Submission
RE ADDITIONAL TERMS OF REFERENCE ARISING FROM THE
BESLEY INQUIRY INTO REGIONAL TELECOMMUNICATIONS
We would like to make some comments on the additional items under reference.
We should say, at the outset that we did not find that the Besley Report much advanced the state of knowledge or the solutions for telecommunications in regional areas. It rehearsed a range of highly predictable complaints about deficiencies of service and then suggested that further forms of government intervention be considered to palliate the problems.
In general, we should expect both variations in service and in take up of services (sometimes hard to separate) across Australia. We cannot expect to completely equalise these two matters across the whole nation. It is a worthwhile objective to provide telecommunications access and the offer of diverse services to as many Australians as is feasible and to accept some cross-subsidisation as part of that. But this cannot be at any cost. The USO is already extremely broad and expensive. We would argue against further incremental creep in the USO in what will be a vain attempt to stifle all complaints. It will simply create new sets of complainants at the margin.
There is a point at which policy makers and governments have to draw a line on the demands made by one sector of the population or another for treatment that the market does not afford. In this case we have a sector of the population pressing continually for compensation for their own locational decisions and achieving substantial offsets in this process. We do not believe all these offsets have been fully measured. At some point, fairness to the rest of society, which supplies those offsets, has to come into play.
Equally important, in a free society such as ours, is the principle that, so far as possible, people accept and internalise the costs and benefits of the personal economic and social decisions that they make.
If we accept the opposite principle of unlimited compensation for perceived inequity then we are contemplating a very different social and economic structure, one in which wealth transfers through government interventions become the rule and the fruits of individual enterprise and effort are increasingly appropriated.
We are also contemplating a stagnant society, as it is the concurrent existence of individual inequalities and opportunities that provides the dynamic for change and progress. Regional policies the world over have always carried the risk of simply staving off the inevitable decline of one area/industry or another.
REGIONAL COMPETITION
We find the concept of regional competition policies quite bizarre. However, unfortunately, this is not an entirely fanciful proposition. We would draw the attention of the Commission to the interventions of the Government and the ACCC at the local level in the downstream petroleum market, which introduced substantial rigidities without having any apparent beneficial effect in lowering the overall level of prices or curbing the substantial fluctuations or regional variations in prices.
For example, we are not aware that the exclusion some years ago of major oil companies from bidding for a site in Canberra in favour of a new entrant has had any effect on the price which Canberrans pay for their petrol.
The ACCC also regularly prosecutes cases of local collusion by suppliers in products such as concrete and petrol where more distant supply is not practicable.
Regional competition policies therefore can already be applied if the ACCC defines the relevant market sufficiently narrowly, which it has not been reluctant to do. If no distinct market can be identified, even under the restrictive ACCC test, then there seems little point in creating yet another overlapping and artificial category. Appointing a Regional Competition Commissioner to deal specifically with such matters seems to us a waste of public money and likely to create yet another layer of intervention and potential rigidity in the telecommunications market.
More specifically, there are obviously bottleneck facilities in the regions by virtue of the fact that, despite all the interventions by government to encourage competition, it has not been worthwhile any operator duplicating the Telstra local loop. Nor will it be while the main feature of that loop is that it gives rise to more obligations than profits.
The use of newly released wireless bandwidth may, in time, provide an alternative local network to the more densely populated parts of the regions but, in all areas, this will be dependent on the generation of profit. The threat of declaration of such new technologies would be likely to be sufficient to guarantee their abortion. Access holidays are not a solution. They are always grace and favour acts of government and, as such, not to be regarded as binding, especially if they give rise to profits.
PAY TELEVISION
Exclusivity of programming is integral to television broadcasting, including pay television. This is particularly the case with the important television products such as movies and live sport. Exclusivity ensures that the broadcaster attracts sufficient viewers to generate subscriptions or advertising revenue.
The Australian pay TV market currently has several features relevant to the issues raised by the Commission:
- No pay TV operator is yet making any profit and total subscriber numbers are growing relatively slowly.
- We have cable, satellite and microwave delivery systems owned by different operators.
- Much of regional Australia is reached by microwave and most by satellite transmissions.
- The important programming is held mainly by Foxtel and OptusVision but is franchised out, particularly to regional operator Austar.
- The movie programming is mostly held by the Hollywood studios which are few in number, often negotiate as a bloc, favour exclusivity for the certainty of revenue it gives them and treat Australia as a small, residual market (which it is).
- The studios are extremely protective of their product and when and where it is shown as they make much of their profit from the geographical and temporal segmentation of its release.
- Pay TV movie product competes with the cinemas, video and, eventually, free-to-air television.
- Sports product is fiercely competed for by free-to-air stations, which have substantial government protection under the anti-siphoning rules.
- Sporting organizations now derive much of their revenue from the sale of exclusive television rights. It is doubtful that Australia could have staged the 2000 Olympics without exclusivity.
- Free-to-air broadcasters still dominate Australian television viewing and have just been granted new competitive protections by the Government. Contrary to the judgement of the ACCC, they are part of the same market as pay TV.
- The Australian pay TV market is small and geographically self-contained and likely to remain so.
Given the international nature of much programming it is therefore doubtful, in practice that a non-exclusivity law could operate successfully in Australia.
It is worth recalling that the pay TV market in Australia started out with an entirely new operator, Galaxy, but the limited size of the market, the high cost of product, licences, facilities and marketing together with strong competition and regulatory restrictions forced Galaxy out of business within four years. Two of the few competitive advantages it had were an exclusive programming deal with four Hollywood studios and exclusive access to the sports programming of Liberty.
The experience of the US does not seem entirely relevant to the Australian market. Its history and market are different.
For decades, pay TV in the US was a pattern of local and regional cable monopolies, which had a virtual licence to print money. This has begun to change with the introduction of digital satellite television and some other wireless broadcasters. The US market, which is probably 20 times the size of ours overall and many times more in pay TV (with more than 60 % penetration and more than 50% of the television market), can sustain many operators and facilities profitably.
In contrast, we mandated digital satellite television from the beginning of pay TV and also had cable and wireless transmission available. We have diverse facilities but not enough market to support diverse ownership.
Exclusive programming enables subscriber networks to be established. Without the guarantee of exclusivity it is doubtful that we would have national pay TV at all in Australia, let alone any competition. It would simply be too risky. We wonder whether those complaining about the current situation simply want to substitute their own local exclusivity for that which now exists or to cherry pick the product now held exclusively by others. Debate over the public interest in these circumstances, as suggested by the ACCC, would take place in a context of complete commercial uncertainty.
The proposal to prohibit exclusivity for areas not in the operator's service area seems unworkable. How else does an operator establish or extend its service area? Similarly, sub-licensing in unserved areas is no different from the sort of wholesaling that takes place in many industries. Why should this be of concern, especially if it facilitates competition? Galaxy's ability to extend into new service areas and to franchise and to on-sell its exclusive programming to Foxtel, Austar and East Coast Television, helped it to compete and survive far more effectively and longer than would have been the case under the regime proposed by the ACCC. It also enabled the smaller franchisees to acquire wholesale product exclusive to their own regions. The ACCC proposal would be no more than establishing a second licensing layer in the regions
Attempts to introduce such prohibitions now would dramatically affect the value of the businesses in this industry and would also affect the free-to-air stations, which would be seen to be the next in line. It would be far better for the government to refrain from interfering in private contracting and competition (eg anti-siphoning) than to dream up new ways to micro-manage competition. The fact is, this is a very imperfect market and attempts to create partial perfection may weaken rather than strengthen competition.
In short, we suggest that this is an area where less rather than more intervention would be beneficial to competition.
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