Speech to Baker & McKenzie 'White Noise' Event

Introduction

It is a pleasure to be here at the launch of the second edition of Baker & McKenzie’s publication, “White Noise: An overview of current issues facing the Australian Communications Sector”.  

Apparently the technical definition of ‘white noise’ is ‘a discrete signal whose samples are regarded as a sequence of serially uncorrelated random variables with zero mean and finite variance.’

Being myself a lawyer like the authors of this work, I naturally knew this from all the classes I took on signal processing at law school.

In fact one of the appealing features of the communications sector is the way that it represents an intersection of so many disciplines and bodies of knowledge. 

Of course it starts with the fundamental scientific and technical disciplines which underpin the technology the sector employs, which is why James Halliday and I have spent so much time studying signal processing.

But it also involves a fascinating interplay of law and regulation; of economics and business strategy – and no small measure of politics!

That is why I think the work that James and his team have produced is such a useful guide to the broad trends which are affecting the sector.  Some of them are technology driven – such as the way that internet protocol, or IP, is now used to deliver just about every service including voice services.

In turn this has had a major business impact.  Services that used to be controlled by the telcos, such as SMS, are now being replaced by services delivered over an IP layer, such as Viber and Skype.  

In commenting on this publication today, I want to point out firstly the ever-growing economic importance of the Australian communications sector.

But there are still some constraints which are affecting the sector’s growth – and I want to touch on some of those – before thirdly highlighting some of the government’s key priorities in communications, which in significant measure are designed to address those constraints.

Economic importance of communications greater than ever

Perhaps the first piece of evidence about the sector’s ever-growing economic importance is the very high take up rate of its products.

The mobile sector offers some particularly compelling examples.

As at June 2013 there were over 31 million mobile services in operation in Australia.  Less than 20 years ago it was only 3.6 million mobile services. 

Not only are the absolute numbers impressive, so too is the extraordinary rate at which people take up the newest iterations of the technology, purchasing the latest phone or device to replace their current one.

According to a paper from Microsoft last year, 76% per cent of Australians now use a smartphone and 45% use a tablet. 

As the White Noise paper highlights, there is also an ever growing level of activity over those devices.  

In the 2014 financial year, Australians each used around 1 to 2GB of data per month.   In the 12 months to June 2014, public wi-fi use grew 21% and has jumped sixfold over the past five years. 

And those numbers will continue to rise.  The ACMA estimates that mobile data usage will grow by 265% over a four year period to 2017, increasing from an estimated 22.2 petabytes in 2013 to 81.1 petabytes in 2017. 

Across the sector we see trends between innovative new products and services and changing customer behaviour in taking up those products and services.

2015 looks to be the year for Australians to take up video on demand services delivered online, with the Nine-Fairfax joint venture Stan just having launched and Netflix expected to launch in Australia soon.

It’s a funny sort of launch when as many as 200,000 people already use your product – but at least their customers won’t have to pretend that they live in the US anymore.

There are plenty of credible estimates of the economic importance of the communications sector.  

According to the ACMA, in 2013 the economic value from mobile take-up and use stood at $33.8 billion. Of this, $26.5 billion was attributed to time savings for businesses using mobile broadband. 

I’ve seen the economic importance of mobile broadband first hand travelling around regional and remote Australia. People have told me how mobile broadband means tourism operators can attract more guests; farmers can sell their crops on the futures markets while sitting on the tractor; and consultants living far from capital cities can sell their services around the world.

The communications sector is transforming the world’s economy.

According to a 2011 McKinsey report around a fifth of GDP growth in advanced economies over the previous five years had arisen from the Internet and associated technologies – and 75% of it was in sectors not traditionally seen as technology industries.

One good illustration of this point is the extremely impressive Rio Tinto Control Centre in Perth, which I visited last year. This centre controls 14 mines, multiple railway lines, and several ports –1500 km away in the Pilbara.  It is a powerful demonstration that modern mining is extremely capital intensive, highly technologically sophisticated – and just as susceptible to productivity improvement through digital communications technology as any other industry. 

As Scott Farquhar, co-founder of Australian software company Atlassian, recently said, “every company is becoming, or already is a software company.  Even if they don’t know it yet.” 

But various constraints are holding back that potential 

With these powerful forces at work, we can expect continued growth in the internet economy in Australia – in fact according to Deloitte Access Economics it will grow twice as fast as GDP and reach $70 billion by 2016.  

But while the growth prospects are very good, there are nevertheless still some constraints that the sector faces – and I want to touch on a few.

Outdated Regulatory Frameworks

The first constraint is outdated regulatory frameworks that have not kept up with technology. Let me highlight for example the way that we regulate and allocate radiofrequency spectrum.  

The system Australia introduced in the early nineties was world leading.  But since that time there have been profound technological advances – which make it possible to use spectrum more efficiently, flexibly and intensely. To mention just a few:

•Analog technologies have been supplemented or replaced by digital – in mobile phones, in broadcast radio and television

•Improved modulation and compression techniques bring greater capacity and reliability

•Interference mitigation techniques let spectrum be used and re-used more efficiently

•There are emerging technologies which let different users share spectrum without interfering with each other. 

The spectrum sharing possibilities are increasing, with new technologies on the horizon such as cognitive radio and dynamic spectrum access.  However, some of these emerging technologies are hard to accommodate under the current regulatory framework.  To allow for the new ultra-wide band technologies, for example, we have needed legislative changes so spectrum and class licences could co-exist.

More generally, the traditional assumption that different networks and technologies deliver different services – an assumption reflected in the three key pieces of legislation regulating the sector (the Telecommunications Act 1997, the Broadcasting Services Act 1992 and the Radiocommunications Act 1992) -  is under growing pressure.   

Today, when every newspaper has a website which also carries video and is competing against websites from around the world, how valid are detailed regulatory constructs which divide media businesses into different categories of print, radio and television?

NBN model of the previous government 

The second constraint is the ill-judged NBN model of the previous government. 

Labor’s approach to the NBN was the very opposite of the rational economic policy making that has been key to our national prosperity. 

Here is what eminent former public servant Bill Scales AO had to say in his Independent Audit of the NBN Public Policy Process released in August last year:

"…the public policy process for developing NBN Mark II was rushed, chaotic and inadequate, with only perfunctory consideration by the Cabinet. After just 11 weeks of consideration, the Government had decided to establish a completely new ‘start-up’ company (now called NBN Co) to roll out one of Australia’s largest ever,  single public infrastructure projects…There was no business case or any cost benefit analysis, or independent studies of the policy undertaken, with no clear operating instructions provided to this completely new Government Business Enterprise, within a legislative and regulatory framework still undefined, and without any consultation with the wider community."

The unfortunate legacy of this chaotic process is what the Abbott Government is forced to deal with today as we work towards a more rational policy framework and the cost-effective delivery of better broadband infrastructure. 

We inherited a politically motivated network design. The Rudd Government announced a speed of 100Mbps, not 80Mbps or 50Mbps, because 100 is a nice round number and sounds lovely in a media release. 

The more rational approach would be to understand what benefits we are seeking to deliver with higher speed broadband, what speeds are required to deliver those benefits, and then choose a network design which most rapidly delivers those benefits. 

As the Vertigan Review has confirmed, Labor’s approach was more costly and delivered a much lower net benefit than the approach the Coalition is now pursuing.

The Vertigan panel did a cost-benefit analysis which estimated the net economic and social benefits of the Coalition’s multi-technology mix NBN at about $18 billion, compared to a baseline in which there is no further rollout of superfast broadband. 

It found Labor's fibre to the premises network had net benefits of about $2 billion. This difference arises because the multi-technology NBN can be delivered more quickly (enabling benefits to be realised sooner) and requires less upfront investment (increasing net benefits). 

Chilling Effect on Competition

I want to talk for a moment about the challenge that the arrangements we inherited create for competition.

After twenty years of bipartisan policy in communications, directed towards stimulating competition and encouraging competitive entry, Stephen Conroy reversed direction, establishing NBN Co as a statutory monopoly, paying existing providers like Telstra and Optus to withdraw from the market, and putting barriers in the place of anybody seeking to enter the market to build their own network.  

If you enter the so called ‘superfast broadband’ market you must offer a wholesale service similar to what NBN Co offers, and you may not sell to retail customers, you can only sell on a wholesale basis to retail service providers.  As the Vertigan Report observes,

"…the rules greatly diminish the commercial incentives to enter wholesale markets because none of the considerable efficiencies of vertically integrated operations are available, while at the same time entrants face almost certain competition from a taxpayer-funded provider."

Of course, Conroy’s changes led to a distinct chilling of private sector investment – and a reduction in both competitive vigour and service availability as a result. 

One good example is that, around the country, many customers today find it impossible to obtain a new DSL service – because the exchange has run out of ports. It is understandable that Telstra and other commercial providers of DSL services are often reluctant to invest in additional DSLAM capacity. 

Our key priorities 

So what is the government doing about these various constraints?  

Our first priority is to execute competently, and as rapidly as possible, on the NBN rollout.

As I have pointed out, we inherited a mess – but we are working systematically to transform NBN Co into a businesslike, well-run organisation which operates  efficiently on a sensible rollout plan.

At the end of January 2015, 770,000 premises are now able to connect to the NBN across all technologies – a big jump on the 310,000 premises serviceable when the Coalition took office in September 2013. 

So NBN Co has significantly picked up its rate of rollout in the last 12 months. But of course there is a long way to go and the roll out rate needs to ramp up very substantially; before that can happen we need to finalise the design and construction arrangements to get the new model in place. 

Our second priority is to navigate back towards a policy framework which prioritises competition as the engine of innovation, lower prices and better service in communications.  The Vertigan Review was charged with laying out this pathway – and produced an excellent report late last year.

We have been frank about some of the recommendations we cannot immediately adopt.  For example, the panel recommended breaking up NBN Co into separate companies, with a view to these being the foundation of different competitors in due course.  At the moment we judge that such a step would be too risky given the imperative of accelerating the rollout.

But we are certainly looking for every opportunity to increase competition – for example in the market for the construction of new fibre networks in new developments. Vertigan recommended that this should be opened up to competition and NBN Co should cease providing such connections for free – and we will be taking up this recommendation.  

A third priority is to leverage the internet to transform the way government delivers services to citizens – just as banks, airlines and many other private sector organisations have transformed their service offerings.

The Prime Minister and Minister Turnbull recently announced the establishment of the Digital Transformation Office (DTO) within the Department of Communications.  

One of its first tasks will be to ensure people no longer have to complete separate log on processes for each government service. Instead, people should have a ‘digital identity’, which they can use to log in to each of their services across the government.

The establishment of the DTO is an important milestone that will enable government services to be delivered digitally from start to finish and better serve the needs of citizens and businesses.

Fourthly, we are working to reduce regulation and red tape in the communications sector.

Communications is a heavily regulated sector – which imposes cost burdens and inefficiencies on the sector and ultimately on consumers.  So Minister Turnbull and I have been enthusiastic participants in the Government wide deregulation agenda, with some important reductions in red tape already delivered.

To date, our red tape reduction measures in the communications portfolio have generated cumulative savings of over $70 million for consumers and businesses, and resulted in over 3,400 pages of redundant or obsolete regulation being repealed.

This has contributed to the Government’s overall goal of removing $1 billion in the cost of unnecessary regulation from the economy each year.

In 2015 this work will continue, as we seek out opportunities to reduce the role of government and its agencies in day to day close supervision of industry participants!

One priority in 2015 will be our review of spectrum regulation – to see if there are ways we can use this scarce public resource more efficiently in the digital age. 

Conclusion  

Let me conclude by congratulating Baker & McKenzie on preparing this very important publication, White Noise.

As the publication highlights, we are at a time of great change in the communications sector.  The sector is of ever growing economic importance as I have argued today.

But there are some constraints on that growth – and government can do a fair bit to relax those constraints.  

That is what we are working to do – and I am reassured as I read White Noise that Baker & McKenzie’s analysis of the environment is quite similar to the government’s – which suggests we are on the right track!