TelcoLand disputes on overcharging

Mark Gregory

Mobile Virtual Network Operators are the forgotten victims of rampant overcharging and anti-competitive behaviour at the heart of the telco battle about whether or not domestic mobile roaming should be declared.

In a blog post, Telstra’s Group Executive of Corporate Affairs Tony Warren said “it is an issue that is generating a huge amount of passion, and rightly so – this is a policy setting that is simply too important to get wrong.”

Mr Warren is correct in stating that the policy is vital, particularly for Australian’s living in regional and remote areas, but the Australian Competition and Consumer Commission (ACCC) should not just consider the effects of declaring domestic mobile roaming on those living, working or visiting areas outside the major cities.

The tier two Virtual Mobile Network Operators (MVNO) are a key ingredient in the competitive mix and the relationship between the MVNOs and the three mobile network operators has always been unhealthy.

Whilst the ACCC may focus on the arguments put to it about the merits or otherwise of declaring domestic mobile roaming, there is a fundamental requirement that the ACCC take into account the need for the MVNO market to be better supported.

The MVNO market is a confused muddle where nearly all of the MVNOs are tied to Telstra, Optus and Vodafone through some archaic practices that prevent – albeit by sleight of hand – most from operating across all three networks.

The premium business-focused Macquarie Telecom provides a mobile service to its customers with open access to all the major carrier networks. Macquarie Telecom, and possibly one or two other MVNOs that are the exception to the rule that do in fact provide strong evidence of the overcharging and anti-competitive behaviour.

If the wholesale charges offered by Telstra, Optus and Vodafone to the MVNOs was a fair price, then we would see all of the resellers and MVNOs offering a multi-network service similar to Macquarie Telecom. But we do not.

Macquarie Telecom national executive for industry and policy Matt Healy told Fairfax that “when Macquarie Telecom buys access from Telstra, it comes at slower speeds and with less functions than Telstra sells its own customers.”

To highlight the problems faced by MVNOs today, we have to go no further than the legendary battle between the dealer Crazy John’s and Telstra. Crazy John’s founder John Ilhan once described Telstra as a “bully.”

And if not for his untimely death at 42 in 2007, Mr Ilhan may have grown the cut-price Crazy John’s beyond the 120 outlets and $200 million in revenue per annum it attained.

It was the trailing commission dispute that flared up between Telstra and Crazy John’s that began in 2003 that led to Mr Ilhan to say he would end Crazy John’s relationship with Telstra in 2007 at the end of the existing agreement.

Mr Ilhan argued that Telstra’s increasing demands were reducing revenues, and it “isn’t competitive any longer”.

Whilst the business approach adopted by dealerships and MVNOs are different the “got them by the throat” approach is still the norm today.

MVNOs are key to ensuring there is customer choice and competition in the mobile market, but the evidence is the MVNO market is unfairly restricted and wholesale access, transit and backhaul prices are too high.

In a positive step for consumers, the ACCC lowered backhaul pricing by up to 78 per cent in April, and for MVNOs the price reduction was timely, providing relief and added incentive to look for customers beyond urban areas.

Telstra’s key argument against the ACCC declaring domestic mobile roaming is the potential negative impact this would have on future investment in infrastructure in regional and remote areas.

Protection of this investment is paramount to Telstra and its shareholders, as it amounts to about $1.65 billion per annum in recent years and over the past 10 years this investment has permitted Telstra to build a mobile network that now covers about 2.4 million sq km of Australia’s 7.7 million sq km total land mass.

By way of comparison the Optus mobile network covers about 1 million sq km and Vodafone covers about 800 thousand sq km.

Telstra’s marketing is squarely centred on the additional coverage provided by its network and now that Optus and Vodafone have moved to close the gap on connection speeds, capacity and availability, Telstra is concerned it could lose the key marketing advantage garnered by touting network coverage.

Telstra charges a premium to its 17 million plus mobile customers and sets wholesale access charges to its mobile network way above what is reasonable, but argues that the prices are fair for access to the largest mobile network.

But in an anti-competitive move, it appears that Telstra does not make its entire mobile network available to resellers, MVNOs or other wholesale customers, even to companies prepared to pay the over the top wholesale charges.

If you put aside the competitive arguments between Telstra, Optus and Vodafone, there remains the overpricing and anti-competitive behaviour faced by resellers and MVNOs.

Vodafone Chief Strategy Officer and Corporate Affairs Director Dan Lloyd argues that Telstra’s pre-tax earnings margin for mobile products is about 42 per cent whilst globally mobile cellular operators earn margins between 20 to 30 per cent.

TPG Chief Operating Officer Craig Levy told Fairfax that “the barriers for new mobile entrants are extremely high”, including millions of dollars of investment to buy spectrum and build a network large enough to start selling mobile plans.

“TPG does not believe that it is likely that it will be able to successfully secure a commercially negotiated roaming arrangement with the current incumbent mobile carriers. For that reason, it should be declared.”

Arguments that potential new international mobile operators may enter the Australian market must be set aside.

The ACCC should focus on the here and now and what is very evident is the mobile telecommunications market is not working how the ACCC anticipated following the 2005 review of domestic mobile roaming.

The ACCC’s domestic mobile roaming declaration inquiry must include a review of the effect of a domestic mobile roaming declaration on resellers and MVNOs.

To argue that the inquiry should focus on the effects of declaring domestic mobile roaming on Telstra, Optus and Vodafone in isolation would be wrong. A competitive, fair and open mobile telecommunications market needs successful resellers and MVNOs to offer cheaper alternatives to the carriers.

Dr Mark Gregory is a Senior Lecturer in the School of Engineering at RMIT University.

Do you know more? Contact James Riley via Email.

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