wireless spectrum

Regulation in Australia — bellweather for subsidized services

Australia is giving Telstra, its national carrier, an unusual ultimatum: Create a separate subsidiary structure or be barred from further access to spectrum. Needless to say, the move has raised howls of protest from many quarters, and it poses one of the most critical questions in all of telecom today.

One problem with a break-ups like this is the loss of shareholder value, and there has been no satisfactory answer to that problem in the Telstra case. Another more potentially significant problem is the loss of investment incentive in a market where everyone wholesales from a single player. That killed broadband growth in the U.S. for almost a decade after the Telecom Act was passed.

In Australia, a government-subsidized broadband build-out is the proposed solution, but nobody really knows if that will work. The government is presuming that investment can be guaranteed by taxpayer subsidy and that competition will force service prices down. The problem is that competition will then demand perpetual subsidies, since return on investment for service competitors is likely to be minimal, and they won’t contribute to building out a shared infrastructure.

Australia has always had the most pro-competition regulatory bias of all industrial nations, and how they cope with these issues will be the conclusive indictor of whether even subsidization can sustain such a regulatory model. We don’t think it can.