users by 2014, yet ABS statistics show 17.4m subscribers with internet access in 2012. • ACCC estimated 10 TB in annual mobile downloads in 2011-12, yet ABS usage estimates were 13.7 TB in Q4 2012 alone and growing rapidly! • Mobile represents 50% of industry revenue in 2010-11 and trend has continued strongly. • Yet current wholesale mobile market is not effectively competitive, with weaker competition threatening consumer interests. What happened with past regulation?
  • 4. 3 Mobile competition in Australia is in trouble • Telstra is building market share and heading towards dominance. Largest single customer network (15.1 million) and revenue > $ 9 billion. • MVNOs disappearing fast, e.g. Kogan mobile, Redbull, Crazy John’s, Savvytel. • Operators like VHA and now Optus saying no more MVNO deals. What does the Competitive Environment look like?
  • 5. 4 Telstra dominant, and getting stronger! Overview of major MNOs Carrier Ownership No. of Subs Market share (% of Subs) Mobile revenue Market share (Mobile Rev %) Telstra ASX Listing 15.1m 49.3% $9.2 Billion (FY ending June 2013) 48.2% SingTel Optus SingTel 9.5m 31.1% $5.711 Billion (FY ending March 2013) 29.9% Vodafone Vodafone (50%) and Hutchison Telecom (50%) 6m 19.6% $4.098 Billion (FY ending December 2012) 21.9%
  • 6. 5 Telstra share of ALL revenues (fixed & mobile) 66% versus 23% for Optus and only 11% for Vodafone Share of total revenue between major carriers Telstra SingTel Optus VHA 2013 2012 2013 2012 2013 2012 Total revenue 25,678 25,368 8,934 9,368 4,098 4,594 Share of total revenue 66% 65% 23% 23% 11% 12% EBITDA 10,629 10,234 2,381 2,357 355 645 EBITDA margin 41% 40% 27% 25% 9% 14% Net profit after tax 3,863 3,424 1,606 1,802 (818) (351)
  • 7. 6 Service coverage almost 100 percent with 3G coverage very similar to 2G coverage. Telstra deploying LTE to 85 percent of population by end 2013 Population coverage Carrier Technology Pop coverage (aggregate) Telstra • GSM-900/1800 (GPRS, EDGE), LTE • 850/2100 MHz UMTS, HSPA, DC-HSPA+ • 1800 MHz LTE 99% SingTel Optus • GSM-900/1800 (GPRS, EDGE) • 900/2100 MHz UMTS, HSDPA • 1800 MHz FD-LTE, 2300 MHz TD-LTE 97% VHA • GSM-900/1800 (GPRS, EDGE) • 850/900/2100 MHz UMTS, HSDPA, DC-HSPA+ • 1800 MHz LTE 94%
  • 8. 7 Mobile revenues growing strongly now over 50 % and likely to be 60- 70% by 2016/7 Share of Australian telecoms industry revenue Source: ACMA, 2012
  • 9. 8 Was 4G the tipping point? Fewer problems with latency: 4G networks capable of delivering speeds 25 times faster
  • 10. 9 • People want it! • Rapid transition from fixed lines to mobiles – 48% of Australians identify the mobile phone as their most used communication device (ACMA- commissioned survey, May 2012.) • Not available everywhere in Australia yet – mainly in metro areas • Telstra is the dominant supplier of 4G. – Optus and Vodafone have to play catch up. Today
  • 11. 10 • Wireless services are at the heart of delivering communications services to end-users in many areas of the country. • We need effective regulation of Australia’s wireless networks is essential to ensure that consumer interests are protected. Need for change - the future of access is wireless
  • 12. 11 In addition to issues covered by the ACCC’s MTAS review, Macquarie considers that mobile regulation should include 3 key elements to foster competition, namely: • Mandated MVNO resale offerings • Declaration of mobile bitstream • Equivalence of access Future Mobile Regulation
  • 13. 12 • Current data/wireless broadband carrier offerings are deprecated and DO NOT include 4G LTE except in limited circumstances. • Foreign precedents in a range of markets including EU, China, Asia support MVNO frameworks to increase competition with consolidation in infrastructure players. • Such frameworks provide quality exemplars for access, pricing, QoS, numbering. • Provide a basis for new market entry if desired Mandated MVNO resale offerings
  • 14. 13 • Point to point layer 2 Ethernet connection between end user device and point of aggregation/NNI • Uses 4G/LTE radio access and mobile backhaul network to provide end to end wireless Ethernet service • Similar in technology to NBN Co fixed wireless access (NWAS) product with connectivity the same/similar • Conceptually no difference between a IP packet requested and delivered on a fixed or mobile IP network What is mobile bitstream?
  • 15. 14 Mobile Bitstream Local Access Bitstream and Proposed Wireless Bitstream Services
  • 16. 15 Equivalence of Access Source: Telecom Italia, 2010 • Important to provide access which permits MVNOs/resellers to provide “carrier grade” voice/multimedia services over IP interconnection. • Service-oriented interconnection (SOIX) to mobile networks to be provided to MVNOs/resellers rather than inferior connectivity-oriented interconnection (COIX). • SOIX is interconnection service aware (eg voice etc) while COIX linking is based on simple IP connectivity and is not interconnection service aware
  • 17. 16 Equivalence of Access Important to provide access which permits MVNOs/resellers to provide "carrier grade" voice and/or multimedia services over IP interconnection Source: Telecom Italia, 2010
  • 18. 17 • Macquarie considers there is need for early review of mobile regulation by ACCC and Government. • Lack of competitive mobile offerings, especially 4G/LTE, will reduce competition including in fixed market. Impact could occur quickly, unwinding decades of competition policy. • Regulation should embrace convergence, shift focus from legacy circuit switched fixed network to all IP networks including wireless. Ex ante regulation is required. • Fixed and wireless data services should be regulated in a broadly similar way. There are no technical impediments. • Opportunity is now to establish new competitive markets for mobile broadband services in the LTIE. Summary