A section of my Introduction to the

 Responses to

Digital Economy Future Directions

Consultation Paper

By Thomas P. Koltai, on Behalf of Perceptric Pty. Ltd.

 

Submitted 10th of February – Before the Governments National FTTH rollout announcement and before the ACCC ruling against Telstra on last mile local loop. – A section of my introductory remarks.

 

History – A Lesson in what not to repeat

Past governments, with an eye to maximisation of short term advantages to the Australian taxpayer may have thrown away the baby with the bath water, with the assignment of control of the last mile local loop to Telstra.

This has left Australia with no neutral options as to the provision of an easy economic destination for its Broadband initiative.

In respect of the initial comments in the Introduction here-to-before, my key observation is that under the Governments planned NBN the proposed technology does not address the reality that only fibre to the home and useable ISM spectrum will be a long term adequate infrastructure play.

As an alternative, rather than implement a second hybrid Fibre/Coax/DSL solution for the country, I would strongly recommend that the Government prioritize an analysis of unallocated spectrum in the 2.6-3.4 GHz range – suitable for the interconnection of mobile and personal computing devices.

My contention is that since the previous government included the last mile copper in the Telstra sell-off, it left us with a legacy monopolistic approach to the last mile. It is therefore the Government’s responsibility to right this wrong.

 

An article by Mr. Richard Chirgwin posted on his Blog http://chirgwin.blogspot.com/ on Thursday, May 01, 2008 expresses what I consider to be the opinion of the majority of informed ICT professionals in Australia. (With the obvious exception of Telco and Treasury employees.).

 

Digital Dividend or Free Spectrum?

So what's the value of the "digital dividend"?

The question arises because that silly expression is so ineradicable in the political lexicon. A "digital dividend" is out there somewhere, we just have to (as Senator Conroy put it) "put in the hard work" and we'll reap the rewards.

The commercial data that led to America's recent spectrum auctions raising $19 billion aren't on the public record. We don't know how many people Verizon and AT&T consider to be the addressable population of their spectrum. But the price tag provides a hint: the premium paid for the spectrum tells us that the spectrum will be used to deploy broad-based services. The "Internet socialist" ideal, that TV spectrum could deliver broadband to those without fast wired services, won't come true in America.

 

If we assume that the spectrum is destined for broad-based services, then population is a good way to look at the value of spectrum from the outside. The auctions raised $19 billion; America has just over 300 million people; so the per-person value of the spectrum is about $63.

And if that figure is applicable to Australia, the digital dividend would be just over $1.2 billion - or three years' interest on the Communications Fund.

While $1.2 billion is a lot of money, it's not much in terms of the total economy, which is close to $650 billion - and there's no guarantee that investors in Australia would put the same value on new spectrum anyhow.

There was, however, a very interesting nugget in Senator Conroy's speech to the ACMA RadComms conference last week: the Ofcom estimate that radio spectrum contributed £42 billion to the UK economy. It's not actually news (the report was published in 2006), but still interesting.

Instead of focussing on the price tag, though, the employment impact is worth noting: Ofcom claimed that spectrum use contributes to 240,000 jobs in Britain, or 0.7% of the workforce. That

would be about 70,000 jobs in Australia.

The way to maximise jobs growth based on spectrum would be to make spectrum applications

irresistibly attractive.

If you accept that the likely "digitial dividend" is going to be small (and $1.2 billion only sounds big), perhaps the idea that the spectrum should be opened up for free (or close to it) isn't so silly.

Those who entered the fray would be able to focus on infrastructure and services rather than having to design the business plan around recovering money over-spent at auction.

Look again at the US experience. What are Verizon and AT&T going to do with their expensive spectrum? Verizon is talking 4G cellular services, while AT&T is talking about a network that can support 3G iPhones.

Somehow, it's hard to wax lyrical about spectrum bought to support a network-locked toy phone (with no apology to Apple fanboys) in a new cellular network. Whatever is claimed for new mobile networks, they remain focussed on the urban market, because that's where the people are.

The widespread belief that the digital dividend will bring new rural and remote services is a delusion. Unless political thinking changes - and unless somebody pops the wishful expectation

of a huge payoff to general revenue - the digital dividend will end up with the same urban focus as is clearly emerging in the US.

 

I might also mention the amazing lack of initiative by the Unwired Group – recently purchased by

channel 7 - to fulfill the promise for the spectrum that they purchased. 1

 

When the Auction was announced, the then acting ACA Chairman, Dr Bob Horton, said that the

Authority was very pleased to bring the 3.4 GHz spectrum to the market:

 

“This particular part of the spectrum offers opportunities for a diverse range of communications services, from wireless local loop to broadband Internet services, and should lead to increased competition, product and supplier diversity, and therefore benefits for consumers," Dr Horton said.

Spectrum is available in Adelaide, Albury, Bendigo, Brisbane, Cairns, Canberra, Hobart, Launceston, Melbourne, Perth, Rockhampton, Sydney, Toowoomba and Townsville and regional areas of Queensland, New South Wales, Victoria, South and Western Australia and Tasmania.

 

1 http://www.market-dynamics.com.au/Documents/3.4GHz%20Licence%20Report%20-

%20Public.pdf

 

A total of 100 MHz is available in each of 14 major town and city areas and 65 MHz in each of five regional areas. The spectrum will be presented as standard size lots of 3.5 MHz with the exception of two lots of 4.5 MHz in each of the 19 market areas.”

 

I have been an Unwired customer for six years. I am still awaiting the diversity, competition and other benefits promised to customers.

 

Today, nine years after deployment, Unwired is available in Sydney and Melbourne only. As one of the only real alternatives to last mile copper it has languished for nearly a decade recovering a mere fraction of its original capitalisation costs and locking out its use to other possibly more

entrepreneurial start-ups. The 37 million dollars provided by Intel didn’t seem to help in boosting their coverage area either. 2

 

Unwired spokesperson Amanda Wallace said that the company was looking into which cities would get an Unwired roll-out first, but would not be announcing its decision until closer to the launch date in 2006. When the roll-out is complete, Unwired's service will be available to 66% of

the population, Wallace said.

That didn’t quite seem to happen.i

 

Austar was the other major purchaser of 3.4 GHz spectrum. This was presumably based on a strategic business plan that I was commissioned to write for the CEO, Don Hagans, in 1996 . This was based on the premise that wireless could provide the last mile delivery of Broadband via 3.4

GHz together with premium Video on Demand Services.

 

Bob Horton’s later commentsii on Spectrum auctions is as follows:

 

“Acting ACA chairman Bob Horton said the ACA would be accelerating the "market-based" management of the spectrum:

"We will continue to use spectrum auctions in appropriate circumstances where demand exceeds supply," he said. "Several companies using spectrum won at auctions are achieving remarkable results that have only been possible because we adopted a market-based approach."

 

He most obviously was not referring to Unwired or for that matter, to AAPT.

 

AAPT with its 28.8 GHz spectrum, purchased for $66.3 million, has also failed to deliver an equitable widely adopted last mile alternative.

 

Granted, it purchased the spectrum with a view to build a microwave tower link between major and regional cities, however engineers are adamant that alternative utilisation could be made quite easily.

 

Similarly Optus invested a substantial amount ($59.7 million) and has yet to roll out a service.

Optus ready for business with LMDS network 28 Nov 2000

Cable & Wireless Optus announced that it was successful in bidding for spectrum in today's 27 GHz auction held by the Australian Communications Authority.

The spectrum is best suited for broadband wireless access, including the use of Local Multipoint Distribution System (LMDS) technology.

 

Chris Hancock, Managing Director, Data & Business Services, said that Cable & Wireless Optus was very interested in all access technologies that provide an opportunity to expand reach, access new customers, reduce the costs of services and allow the introduction of greater competition to the marketplace.

 

2 http://whirlpool.net.au/article.cfm/1535?show=replies

 

There have not been any announcements about the use of the spectrum since it was purchased.

 

Could he have been referring to the Austar 3.4 GHz which last year was primed for sale for a record 52 Million dollars to Optus subsidiary local loop player, Opel?

The record was the loss - 128 million dollars for spectrum that had not been utilised during the intervening years between purchase and sale.

 

Spectrum Licences expire in 2015, or, considered in a different manner, last 180 months. Austar sat on its spectrum licenses for 96 months, and therefore in effect lost 32 million dollars on the spectrum’s current value (unless one calculates the additional population growth between 2000 and 2008).

(No offense boys and girls - but who do you think bears that loss ? The Government or the Taxpayers through increased subscriber servcie charges.)

Nevertheless I am sure that this is small consolation to Austar’s shareholders.

An interesting observation on the recent sales of spectrum licenses by licensees to other licensees is the move to consolidate control of these strategic assets between several of the large incumbents.

 

There are a great number of commercial developments in other parts of the world that could have already been employed in Australia utilising the above spectrum to deliver a series of cost effective, broadband solutions for all of Australia.

Unfortunately, when competing with a deep-pocket group of monopolists, the price of spectrum is easily bid up to a price where the successful purchaser is unable, without additional capitalraising, to utilise the spectrum in a meaningful manner.

Possibly the Optus/Opel acquisition may have if it were able to survive the funding requirements, heralded a robust 2-30 Mb per second wireless broadband local loop to offer real competition in Australia. As may the Channel 7 acquisition of Unwired.

 

The spectrum game to date has been an additional taxation revenue generator for the Government but with little material benefit returned to the Australian people with the possible exception of higher prices for a longer period to pay for the exorbitant prices of unused spectrum

assets gathering dust in a filing cabinet.

 

On the basis of the above examples, I entreat the Government to err on the side of deliverable bandwidth to those that need it most, driven by an industry (WIFI) that is devoted to getting the maximum out of what little ISM bandwidth it has been able to utilise.

 

Estimates of the 2.4 GHz WIFI market on a global basis exceed 1.3[US] Trillion dollars.

Translated into Australian dollars per capita, that provides a price of $390 per man woman and child. To me that appears to be approximately the price of a home router CPE and a 15 db gain antenna for the following innovative idea:

 

The World of Make Believe.

In a perfect world, a Government that wants to ensure connectivity to and for its population would look at delivery of connectivity on multiple platforms.

Cell phones (the 7th Mass Mediaiii), Wireless Broadband and Fibre to the Home.

In this example – I have selected unsold spectrum in the 2-5.9 GHz range reserved by the government for lease by any carrier prepared to build the infrastructure – and based on equal representation.

The cost for the spectrum used shall not exceed $1 per user per Mb connection speed per month

– to all carriers.

i.e.: a 256 Kb broadband connection would be licensable at 25¢ per month.

 

This would result in an equivalent return to the Government based on user numbers – without the commercial uncertainty inherent in a fifteen year licensing environment. Minimum service levels provided would be 256kb broadband, with additional services such as QOS guaranteed VOIP and

“wireless fixed line services” as a subscriber requested add-on – extending the bandwidth of course at the appropriate pro-rata licensing fee.

Infrastructure would consist of a series of towers following Australia’s main highway system with adequate fibre to the tower network to ensure that every Australian within a 35-65 km range of the tower network can obtain between 256Kb and 30 Mb per second of data services.

Each alternative tower can either be leased to incumbent telecommunications players on a leapfrog basis with the maximum quantity of towers leased by any one carrier being regulated as the total number of towers, divided by the total number of carriers. In this manner, no one carrier can dominate the spectrum, and by extension, Australian consumers.

Each carrier tendering must commit to offering an OC-48 or better interconnect regime at zero settlement at the exchange level.

 

Transit costs to be negotiated between the carriers – spectrum allocation should make allowance for long haul (micro-wave) alternatives (via low cost special purpose apparatus licences) to carrier fibre backhaul to lessen the potential of possible anti-competitive collusion.

 

• Benefits to government in this model include – shared and ubiquitous responsibility for Universal Service Obligation.

• Benefits to Telstra and Optus – USO load redistribution.

• Benefits to consumers – competitive redundant connectivity options.

 

Community Fibre Loops.

As an alternative – but it is my contention that this is additional too and not as an alternative;

Communities can be encouraged to provide their own fibre loops.

i.e.: Home owners can form co-operative last mile telecommunications infrastructure suppliers and similar to school fetes, garage sales, cake bake-offs and other community fund-raising exercises, raise the required capital to implement Fibre To The Home.

Each home owner in the community co-operative can dig their own trench alongside the driveway from the kerb to the end of the drive way.

If everyone in Australia dug their own 450 mm deep, (average) 6 metre long 100 mm wide trench, and placed 1 or 2 (6m length) electrical conduit 15 mm pipes in the trench – preferably terminating next to the house., then nearly $180.00 per home would be saved lowering the estimated 1997 capital cost of FTTH to $220.00 per home for the fibre; street crossings and additional ditch-witching required on nature strips.

That’s an Australia wide saving of $1,098,000,000. Unfortunately, this proposal would only work in the housing suburbs and not metropolitan areas.

It is my contention that most apartment buildings are now constructed with digital frames, many already with planned or existing fibre terminations. Regrettably, a great many of the digital installations are Telstra-only termination.

Upgrading older copper analogue based MDF equipped buildings has not been costed. But it would be interesting if the newer suburbs, in NSW – past Penrith, were automatically supplied with fibre.

 

The economy of the poorer suburbs would surely receive a technological boost and race past the inner city suburbs enabling real teleworking and additional opportunities for the mobility challenged and disabled.

Communities that achieve 51% penetration in their suburb’s (areas) should be connected via federal funding to the closest exchange where they would be connected via a neutral fibre optic switch to the preferred services.

To ensure competitiveness – both in quality of service and a pricing model designed to encourage, not discourage, telecommunication product utilisation, this connection should under no circumstances ever be offered as a bundle connection to only one carrier.

 

The Redefinition of Business.

As we move deeper into digital commerce, interest groups will occasionally attempt to stem the tide, fearful that their business model will become redundant in a digital world.

The most obvious example of industry concern was that raised by the Postal services of various countries who were concerned that the advent of Email would extinguish their profits.

 

CASE IN POINT – The Royal Mail

In the United Kingdom in 1825, the cost of a sending a letter from London to Glasgowiv via carriage mail cost as much as a day's wages (1sh.1½d)v for a working man (9 shillings per week)vi.

Competitors devised a route via coastal shipping to decrease this cost to eight pence, providing a saving to the working man of five pence – but at a risk of piracy and shipwreck.

Was there an outcry of anti-competitive behaviour? Only from the coach and rail operators who saw their profits disappearing as HMPO set-up a dispatch office in the Merchant Marine offices at the docklands.

Amidst fears that email would nullify the mail service, the US Postal Service in 1995, issued a set of tender documents to set-up a modem email gateway service so that people could send mail via their paid network. The postal service was needlessly concerned.

With the Internet, online shopping arrived together with a requirement for parcel delivery and the requirement for tracking parcels (albeit with some glitches in the system).vii

The universal service obligation of rural parcel delivery has ensured that the Bundespost, Royal Mail, US Mail, Australia Post et al, have redesigned their rapidly evolving business models utilising external contractors for parcel delivery.

It may well be that something similar saves Telstra when they finally divorce themselves from reliance on the copper loop and change tack to adopt a wireless model as mooted in the recently released “Interim Report on a Digital Britain”viii. An intent to follow the enhanced wireless

broadband rollout may have been the real reason for Telstra’s “failure” to partake in the governments NBN process.

Empirical data is lacking on the comparative transaction costs of conducting commerce via traditional methods: bricks and mortar store, face-to-face, mail order, telephone, Viatel, Minerva, CompuServe, Minitel and now the Internet. However, Ruth Calaghan of the West Australian

newspaper obtained quotes from industry sources in 1999, including Alinta Gas, ACA Research

and Telequity that indicated that Internet was proving to be the cheapest alternative to conducting

business with customers:

“Every time a traditional sales representative hops out of the car to see a client it costs the business about $300,” he said.” When a customer visits a branch network that is about $25 to $30. The same transaction in a call centre costs about $4 to $8 and if the centre uses the Internet

it is less than 25¢.”ix

I believe that everyone realises the benefits of E-commerce Now we just have to educate the population that there is a need to implement this immediately.

 

Conclusions Today.

 

The Government can not allow control of the new infrastructure to ever fall into the hands of a single commercial entity - or any group of commercial entities that do not fairly represent delivery to 100% of the Australian population and consist of less than twenty Carriage Service Providers.

The Government needs to address the bush/remote requirements through enhanced ISM spectrum allocation capable of servicing the unserviced 20% of the population – who are currently fobbed off with unstable – and often unusable satellite connections.

Government is starting to listen. Senator Kate Lundy Hosted an Open Sphere session in Canberra that demonstrated the willingness of the current Government to actually listen to its constituents.

Thank-you Senator Lundy.

Perhaps there is hope for Australia to regain the "Lost Ecommerce Years" forced on us by a share price hungry previous Government.

References

i Unwired now Unbelievable – User Comments about Unwired service quality

http://forums.whirlpool.net.au/forum-replies-archive.cfm/456802.html

ii Analyst slams ACA spectrum auction - Abby Dinham, ZDNet Australia

19 August 2004 04:13 PM http://www.zdnet.com.au/news/communications/soa/Analyst-slams-

ACA-spectrum-auction/0,130061791,139156749,00.htm

iii The Seventh Mass Media http://smlxtralarge.com/wp-content/uploads/2008/03/smlxl-m7mmcopy.

pdf

iv 1788 London to Glasgow Mail Coach established, taking four days.

1819 Steam ships used for first time to carry mail.

Table 13.8 Postal services: P288

Economic chronologies Extract taken from United Kingdom Input-Output Analyses, 2006 Edition

Consistent with 2006 Blue Book and 2006 Pink Book

http://www.statistics.gov.uk/articles/nojournal/Economic_chronologies_2006.pdf

v [iii] http://www.janeausten.co.uk/magazine/page.ihtml?pid=364&step=4

vi Wages were nine shillings a week for an able bodied man - Rev Herbert Brown who was Rector

of St Lawrence from 1901 and went on to write the excellent histories of St Lawrence and

Bradwell on Sea in the 1920's http://www.essex-countrylife.

co.uk/farmingwagesandconditions.htm

vii http://msdemmie.wordpress.com/2007/08/06/the-royal-mail-doesent-deliver-anymore/

viii http://www.culture.gov.uk/images/publications/digital_britain_interimreportjan09.pdf

ix Callaghan, R. (1999, 8 January). Customer Queries Keep Alinta Gas Humming. The West

Australian, (p. 30).