1. Page 1 ACMA International Training Program Liberalisation - the incumbent’s perspective Danny Kotlowitz Telstra Regulatory & Competition Legal Group 5 September 2006 Page 1

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

3. Page 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. Page 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/) http://www.marketclarity.com.au/voip/

5. Page 5 State of the Market  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 SectorAnnu al Growt h communications services 5.9% GDP3.7% construction5.6% manufacturing2.1% finance & insurance 4.8% culture/recreation3.4% 10 years to June 2005

6. Page 6 71% Local 63% Domestic LD 50% International LD 45% Mobile**** 64% Data** 59% Subscription TV 13% Sensis Advertising (main media) 26% Narrowband*** 20%* 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). Basic Access 18%* Telstra shareOtherResold 41% Broadband*** 73% Telstra’s Market Share (2004/5) Internet & IP** 39%

7. Page 7 State of the market: broadband penetration

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

9. Page 9 Economic benefit Extent of competition-simulatory regulation Impact of 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. Page 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)www.regulationtaskforce.gov.au/index.html

11. Page 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. Page 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. Page 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. Page 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. Page 15 Social Policy: is Australia different?

16. Page 16 Social Policy: USO cost is a Ministerial call

17. Page 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 www.nowwearetalking.com.au