Chris Barton: Aussies offer lessons on unbundling

"They're a bit like a delinquent child. You have to be positive when they start behaving properly. But they still have a long way to go."

Optus director of corporate and regulatory affairs Paul Fletcher is talking about Telstra and the progress the incumbent Australian telco has made along the deregulated path.

In Sydney with a couple of other New Zealand journalists as a guest of Telstra, we're here to see first-hand local loop unbundling - the freeing up of the copper wires to Aussie homes and businesses to competition - in action.

Australia has a three-year headstart on New Zealand, which could begin the process early next year. To show us what is possible, Telstra has arranged visits to unbundled exchanges, interviews with its wholesaling staff and, surprisingly, interviews with the competition. Even more surprising is that when Optus asks to do the interview minus Telstra's PR minders, Telstra agrees.

Earlier, in the North Sydney exchange, we are shown the racks of perforated white blocks and the tangled strands of green tie wires that reroute Telstra's copper from the main distribution frame to the locked interconnect room. There, tall beige and grey cabinets of competition - Optus, Primus, Request and even Telecom's Australian arm AAPT - stand like sentinels amid the hum of air conditioners jealousy guarding their hard-won cargo.

Fletcher immediately gets down to the nitty-gritty of unbundling - the price Optus pays Telstra for an unbundled copper wire. The exact amount is bound by confidentiality agreements, but Fletcher points to the indicative pricing set by the Australian competition watchdog, the ACCC, which is around A$30 a month per wire. Given the monthly rental consumers pay for that wire to deliver their phone services, it seems a lot.

Fletcher agrees, pointing out that there are other costs too - the rental of space in Telstra exchanges to house its equipment and the backhaul or "data tails" Optus often needs to get from the exchange to its network. On the positive side, Fletcher notes that the ACCC is reviewing those prices and for suburban areas is now proposing A$22 a month.

Despite the high monthly rental, local loop unbundling has enabled Optus, through its subsidiary XY Zed, to offer high-quality synchronous 4-megabit-per-second (Mbps) data and voice services to businesses. The fact that XY Zed's business is doing quite well and that it has now placed its equipment in 100 exchanges is testimony not just to the benefits of competition but also to the latent inefficiency of Telstra's monopoly telco network.

In seeking better prices for access to Telstra's raw copper wires, Fletcher wants the ACCC to acknowledge Telstra has been given "a massive free kick" - namely, "a hundred-plus years of tax-payer funded infrastructure".

But he's also a fan of what local loop unbundling can bring and its advantage over wholesaling. Which is that despite high fixed costs in placing the digital subscriber line gear into the exchanges, once there the equipment enables Optus to get its variable costs down as it builds in scale. In contrast, reselling Telstra's digital subscriber line products means costs increase with every customer.

But herein lies one of the paradoxes of local loop unbundling - wholesale pricing can inhibit its uptake. Essentially that's what has happened in Australia's residential market. In rolling out its digital subscriber line (fast internet) service, Telstra has also made it available at attractive wholesale rates to other internet service providers. So attractive that reselling Telstra's fast residential internet makes more sense than going down the unbundling path.

Later, Yasmin Dugan, head of business development for Telstra Wholesale, tells us the advancement of the company's wholesale business was a matter of survival. She says the company once thought much the same as Telecom is thinking now: "It's my network, why should I let anybody else on it?"

But in 2000 it saw the light - helped by the ACCC holding the unbundling gun to its head - and began actively developing its wholesale business, now worth A$2.5 billion in revenue a year.

Further evidence of the flowering of Telstra Wholesale is found in the deals Dugan is cutting with partners such as NEC Nextstep for business-quality fast internet and with Personal Broadband Australia for an "infill" wireless fast internet product to supplement its existing offerings.

Dugan points to numerous threats which brought about the change: the "overbuilding" of networks by competitors which saw transmission prices plummet as new entrants vied for customer traffic; the recognition that if competitors won customers to their own bypass networks, Telstra would never see that business again; and the awareness that it was better to control your own destiny rather than have controls foisted on you by a determined ACCC.

The latter realisation led to Telstra implementing line sharing - a specialised form of unbundling - in July this year, ahead of the ACCC mandating its introduction. Under line sharing, also known as spectrum sharing, the high- frequency signal sent down the copper wire to transmit data can be assigned to a competitor while leaving the low frequency used for voice with the incumbent.

It's particularly useful for internet providers or specialist data providers wanting to provide data services and not voice and gives consumers greater choice. At present it's not one of our Commerce Commission's recommendations for unbundling and in Australia was introduced as a second phase of the unbundling process.

Fletcher points out that in some jurisdictions line sharing has been introduced at a zero monthly cost to the new entrant - the argument being that the incumbent is still getting its line rental from the consumer for voice service.

The Australian experience provides some good lessons for New Zealand as it embarks upon its unbundling saga. Three questions spring to mind: Will commissioner Douglas Webb have the wisdom to set the right price for unbundling rentals so competition flourishes? Will local ISPs - with the exception of ihug largely absent from our unbundling debate - lobby Webb on the need for line sharing? And when will Telecom, like Telstra, see the light?

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