ACMA RadComms2014 Productivity Consequences of flexible regulation Ian Martin

1. ACMA RadComms2014 Productivity Consequences of flexible regulation Ian Martin Regional Head of Telco ResearchCIMB Securities 10 September 2014

2. Market sector MFP index and growth rates within productivity cycles Source: PC, Productivity Update May 2013 2003-04 2007-08 1998-99 90 1993-94 1988-89 1984-85 1981-82 1973-74 0.5 0.7 0.6 0.9 2.5 0.2 0.0 -(0.7)

3. ABS IMT productivity index Source: ABS cat 5260.0.55.002, 2014

4. Mobile sub-sector productivity Source: CIE, RadComm2013

5. CIMB indicative fixed line productivity Source: BIE, 1996, ACCC 2004, CIMB estimates

7. First telecommunications legislation in Australia

8. Highlights of micro-economic reform Essentially taking government out of direct involvement in allocation of resources in favour of market allocation … productivity enhancing • Reform of GBEs to focus effort on efficiency rather than other objectives • Market driven allocation of spectrum; spectrum licensing; spectrum trading • Quantifying and direct funding of cross-subsidy • Routine cost-benefit analysis • Introduction of competition • Separation of regulation from production and investment: (Austel, ACCC) • Pro-competitive safeguards: access regime, industry specific regulation • Privatisation of GBEs: capital allocation within an efficient capital market rather than by government Each step contributed to a better matching of resources with likely demand

9. Undermining microeconomic reform... Having got out of direct decision-making on resource allocation, governments get back in through the back door, ie by regulation and direction • Over-eager declaration of services(Calls for separation of declaration from management regulation of access) • Regulatory direction over industry structure(Cost Benefit Analysis of any directed change in industry structure) • NBN: renationalisation, regulated technology preference, rollout preference • Management of the access regime to achieve a preferred industry structure and/or distributive outcome … will it undermine mobile productivity? • Undermining of competitive neutrality: risk to the Internet of Things (IoT) • Extensive Ministerial direction over spectrum allocation … undermining the ability of the market to match resources with demand is what undermines productivity … regulatory changes post-investment = sovereign risk

10. Regulated access regime: shifted risk and return Undermined market evaluation of network benefits and costs Risks have increased in telecommunications infrastructure investment • Invest on one basis … only to see it over-turned post investment commitment • ACCC has introduced new concepts post investment commitment, unrelated to economic efficiency Returns have increased across telco access seekers through redistribution rather than investment • Several steps-down in access prices … aggregation among access entrepreneurs • Access prices below cost across a broad average of users, disincentive to invest at scale Structural separation pursued as an claimed ‘reform’ without evaluation • Has left risk with owner of infrastructure and distributed returns to access seekers • Pure access seeker share price mid-2009 to mid-2014 • Wholesale only network provider share price since separation Source: IRESS

11. Market valuation: access seeker v. network provider Would the ACCC do the same thing in mobile as it has done in fixed line? “Sources: CIMB, Company reports

12. The Internet of Things: likely largely wireless connected • What spectrum and allocation approach for IoT? • What impact will reservation of fixed backhaul to NBN Co have on IoT industry structure and development of services? Reserved backhaul is 35% of NBN Co’s LT revenue “We believe that theproliferation of mobile devices and the need to service those devices will be one of the key areas driving demand for the NBN.” NBN Co, Deloitte Access Economics Report, ‘Mobile Nation’, Feb 2013 Source: Altera

13. Spectrum management and spectrum auctions Process and arrangements should facilitate private sector to evaluate and meet emerging demand ACMA has a positive reputation among investors for spectrum management • Probably hard not to have a positive reputation given growth in MBB • Good spectrum management is ‘below-the-radar’ for secondary market investors Spectrum auctions • Closely followed in the equity market given impact on capex and market • How many Ministerial directions are needed to sell a block of spectrum? • ‘Red underpants’ requirements unsettle investors • 700MHz spectrum price was effectively set by the Minister for Communications • In effect excluded VHA; how can it be ‘efficient’ to have left so much spectrum unsold • Can’t rectify post-auction without triggering sovereign risk 5G spectrum • Will be more closely followed by the market because Demand > Supply • Where will it come from? Who will have to ‘surrender’ spectrum? What process to manage this?

14. What might have been? AWA and mobile telephony, 1949 Mobile wireless Source: AWA Annual Report 1949

15. What’s that you say, Chris? Productivity and innovation in the mobile sector? That requires flexible regulation to facilitate market-driven investment and competition, not over-ride it with regulatory preference. Roger that, over. Source: AWA Annual Report 1949