The History and Future of Deregulation
by Johanna Plante,
CEO of the newly formed Australian Communications Industry Forum (ACIF),
extracts of her speech held at the Power Breakfast in Sydney on 1 October 1997

[…] I would like you to imagine it is the 1890s rather than the 1990s. Imagine you are sitting here prefederation, more than a hundred years ago not to hear about the liberalisation of telecommunications and the intricacies of deregulation, reregulation, procompetition, cable duplication, cable rationalisation and Professor Alan Fels, but to hear about and see for the first time a wonderful new invention the telephone. […]

A new business develops

Now imagine you are considering this new invention from a business perspective. You look at the supply and demand side of the equation and quickly conclude that this telephone business is much too risky. […]

As you analyse further, you soon discover the sheer magnitude of the capital you would need to build a network and connect people to that network. You also quickly realise that if you tried to charge people the thousands of dollars it would actually cost you to connect them, you would get very few customers. And of course the less people there were connected to your network, the less attractive and useful the service would be for those that were connected. […] So all these things – the capital intensity of the telephone business, the need for hefty, ongoing crosssubsidies and the difficulty in attracting new customers together with massive uncertainties as the time as to who would really want such a service and how much they would actually use it would probably have stopped any reasonable business person from investing on a commercial, unprotected basis.

And so, right across the world, governments created monopoly telephone companies mainly public sector (with a few exceptions) and gave them the protection and certainty to make the necessary longterm investments in what soon came to be seen as a ‘public good’ natural monopoly infrastructure just like water and electricity. This protected monopoly went on for almost a hundred years. And then, in the short space of just over a decade, it was turned completely upside down.

Why? Why was it that after a century of fairly effective monopoly telephone provision, the world suddenly decided that telephone monopolies were all wrong and that competition was the way to go? What changed? What was so radically different in those last few decades of this century?

Technological progress

The answer is simple: technology. Not just telecommunications technology, but all the other technology developments of the last few decades that changed forever the face of telecommunications.

Because we have all experienced such dramatic and accelerating rates of technology change in our own lifetimes, it is hard for us to realise that in the first sixty or seventy years of the telephone business, nothing much has changed from the day the first automatic telephone exchange was installed. […]

Though the users and usage continued to grow as the network was expanded, the only use continued to be plain old voice communications. […]

Electronics changed all this. Electronics catalysed exponential growth in both telecommunications and computing that created an explosion in the diversity, utility and uses of telecommunications. It also led to escalating customer demands for better, faster and more sophisticated communications demands that the incumbent monopoly carriers found more and more difficult to meet. Market pull was replacing technology push as the main driver of telecommunications growth, severely challenging the capital investment and construction capabilities of the monopoly carriers.

At the same time, plummeting costs, greater diversity of demand and explosive technology innovation were progressively making telecommunications a much more attractive business proposition potentially a business that people would invest in without regulatory protection a business that people actually wanted to invest in. And this was all occurring in an era of privatisation and microeconomic reform.

The beginning of deregulation

So, by the early 1980s, the world of telecommunications and monopoly carrier operations was being turned on its head. […]

Enter deregulation or, more accurately, market liberalisation. Worldwide, reducing or removing barriers to market entry was coming to be seen as a way of increasing investment in telecommunications, improving the efficiency of the industry, catalysing faster innovation and growth and reducing prices not to mention the opportunities it promised for private sector business profits.

But of course there were also countrydriven specific drivers for this deregulation as for example in the USA, where network liberalisation flowed from a judicial decision rather than being driven by government policy, […] or in Australia, where network deregulation flowed from the government’s “Review of Structural Arrangements” which was, in fact, a review of the structures and relationships between the governmentowned telecommunications carriers Telecom, OTC and AUSSAT.[…]

The Australian way

Australia is now in the final stages of its decadelong transition from government monopoly to full and open competition in telecommunications. The government’s ultimate objective is to achieve an efficient and internationally competitive industry in the longterm interests of end-users.

The vehicle through which it set out to achieve this was the introduction and growth of competition, progressively in all areas of the industry. And the process it adopted was progressive market liberalisation, starting with the introduction of a second network competitor in 1991 and the explicit promotion of duopoly network competition.

Yet, ironically, the end result of this process has been an order of magnitude increase in industry regulation. […] Some of you may find it rather strange and counter intuitive as to how there can be such a massive increase in an era of socalled ‘deregulation’. But I guess there are some fairly plausible explanations:- As telecommunications markets are liberalised and you get multiple, interconnected carriers and service providers you need more rules and regulations to protect consumer interests, safeguard endtoend network integrity, maintain endtoend service quality, achieve carrier cooperation and coordination, ensure compatibility between different provider services and ensure ‘anytoany’ connectivity […].

Another reason is that if youreally want competition in an infrastructureintensive industry such as telecommunications that has substantial and increasing inherent economies of scale and scope, you need rules and regulations to give new entrants access to those ‘bottleneck’ natural monopoly facilities that they need to viably compete.

And also where you have one or more incumbent players that have substantial market power, you also need to protect smaller players from anticompetitive conduct.
But the whole 1991 concept of actively promoting network competition as opposed to just providing an opportunity for more widespread fair and even competition is something that seems to be unique to the Australian telecommunications industry. […]

We are in a fully and openly competitive marketplace with no regulatory barriers to entry and a whole gaggle of new regulators and regulations:

For suppliers this means opportunities for new business ventures and revenue streams. It also means much more intense competition and escalating pressures on productivity, prices and costs.

And for customers it means many more technology, service andprice options and much greatercomplexity of choice.
So, how will things evolve from here? Well, one thing is certain nobody really knows. But I would like to conclude by giving some of my views on what might happen and where things might go.

Expectations for the short run

I believe that technology will remain the main driver of significant marketplace and product changes, but it will be competition that makes sure that the benefits do actually flow through to the customer. There will be much more vigorous long distance and international price competition between existing and new players, breaking down at last the duopoly pricing regime.

Newer market entrants will have lower cost structures. They will also be able to get costeffective access to the facilities of existing carriers through the new regulatory regime and minimise their capital investment. […]

I believe that the number and diversity of niche market players, both telephony and Pay TV, will grow, particularly in regional centres. Concentration by competitors on the highmargin market sectors such as long distance telephony and data will probably leave room in other less popular areas for low cost, efficient and entrepreneurial new entrants to carve out attractive niche businesses through innovative product packaging and pricing. […]

There is also likely to be strong interest in the highgrowth, highmargin area of data communications and this will mean a dramatic increase in optical fibre and satellite transmission capacity. I would expect that this would eventually lead to sharp price declines and shrinking margins.

The importance of customer service

In the longer term, pricing pressures on what is really a commodity product that is, a plain old telephone call are likely to shift the focus to product and service differentiation and to what other things can be bundled in to increase the value and attractiveness of the total telephony package. Price will become less important, and the evolution from an ‘infrastructure’ business to a ‘service’ business will be complete.

But one thing is certain it will become harder and harder for customers to keep across all the product and price options out there in the marketplace. So I would expect that over time, the vast majority of consumers will just tend to stick with a service provider they know, they trust and they feel comfortable with.

After all the hype about technology, liberalisation, deregulation and competition has died down, the key to success in the telecommunications industry will come down, not to what ACIF, the ACAF, the ACA, the ACCC, or the Minister does, but to the simple common denominator of customer service as it does in all other industries the world over.