AUSTRALIAN REGULATOR SAYS TELSTRA DOMINANCE OF

UNCLAS SECTION 01 OF 02 MELBOURNE 000038

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SUBJECT: AUSTRALIAN REGULATOR SAYS TELSTRA DOMINANCE OF
TELECOMMUNICATION MARKET LIKELY TO CONTINUE



1. (SBU) SUMMARY: The Australian Competition and Consumer Commission
(ACCC),the Australian government's anti-trust regulator, believes
that the telecommunications giant Telstra is even better positioned
to increase its market dominance following the final government
share sell off (known as T3). While the ACCC has extended a series
of challenges to Telstra's market dominance, the GOA's refusal to
split the company will make it more difficult to prove any
cross-subsidization within Telstra. As a result, while competition
from cellular telephone companies remains a possibility in the voice
market, potential competitors will hesitate to go head-to-head with
Telstra in the critical data transmission market, where it may well
be able to get away with cross-subsidization of a new fiber optic
network through an opaque accounting of costs. If Telstra does
capture the growing demand in the data market, it will succeed in
undermining competition and securing its own dominance in
telecommunications. In that case, we can expect Australia's
competition regulator will continue to challenge Telstra in court
but it and U.S. firms that wish to compete in Australia's
telecommunication market will continue to face an uphill battle.
END SUMMARY.


2. (SBU) Joe Dimasi, Executive General Manager of the Australian
Competition and Consumer Commission (ACCC) met with Economics
Counselor Matt Matthews and Melbourne pol/econoff Maya Dietz on
March 5. Dimasi said that not only did Telstra remain a dominant
player in the telecommunications market post T3, it likely would
become even more so in the future. Although the Howard government
made no changes favorable to Telstra in the privatization process,
according to Dimasi, the Government's failure to split the company
and create only weak separation of operations left Telstra well
positioned to exploit cross-subsidization opportunities in future
ventures.


3. (SBU) "If the story was voice, Telstra dominance could be
threatened by mobiles," Dimasi said. "But the story is data
transmission, which is where all the new money is coming from."
Cellular telephone companies, or mobiles, as Australians call them,
have increased capacity to carry data, "but wireless can only take
you so far before congestion becomes a real issue," he said. At the
moment, this really meant looking at fixed line networks. The two
fixed lines options, as he sees them, are to use the existing copper
network (which Telstra controls),or invest in fiber lines. "You
are not going to get competition with fiber," Dimasi said.


4. (SBU) Telstra's initial proposal to the ACCC to increase the
speed of its current copper network was rejected by the regulating
body because of the high price Telstra wanted to charge competitors
to use the network. According to Dimasi, Telstra is using the press
to convince users that the ACCC has tried to force the company to
price below cost, and that it is the ACCC that has prevented the
networks from reaching the rural areas. Both are lies, according to
Dimasi. By law, the ACCC cannot require a company to price below
cost. Second, Dimasi believes Telstra never had any intention of
networking rural areas, because it was not commercially viable.


5. (SBU) A consortium of nine smaller telecommunications companies
(led by Optus and comprised also of AAPT, Internode, iiNet, Primus,
Macquarie Telecom, Powertel, Soul and TransACT),known as the G9,
also has put forth a proposal that would allow for open access to
the network. An important distinguishing element of G9's plan is
that whoever owns the network will not have a retail arm, and
therefore would focus on access seekers rather than access
providers. Although a seemingly good alternative to a Telstra
monopoly, it is not yet clear whether the consortium can "pluck up
the courage" to challenge Telstra, Dimasi said. "Telstra has enough
money to roll out its own [fiber] network...and the market cannot
afford two." If the G9 fails to raise the financing, or simply
backs down under Telstra pressure, it would entrench the dominance
of Telstra's position, he affirmed.


6. (SBU) Telstra has lost all of its challenges of ACCC rulings
before the Australian Competition Tribunal, according to Dimasi,
including its claim that the ACCC was unfairly forcing the company
to lower its price for line access. Dimasi also thinks that Telstra
will lose a case it has pending before the High Court, in which the
company alleges that its property has been taken without due
compensation, referring to the fact that it cannot price as it wants
for competitors to use its lines. Telstra is making "a last ditch
effort before the elections", Dimasi said, to strike fear into its
competitors and win concessions from the government. In the end,
Dimasi thinks that ACCC will spend its time dealing with concerns
about cross-subsidization, and term and conditions of access by
other providers to Telstra's network. "There are long, hard battles
in the courts ahead", he concluded.

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7. (SBU) COMMENT: Splitting Telstra's infrastructure and product
divisions would have made the transition to fiber networks more
rational and easier to regulate. However, this was politically
untenable at the time, likely because the government wanted to
maintain the company's share price before the sell-off. As the
benefits to making the switch to a fiber network are substantial,
especially in a country with Australia's geographic peculiarities,
it will likely go forward, with Telstra in the driver's seat. How
opaque the operating environment will be for other telecommunication
companies, and how much profit Telstra garners from the transition,
remains to be worked out in the courts. END COMMENT.


8. (U) This message was cleared with Embassy Canberra.

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