A Report to the Minister for Communications, the Information Economy and the Arts on the State of Competition in Australian Telecommunications Services One Year After Deregulation

Abstract

On 1 July 1997, Australia fully opened its telecommunications markets to competitive entry. What has happened? Has competition arrived? How would we know? If competition is not yet evident, why not? This report, commissioned by Telstra Corporation Limited, was submitted to the Minister for Communications, the Information Economy and the Arts, Senator the Hon. Richard Alston. The report, by an outsider familiar with telecommunications deregulation elsewhere in the world, answers such questions on the basis of the limited evidence available as of the first anniversary of the end of Australia's telecommunications duopoly. IN the course of rendering this evaluation of the state of competition in the Australian telecommunications marketplace, the report also identifies areas where regulators must continue to introduce policy reforms.

The report's assessment is that Australia is, on the whole, making the grade. In product markets open to competition and largely free of residual regulatory distortions, such as international direct dial (IDD), one observes robust competition. If one were awarding grades, those markets would get an “A.” The same is true of the markets for newer services, such as Internet service, whose providers have sprung forth, seemingly spontaneously, without preexisting regulatory oversight.

In other product markets, however, remaining regulatory policies cause substantial deviations from the conditions one would observe in competitive markets. For such products, it is consequently much harder to assess, after only one year, the success or failure of the 1997 policy shift. The problem in those markets is not market failure, but a failure to rely on marker forces. The most notable example of such regulatory distortion is local exchange service for residential customers. A simplistic assessment might conclude that such markets deserve an “F” for their lack of competitive entry and thus demand more invasive regulatory action to “jump start” competition. Such a policy prescription, however, would not be likely to convert a failing grade into a passing one. Policymakers are not likely to achieve satisfactory—let alone exceptional—levels if market performance in the supply of residential local exchange service by adding to one regulatory distortion another layer of supposedly countervailing regulation. To the contrary, true competition will manifest itself in such markets only when policymakers correct the underlying distortions that prevent a competitive market from operating.

This report is organized in three principal parts. Part I provides and overview of Australia's regulatory structure at the time of the July 1997 watershed and examines what the relevant parties expected deregulation to accomplish and when they expected those accomplishments to manifest themselves. An important part of that exercise is to ask two questions. First, were those expectations reasonable? Second, what factors are responsible for any expectations that have failed to materialize?

Part II assesses the state of competition in Australia's telecommunications markets one year after deregulation. It reviews the available data and anecdotal evidence relevant to the competitiveness of the major product markets. Not surprisingly, the state of competition differs across those markets. Overall, however, Australia is on track to make the transition to competitive telecommunications markets, and it compares favorable with other industrializes nations in that regard.

Part III sets forth an agenda of further regulatory reform that will be necessary if Australia is to complete the full transition to open competition upon which it embarked in July 1997. Specifically, the report recommends that Parliament commit itself to eliminating any remaining regulatory impediments to competition and to forbearing from creating any new such impediment in the name of “jump starting” competition. The Australian Competition and Consumer Commission (ACCC) similarly should follow such principles in administering the policy that Parliament lays down. The government's credible commitment to those goals would permit truly competitive makers to develop and would avoid, as the alternative, “managed competition” in which regulators would, for years to come, actively intervene in matters of entry, product definition pricing, and so forth.

One should not unrealistically expect that overnight, or even in a single year, the full benefits that flow from reliance on the competitive process will manifest themselves. Such an expectation certainly would not square with actual experience in the United States, which has undergone a series of fits and starts in implementing similar policies to deregulate telecommunications. The report concludes, therefore, with a call for all the relevant parties to have more realistic expectation, but expectations that nonetheless reflect the good news that Australia is firmly fixed on the trajectory leading in the near term to competitive markets for telecommunications services.