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1. ACMA International Training ProgramLiberalisation - the incumbent’s perspectiveDanny KotlowitzTelstra Regulatory & Competition Legal Group5 September 2006 Page 1

2. Introduction • Who we are • State of the market • Regulation • Competition policy • Social policy • Conclusion

3. Company information Telstra is Australia’s leading telecommunications and information services company, with one of the best known brands in the country. We offer a full range of services and compete in all telecommunications markets throughout Australia: • Total fixed lines in service: 9.94m lines • Mobiles: 8.488m customers • Online: 2.5m Internet customers • Pay TV (bundled): 343,000 subscribers Telstra has over 1.6 m shareholders Notes: (i) data from Telstra full year results June 2006; (ii) mobiles customer numbers exclude MVNO customers; (iii) online customer numbers exclude wholesale SIOs; (iv) Pay TV bundle is for Foxtel or Austar

4. State of the Market • No limit on foreign investment in carriers and carriage service providers competing with Telstra • Over 160 carriers and 1000 carriage service providers • Over 700 ISPs (10 have in excess of 100,000 customers) • Four 2G/3G MNOs and numerous MVNOs and MVARs • Three mass market wireless broadband network operators (aside from the MNOs) and several niche operators • Numerous VoIP providers including ISPs and standalone VoIP-over-DSL providers through major retailer channels – numbering over 180 services (see “Aussie VOIP list” at http://www.marketclarity.com.au/voip/)

5. State of the Market 10 years to June 2005 • Telecoms contributed 2.65% of GDP in June Quarter 2005 • The industry employed 185,279 people in August 2005 • Between 1997 and 2004, overall telecoms services prices fell by > 18% • Between July 1997 and June 2006 Telstra's labour force declined from 76,585 to 42,507 persons (FTE) • But competitors have employed approximately 60,000 more in same period

6. Telstra’s Market Share (2004/5) Local Domestic LD International LD Mobile**** Basic Access 20%* 18%* 71% 63% 50% 45% 73% Sensis Advertising (main media) Data** Subscription TV Narrowband*** Broadband*** 13% 39% 26% 64% 59% 41% Internet & IP** Source: Product Management Estimates * Approx. % of local calls/basic access resold over Telstra’s network. ** Revenue Market Shares based on Dec 2004 YTD revenue. Products in Data and Internet & IP groupings match corporate accounting lines. Data no longer includes ISDN. *** Total market subscriber estimates are based on IDC total market estimates. **** Dec 2004 market share based Telstra Dec 2004 data and competitor data to Dec 2004, Sept 2004 (Hutchison). Telstra share Other Resold 39%

7. State of the market: broadband penetration

8. The Regulatory Environment National Security Enforcement Section 105 Operational Separation Defence & disasters Aspirant CUSPs Part XIB RKRs Numbering Plan Emergency services Privacy Commissioner Part XIB TPA(competitive conduct) Priority Assistance Interception regulation Preselection and overridecodes COMMERCIAL INFORMATION TELECOMMS COMPETITION Number portability Certify Cabling Division 12Reporting ACIF Obligations Line Caller Identification NETWORK FUNCTIONALITY Part XIC TPA (Access Regime) OEZ Contract Preselection / pre-paid mobiles Itemised Billing BSC Tariff Price Caps General TPAProvisions Operator & Directory Assistance RETAIL PRICECONTROL 000 SFOA CONSUMER INFORMATION Untimed Local Calls Free operator & directoryassist for residential LIMAC Publish and provide phonedirectory Network Reliability Framework Privacy Obligations NETWORK COVERAGE Telephone sex services Integrated public numberdatabase & access Carrier Access TECHNICAL REGULATION QUALITY OF SERVICE MISCELLANEOUS Customer Service Guarantee Equivalent to AMPSnetwork Land Access powers and immunities Applies to all carriers and carriage service providers ACIF IndustryCodes Universal ServiceObligation Part 21 Obligations TIO Industry Development Plan DDSO Specific legislative obligation applying to Telstra only Local Presence Plan (Red text = new in 2006)

9. Impact of regulation Economic benefit Extent of competition-simulatory regulation • At any given point in time the extent of regulation that simulates competition has a 'tipping point' where it becomes pro-competitor not pro-competitive • Judging the appropriate extent of regulation necessary, is the key regulatory challenge • Incumbents are not ‘magic puddings’

10. Regulation: a growth industry! • Between July 1997 and October 2005: • the number of legislative and regulatory instruments for telecoms grew from 20 to 348 • the total number of pages of these instruments grew from 1,602 to 10,103 • In the 2005-6 financial year: • Telstra staff spent 144,600 hours writing reports to regulators • a total of 485 reports (206 weekly, 77 fortnightly, 120 monthly, 56 quarterly, 6 half-yearly, 17 annual, 2 triennial) • 162,654 pages • Government, regulators and ombuds employ around 550 people in the communications area • Last month the Minister announced a review of telecommunications regulatory reporting with a view to identifying opportunities to streamline reporting and remove redundant or unnecessary industry reporting requirements • This follows the report of the Taskforce on Reducing the Regulatory Burdens on Business (the Banks Report) which acknowledged the concerns of Telstra, Optus, Vodafone and others (See: www.regulationtaskforce.gov.au/index.html for more information)

11. Trends in regulation internationally • Trend away from ex ante regulation • Retail price controls abandoned even in markets where incumbents retain 90%+ market share (eg. Germany, Holland, Sweden) • Focus of regulation has moved from retail to wholesale • attempt to address source of market power • distortions caused by regulation of same services at both retail and wholesale levels • Alignment of telecoms competition regime with general competition law • EU framework requires NRAs to identify markets where operators have significant market power

12. Competition Policy - Australia • Competition law applicable to all participants in all Australian markets says that: • A corporation that has a substantial degree of power in a market is not permitted to take advantage of that power for the purpose of - • substantially damaging or eliminating competitors • preventing competitors from entering market • deterring or preventing competitive conduct • Telecoms markets have their own special, tougher test: • A corporation that has a substantial degree of power in a market is not permitted to take advantage of that power with the effect of – • substantially lessening competition in a telecoms market

13. Competition Policy - Australia • Telstra accepts that some regulation is necessary • In a competitively mature market regulation should be rolled back, not extended as is happening in Australia with new operational separation provisions in our legislation • Telecoms-specific access regulation should be removed • Ill-conceived regulatory settings can distort industry investment • Below-cost access reduces the incentive for industry to invest in network improvements or innovation • Result: • bottlenecks are perpetuated • investment and innovation are discouraged • harm to both society generally and customers individually • Regulatory ‘creep’ into new services and markets where no legacy bottlenecks exist

14. Social Policy • Guaranteeing Universal Service and affordable basic voice call services are fundamental government goals • eg. government has a stated policy of geographic price parity • Historically it made sense for the government-owned monopoly to absorb the cost of this regulation – because the Universal Service fund is perpetually undercosted, Telstra has cross-subsidised the provision of service in non-profitable areas • However, in a competitive market should the burden remain solely with Telstra and its shareholders? • A fundamental principle of effective regulation is competitive neutrality • Social and competition policy must be aligned • Inconsistent approaches to pricing e.g. ULLS mean it is now under threat

15. Social Policy: is Australia different?

16. Social Policy: USO cost is a Ministerial call

17. Conclusion • Telstra has serious concerns as to whether, following recent new legislation and the current round of pricing decisions by the ACCC, Australia can continue to portray itself as an international best-practice regulatory jurisdiction • The dilution of government ownership in T3 (the full sale of Telstra) should help Australia raise its game on regulation “For too long, the government has had a massive conflict of interest, as the owner and seller of Australia’s largest telco; and as the industry regulator. … The Government does not have to own Telstra in order to regulate it. The government regulates the entire telecommunications industry, regardless of Telstra’s ownership structure.” - Prime Minister Howard, 25 August 2006 Keep up to date with the debate on Australian telecommunications regulation at:www.nowwearetalking.com.au