Telstra Corporation’s response to the ACCC’s mobile roaming declaration inquiry – Discussion Paper TELSTRA CORPORATION LIMITED Response to the ACCC’s Discussion Paper on the declaration of a wholesale domestic mobile roaming service 2 December 2016 [CIC begins] = information not to be released without a confidentiality undertaking [CIC begins] = information not to be released even with a confidentiality undertaking TELSTRA CORPORATION LIMITED (ABN 33 051 775 556) | PAGE 1 Telstra Corporation’s response to the ACCC’s mobile roaming declaration inquiry – Discussion Paper CONTENTS EXECUTIVE SUMMARY 4 01 COMPETITION IS DELIVERING WORLD-LEADING OUTCOMES FOR CUSTOMERS 8 1.1. Competition continues to improve extensive mobile coverage 9 1.2. Competition is delivering greater choice and improved services to customers 16 1.3. Mobile competition is delivering long term benefits to the economy 22 1.4. The impact on regional and rural Australia 23 1.5. The Australian mobile market is delivering world-leading outcomes 27 02 POSITIVE CUSTOMER OUTCOMES ARE DRIVEN BY COMPETITIVE MARKET DYNAMICS AND EXISTING REGULATORY AND POLICY SETTINGS 30 2.1. Network coverage and price drive customers’ purchasing decisions 30 2.2. Customers have a high willingness to pay for quality network coverage 33 2.3. The willingness to pay for quality network coverage drives better outcomes for customers 34 2.4. Existing regulatory and policy settings also support the race for better quality coverage 40 03 DECLARATION OF ROAMING WILL UNDERMINE THE OUTCOMES ACHIEVED THROUGH INFRASTRUCTURE-BASED COMPETITION 49 3.1. Declaration of roaming will reduce investment in regional and rural areas 50 3.2. Customers will face higher prices if roaming is declared 54 3.3. There will be less dynamic competition if roaming is declared 55 3.4. There will be customer experience and network management issues with roaming 56 3.5. Declaration will undermine Government policy objectives 60 3.6. A limited declaration will not solve these issues 61 3.7. Setting a regulated price offers no feasible solution 65 04 COMMON QUESTIONS ABOUT THE FUTURE OF AUSTRALIA’S MOBILE INDUSTRY 67 4.1. Will coverage be extended beyond the existing footprint? 67 4.2. Will more regional and rural customers have a choice of provider? 68 4.3. Does Telstra benefit from a legacy advantage in deploying mobile networks in regional and rural Australia? 69 4.4. Are customers disadvantaged by bundling mobile services? 70 4.5. Is infrastructure sharing working? 71 4.6. Have public funds contributed to the development of Telstra’s mobile network? 71 4.7. Does Telstra have monopoly power in areas where it is the only MNO? 73 TELSTRA CORPORATION LIMITED (ABN 33 051 775 556) | PAGE 2 Telstra Corporation’s response to the ACCC’s mobile roaming declaration inquiry – Discussion Paper 4.8. If domestic roaming already exists, why is there a problem in declaring it? 76 4.9. International precedents do not support declaration of roaming 76 05 DECLARATION IS NOT IN THE LONG-TERM INTERESTS OF END USERS 80 5.1. General principles relevant to applying the statutory framework in this inquiry 80 5.2. Declaring roaming will have detrimental effects on competition and infrastructure investment and is not in the LTIE 81 5.3. Who gains out of declared roaming? 86 5.4. The industry requires regulatory certainty 86 APPENDIX A: International experience does not support the case for declaration 88 APPENDIX B: ACCC Q&A 107 TELSTRA CORPORATION LIMITED (ABN 33 051 775 556) | PAGE 3 Telstra Corporation’s response to the ACCC’s mobile roaming declaration inquiry – Discussion Paper EXECUTIVE SUMMARY Declaration of a wholesale mobile roaming service is not in the long-term interests of end-users (LTIE) because it undermines infrastructure-based competition, particularly in regional and rural Australia. The leading UK economist, Professor George Yarrow, identifies the issues which are at stake in this inquiry: “[I]t is remarkable by international standards that the balancing act has been accomplished in Australian mobile telecommunications in a way that appears to combine relatively light handed regulation (tower-sharing arrangements, regulation of backhaul services), limited coercive taxation (i.e. fairly modest financial support from the public revenues) and vigorous competition, witnessed by the number and the commercial conduct of MNOs and MVNOs. Notwithstanding vigorous competition, there is geographically uniform (i.e. national) pricing and close to universal coverage of high quality services.” Declaring mobile roaming would put all of this at risk. It would disrupt the highly competitive mobile market by eliminating the race for coverage between mobile network operators (MNOs) which incentivises and funds investment in expanding and upgrading mobile networks across Australia. The effects of declaration will be most acutely felt by customers in regional and rural Australia because many areas would no longer be economically viable. The quality of coverage will reduce and access to the latest technologies will be limited, affecting business and agricultural productivity, and the effectiveness of health, education and government services delivered over mobile technology. Competition is currently delivering world-leading outcomes to Australian consumers and businesses Section 1 discusses the world-leading outcomes experienced by Australian customers, including: • MNOs extending coverage to the vast majority of Australians – Telstra’s network covers 99.3 per cent of the population and unique coverage areas from Optus and Vodafone extend coverage further. Between 2006 and 2016, Telstra expanded its Australian geographic coverage from 1.6 to over 2.4 million square kilometres, an increase greater than the size of France. • Significant price reductions – prices have fallen over 50 per cent since 1997. • Increasing value for money – many plans come with unlimited national calls and SMS, significantly increased data allowances (some have increased over 300 per cent in the last two years) and access to a range of media and entertainment services. While competition has produced great outcomes, Telstra acknowledges that more needs to be done to meet the demands of mobile customers, particularly those in regional and rural areas who value coverage above all else. However, declaring roaming is not the answer and in fact it may end up reducing overall coverage. Maintaining the strongest incentives to invest in mobile networks is the best way to continue to produce world- leading customer outcomes. Customer willingness to pay for network quality and coverage is driving MNO investment Section 2 discusses the following competitive dynamics that are driving these world-leading outcomes: • The coverage race between MNOs – despite Australia’s vast landmass and dispersed population, coverage of the second and third MNOs in Australia is broader than in countries with higher population densities, e.g. the UK, the US, Canada, New Zealand, France and Germany. TELSTRA CORPORATION LIMITED (ABN 33 051 775 556) | PAGE 4 Telstra Corporation’s response to the ACCC’s mobile roaming declaration inquiry – Discussion Paper • Network expansion into regional and rural areas that would be uneconomic on a standalone basis – • National average pricing – which ensures the benefits of competition in metropolitan areas are shared with regional and rural areas through national pricing. In the mobile industry, competition is achieving the important social goals of universal service and parity in urban and regional pricing which in other sectors have required complex industry and regulatory solutions such as a monopoly provider (nbn co) and compulsory levies on all users (USO). This section also discusses how existing regulatory and policy settings support this race for coverage: for example, the facilities access regime encourages new entrants by reducing their costs of expansion. Declaration will undermine outcomes enjoyed by customers Section 3 discusses the negative effects of declaring roaming: • The business case for regional and rural investment would be undermined. MNOs could no longer sustain a competitive strategy of building in uneconomic areas on the basis that they will attract customers willing to pay for higher-quality coverage, so the incentive to invest will be removed. • Regional and rural customers (including businesses) would miss out on coverage being extended into new areas and coverage in existing areas being upgraded and, over time, some would lose mobile coverage. • Customers would face higher prices. The roaming charge would need to be seven times the current retail revenue to recover site costs. Service providers could abandon national pricing to limit the impact of higher prices to only those customers that roamed. Regional and rural customers would pay more for their services than customers in metropolitan areas. • Congestion in regional and rural networks would increase, resulting in degradation to the user experience, including reduced data speeds, to the detriment of all users of those networks. • Roaming would provide a poor end user experience, with call drop-outs, periods where devices cannot be used as they ‘ping-pong’ between networks, reduced battery life and risk of network failure. The ACCC cannot set a roaming price which accounts for an MNO’s loss of retail revenue or which substitutes for the lost competitive dynamic of the coverage race and its beneficial outcomes for consumers. The access price will not preserve Telstra’s incentive to continue