Conroy’s attack on Vodafone highlights his own poor performance on telecommunications competition

Broadband Minister Stephen Conroy has made a strident attack on Vodafone Australia and its chief executive Bill Morrow – in a prepared speech he gave at a mobile phone industry function at Parliament House. Here is how the Australian Financial Review reported it last Friday:

Communications Minister Stephen Conroy has unleashed a tirade against Vodafone… accusing its chief executive of acting like Sol Trujillo, the divisive former Telstra boss….’Despite advances in mobile phones, they [Vodafone] don’t want to provide services in regional Australia,’ Senator Conroy said…’I find it extraordinary that the world’s largest mobile operator wants to close down a regional network for people they don’t service.  They lost 750,000 customers due to poor service and they want to lecture to everybody, they want to cut those people off.  They are doing a good enough job of it themselves.’

Conroy was evidently reacting to an opinion piece by Mr Morrow, published in the AFR earlier last week.  Morrow observed that over the past ten years some $660 million has been paid by telecommunications companies to subsidise the ‘universal service obligation’ (USO).  The USO is a requirement on Telstra to deliver to every Australian household which wants it a basic voice service over the fixed line network (at the regulated price).

Telstra claims it loses money on the USO; for many years there has been a scheme under which the loss is estimated each year (it has typically been in the range of $100 to $200 million a year), and then each industry participant is effectively taxed to pay for a share of that loss.  This puts Telstra, the largest and most profitable company in the industry, in the pleasant position of receiving a cross subsidy of tens of millions of dollars from its smaller and less profitable competitors.

It is no wonder that Stephen Conroy is a bit touchy on the subject of universal service.  The previous USO policy was bad enough; Conroy has made it worse as part of his murky arrangements to pay $11 billion of taxpayers’ money to Telstra to induce that company to move its customers from its network onto Conroy’s NBN.  $9 billion will come in the form of payments from NBN Co to Telstra – but Conroy has used the USO as a means to pass a further $2 billion over. 

Conroy did this by relieving Telstra of the legal obligation to continue to provide the USO; instead this will now be an obligation of government (through something called the Telecommunications Universal Service Management Agency or TUSMA).   TUSMA will contract out to a third party the job of providing the actual service, and – surprise, surprise – it has chosen Telstra.  The net result is that Telstra keeps doing what it used to do, but gets paid a whole lot more money to do it.  Telstra has told the market that the new USO arrangements are worth $2 billion to the company. 

Another reason Conroy is a bit touchy is that the subject of Morrow’s article was how to increase competition in rural and regional telecommunications – specifically mobile telecommunications where Telstra retains a very substantial coverage and market share advantage.   This is not an area where Conroy has a record to be proud of.  He has effectively abandoned competition as the primary goal of Australian telecommunications policy, reversing a bipartisan policy consensus which had lasted for nearly twenty years. Instead, Conroy has made building the NBN his first and highest priority, and he has been quite happy to take decisions which damage competition if he thinks they will advance the NBN. 

That has certainly been clear in fixed broadband, for example with Conroy’s atrocious decision to legislate to ban the operation of fixed broadband networks competing with the NBN (unless they use the same wholesale-only business model).  It is now increasingly evident that his actions are weakening competition in the mobile sector as well.  By handing Telstra $11 billion Conroy has given it a formidable war chest which it can reinvest into mobile.  He has also mishandled the forthcoming auction for critical radiofrequency spectrum and this is likely to do further damage to competition in mobile broadband. (I have written more about this in a recent article in the AFR.)

In fact, Conroy has managed to achieve a perverse turnaround.  For many years the consensus view was that fixed line competition was weak but in the mobile sector competition was much healthier (in part reflecting policy decisions of the early nineties when Optus and Vodafone were given licenses to compete with Telstra in mobile using the then new GSM technology.)  Today, many observers are increasingly worried about competition in mobile.

Stephen Conroy has been Broadband Minister for five and a half years. Billions of dollars have been spent on the NBN but as at December 2012 barely 10,000 Australian premises were connected to the fibre network.  In mobile, competition has reduced and Conroy has failed to leverage his NBN billions to deliver improved mobile competition in rural and remote Australia. (To take just one example, NBN shows little interest in selling fibre backhaul to mobile operators; this is a missed opportunity to stimulate competition in rural and remote Australia.)

Now Conroy is reduced to shooting the messenger, engaging in direct criticism of Vodafone after its chief executive pointed out a few basic facts about some competition-suppressing aspects of current policy settings in telecommunications.

Full disclosure: last week I was part of a small group of MPs who met with Mr Morrow over dinner.