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Towards a National Mobile Phone Strategy

Strategic Approaches to Extending Affordable Mobile Phone Coverage Across Australia

Objective

To establish strategic principles for extending affordable and sustainable mobile phone services to all Australians.

Background

Demand for mobile services

Mobile phone communications is one of the high growth areas of the Australian and world telecommunications markets, and is an industry where growth continues to exceed projections:

• After only 13 years of operation over nine million Australians are mobile phone subscribers. The majority of this growth has occurred in the second half of the nineties - in 1994 there were just over one million subscribers;
• While mobile services have been rolled out to enable access by almost 97 per cent of the Australian population, approximately 88 per cent of the geographic area of Australia is still unserved by terrestrial mobile phone services. However, these areas are now served by low earth orbiting (LEO) satellite mobile service, through the Globalstar/Vodafone alliance.

By June 1999 Australia had the twelfth highest mobile phone penetration rate among industrialised countries. At 35 subscribers per 100 inhabitants, Australia was well ahead of the OECD average of 27 subscribers per 100 inhabitants. By the end of 2000 the mobile phone penetration rate in Australia is expected to have risen to 50 subscribers per 100 inhabitants.

• In 1999 Australia was ahead of the UK, US, France, New Zealand, and Germany; but behind Finland, Norway, Korea and Japan.

These high take-up rates demonstrate the very high value placed on mobile phone service by Australian consumers - for business, recreation and safety purposes.

Competition in the Market

In response to this strong consumer demand, Australia now has a strongly competitive mobile phone market, measured in terms of the number of competing carriers. From this year Australia has six licensed mobile phone operators. OECD analysis shows a strong correlation between market growth and market openness. During the 1990s, the more liberalised markets that also had four or more operators consistently outperformed other markets.

• Other world market leaders in this respect are the US (eight operators since 1999), Japan (five since 1994), Korea (five since 1997), and the Netherlands (five since 1999).

The average annual price for a basket of digital mobile phone services in Australia is slightly above the OECD average, adjusted for purchasing power parity:

• For personal users the annual price in Australia is US$679 compared to an OECD average of US$617;
• For business users, the annual price in Australia is US$1283 compared to an OECD average of US$1198.

The Technologies

The Global System Mobile (GSM) network was the first digital mobile phone system to be introduced into Australia. Four companies provide GSM service.

• Telstra has the most extensive network, followed by C&W Optus and Vodafone;
• OneTel is building a national network (state capitals) with a potential market of two million customers, and has a roaming agreement with Telstra for areas outside its network.

Code Division Multiple Access (CDMA) networks are the latest digital mobile networks to be rolled out in Australia. CDMA has the advantage of longer range than GSM (topography permitting). Four companies provide CDMA service.

• Telstra has been rolling out a national CDMA network to replace the analogue AMPS network that will be completely shutdown by the end of 2000. Telstra commenced rollout of CDMA in November 1999, and by October this year 2100 base stations have been installed across Australia - about double the original roll-out plan, and covering an area about 79 per cent larger than the AMPS coverage;
• C&W Optus is reselling Telstra's CDMA coverage, and therefore Optus customers will also have full access to this extensive network;
• Hutchison (Orange) is building a CDMA network with a potential market of 8 million people in Sydney and Melbourne, and has a roaming agreement with Telstra for other areas;
• AAPT is constructing a network (and investing up to $500 million) with a potential market of 11 million people including Queensland, Western Australia and Tasmania; the majority of South Australia; and Canberra and Darwin. It is reported to be negotiating roaming agreements to complete its coverage of Australia.
• In April 2000 Primus announced a $110 million deal with Telstra to provide voice and data services over its CDMA network.

There are two types of satellite mobile phone systems in Australia: Geostationary Orbit (GSO) systems such as C&W Optus' MobileSat, and Low Earth Orbit (LEO) systems such as Vodafone's Globalstar:

• GSO systems, such as those provided by both Telstra and C&W Optus, have had a low take up rate due to high costs, bulky equipment and coverage limitations inside buildings and built-up areas.
• Vodafone launched its satellite mobile phone service, Globalstar, which targets rural users, in March 2000. There are also reception limitations with the Globalstar system where line of sight is not available. The Globalstar system roams onto the Vodafone GSM network when the handset is within the Vodafone GSM network coverage, so that users have cheaper GSM coverage at these times. Vodafone/Globalstar has built gateways at Dubbo, NSW, Mt Isa, Queensland, and Meekatharra, WA. The integration of Globalstar with Vodafone's terrestrial GSM network gives Vodafone coverage of 100 per cent of the Australian continent. Prices for satellite mobile phone services are still significantly above terrestrial service tariffs (eg. from $1300 per handset and $1.78 per minute call charge for Globalstar), but are trending down;
• Iridium, the other LEO mobile phone service was liquidated in March 2000. Commentators point to inappropriate technology and a miscalculated business plan (insufficient financial backing; targeting global executives as customers) as the cause of its demise.

Third generation (3G) mobile telephony will provide for advanced data services (eg. fax, e-mail and high bandwidth Internet access) through mobile telephones.

• The ACA is clearing the 3G spectrum for auction early in 2001;
• Major mobile phone companies in Australia have shown strong interest in 3G capabilities.

Government support for Extending Services

Since 1997 Government funds have been available to support the extension of mobile services through the Commonwealth's Networking the Nation (NTN) program. The NTN program has so far funded (at June 2000) some 31 projects totalling $10.7 million for improving mobile phone coverage in regional, rural and remote Australia. These projects require fully competitive processes to select a carrier to provide the service, and typically involve a substantial capital contribution from the successful carrier.

As part of the $1 billion Accessing the Future package of Social Bonus programs, funded from the second partial sale of Telstra, $25 million was allocated to facilitate continuous mobile phone coverage across 9,425 km of designated major Australian highways. This project is currently being implemented via a competitive tender, which has the objective of extending continuous coverage by both CDMA and GSM technologies along all these highways.

The Social Bonus also included $1 million for each of Western Australia, South Australia and Tasmania to enable further expansion of regional mobile phone coverage. Western Australia's funds are being allocated through the NTN program, South Australia will disperse its funds through a tender process and Tasmania is currently assessing options for expenditure of its component.

Issues

The mobile phone market has responded quickly and effectively to the obvious demand for services throughout Australia. Almost 97 per cent of Australians now have access to at least one terrestrial mobile phone service (Telstra CDMA), and 100 per cent have access to a LEOSat solution through Vodafone/Globalstar.

However, despite these advances, concern has been expressed that the three per cent of Australians, unserved by terrestrial networks, are significantly disadvantaged in terms of the prices they must pay, both for handsets and for call charges. The Commonwealth Government's Telecommunications Service Inquiry certified that mobile phone coverage at affordable rates was one of the three major service concerns expressed by regional, rural and remote submitters to the Inquiry. Governments at all levels are exploring strategies to redress this level of inequity.

Government intervention and competitive neutrality

In the past government intervention strategies (for example, through NTN) have concentrated primarily on extending terrestrial base station coverage, typically through partial support for capital costs. In circumstances where LEOSat solutions were either not available or prohibitively expensive, this was clearly the most appropriate and effective strategy.

However, with the advent of Vodafone/Globalstar, in March 2000, the market environment has become more complicated, and the strategic options not as readily apparent. While the Globalstar offering is still considerably more expensive that CDMA and GSM services, both for handsets and call charges, the price premium is no longer prohibitive. Indeed current Globalstar prices are comparable with early prices for terrestrial offering, and also compare favourably with Globalstar prices being offered in other countries. Furthermore, Vodafone argues that these prices will reduce rapidly as economies of scale grow with increased take-up of service.

In this respect the company has expressed concern to the Commonwealth that government strategies to subsidise terrestrial infrastructure extension are unfairly impinging on their core target market. It was also concerned they were jeopardising the likelihood of achieving the economies of scale required to reduce handset and call charge prices.

There is some validity in this concern. It is also clear that there is a point where target populations are sufficiently thinly scattered that it is no longer viable to serve them via terrestrial networks, even with a 100 per cent subsidy for capital infrastructure. In other words, there is a part of the market which will be served most effectively by a satellite solution.

It would be a complex and difficult exercise to ascertain where this point lies. The most obvious approach would be to assess where the recurrent cost of providing terrestrial service (plus normal profit) exceeds recurrent revenues, and assume that beyond this point subsidising a satellite approach is most feasible. However, before this point, it could still be more cost effective to support a satellite solution if the cost of subsidising handsets to terrestrial handset price levels was cheaper than the cost of subsidising terrestrial infrastructure. This could occur if handset subsidies resulted in increased take up, therefore reducing call charges for satellite services to levels comparable with terrestrial service charges. Without a more detailed understanding of the elasticity of demand for satellite services, this cut-off point would be difficult to assess.

Assessment of the relative merits of each approach also needs to take into account the utility of each system for users in the target region. Globalstar offers a "go anywhere" capacity for users who may need to travel into remote areas. Alternatively, a CDMA solution may allow more affordable use in neighbouring areas covered by CDMA service.

Handset subsidies

It is clear that if governments have an objective to provide all Australians with access to mobile services at reasonably comparable prices, they will need to consider subsidising satellite services in some way. State governments, particularly the Western Australian Government, as well as regional communities, have implemented, or are seeking to implement, schemes to subsidise the capital cost of handsets as the most administratively simple and effective way of providing support for satellite mobile service. It has been recognised that any attempt to subsidise call charges as a means of achieving price equity would be administratively very complex, and would run the risk of significant market distortion.

The approach of subsidising LEOSat handsets differs from supporting terrestrial mobile infrastructure in two important respects: - The subsidy is for equipment essentially for private use, rather than for infrastructure that is available to the general public; and - The subsidy is provided to reduce the price of the service, rather than to make it available to unserved communities.

These differences have raised concern that governments should not be in the business of subsidising privately held equipment, nor should they be seeking to intervene in the price of commercial goods and services. However, such an approach can be justified, as demonstrated by numerous government initiatives to provide equity for disadvantaged consumers through payments targeted at individuals, and through strategies to reduce the price of unfordable services.

In the area of regional telecommunications the following initiatives are directly relevant and comparable: - Payments to individuals ¨ The NTN Board has provided funds to support the conversion of subscribers' set-top boxes to digital format under the Remote Area Broadcasting Scheme; and ¨ The Special Digital Data Service Obligation specifically allows for a rebate on the price of consumer satellite reception equipment, in order to reduce price inequities between that service and the ISDN service that applies under the Digital Data Service Obligation. - Support to reduce prices ¨ The NTN Board has clearly stated it will support the provision of new Internet infrastructure in order to reduce prices paid by consumers, if those prices are effectively impeding broad access to the service.

These and many other examples in other areas of government, show that governments should not be unduly concerned about the principle of providing a subsidy to individuals for the purpose of achieving equitable and affordable access to services. However, there are a number of policy and administrative issues that need to be addressed in developing a program to subsidise satellite handsets; including

- Scope of the program

What geographic areas will the program cover? All areas in a State/Territory not covered by terrestrial service? Those most isolated?

- Amount of the subsidy

What level of subsidy should be applied? Sufficient to reduce handset prices to those applying to terrestrial handsets? Sufficient to stimulate take-up of services to a level that would provide enough economies of scale to drive down prices through market mechanisms?

- Eligibility issues

Who should be eligible for a subsidy? Should businesses be included? Should a means test be applied? How many subsidies per household?

- Duration of the program

For how long should the program run? For a set amount of time? Until available funds run out? Until prices drop to a certain level? Or a combination of these elements?

The Western Australian government has addressed this range of issues in establishing its program to subsidise satellite handsets in the more remote parts of that state. Other programs may adopt slightly different approaches, depending on varying factors such as the amount of available funds, market developments, and equity objectives. However, a common overriding objective of all such programs should be to stimulate the development of the commercial market for these services in an open, fair and transparent way, and to distort that market development to the least extent possible.

Inter-carrier roaming

Inter-carrier roaming offers the benefit of allowing the most extensive mobile networks to be used by the customers of networks with less coverage. This is of particular significance in regional areas where Telstra has the greatest service coverage, both with GSM service and more recently with its very extensive CDMA network. It should be noted though that consumers pay a premium for calls when they roam onto another carrier's network.

The Australian market is experiencing an increase in inter carrier roaming agreements between mobile phone carriers. This is consistent with the 1998 ACCC finding that there was sufficient commercial incentive for carriers to enter into roaming agreements for the ACCC not to mandate roaming through regulation. This approach is supported by the industry, with carriers arguing that mandating roaming eliminates the competitive advantage of network coverage, and therefore acts as a disincentive to invest in mobile phone infrastructure.

In implementing its $25 million program to provide continuous mobile coverage on the nation's major highways, the Commonwealth has recognised that roaming may enhance its capacity to extend continuous coverage to the maximum number of users of these highways. It is therefore requiring bidders to offer roaming on at least the government-funded base stations on these highways, with details on terms and conditions and implementation schedules to be set out in tender responses, and to be subject to contract negotiations with the Commonwealth. Carriers will also be evaluated on the extent to which they offer roaming on other parts of their network so as to allow other carriers to achieve full continuous coverage.

There have been calls to mandate roaming more widely, particularly in regional areas where Telstra's GSM coverage is far superior. However, there are a number of difficulties associated with such a move that may well outweigh the benefits that may result. In particular the following matters should be noted: - All three GSM carriers are strongly opposed to mandated roaming on their GSM networks, and there would likely be significant difficulties in established agreed commercial arrangements; - The only real benefit in such arrangements would be for Vodafone and Optus customers roaming onto Telstra's regional GSM network, given that Telstra has virtually full coverage of areas serviced by Optus and Vodafone; - Telstra's GSM coverage advantage in these regional and rural areas is likely to diminish over time, given that it is likely to concentrate heavily on CDMA expansion in these areas; and - Telstra is actively encouraging roaming agreements on its CDMA network, as it seeks to consolidate its first-mover advantage in this technology.

Universal Service Obligation (USO) Reform

As part of its objective to introduce competition into the delivery of services under the USO, the Commonwealth has established two USO contestability pilot regions, in the Greater Green Triangle and Goldfields areas of Western Victoria and South East South Australia, and in the New South Wales Northern Rivers region and South Eastern Queensland.

In these pilot regions carriers will be able to seek pre-qualification with the Australian Communications Authority to compete with Telstra to provide services to loss-making customers, and to access USO subsidies attached to these loss-making services. Carriers will be able to seek approval to provide Alternative Telecommunications Services (ATS) in fulfilment of the USO. Such services must be voice services, but may offer functionality that differs from the Standard Telephone Service (STS) as provided by Telstra.

It may well be that mobile services could be offered as ATS products, and through the USO mechanism be extended to parts of regions currently unserved by commercial mobile offerings. Equally satellite mobile services could be offered through this mechanism, on more favourable terms and conditions than are currently available commercially.

Untimed Local Call Tender

The Commonwealth Government has committed $150 million, and released a Request for Tender for the provision of enhanced infrastructure in Telstra's extended zones, to allow universal access in Australia to untimed local calls. This RFT encourages the provision of other enhanced communications services by bidders, in addition to the core requirements for untimed local calls, and untimed local call access to the Internet. It is possible that improved mobile coverage may be one of the enhanced services offered by respondents.

Demand Aggregation Strategies

Some States/Territories (for example, South Australia) have sought to use their aggregated buying power to require or encourage carrier suppliers to extend mobile services into previously unserved areas. Such strategies could also be linked to strategies to aggregate fixed voice services.

Recommended Approach

It is clear that the vast majority of Australians consumers, almost 97 per cent, have access to a mobile service (or services) that are of high quality and relatively affordable by world standards. The remaining three percent have access to a satellite mobile service that is of high standard, but still relatively expensive. These consumers are therefore disadvantaged in comparison to the rest of the community, more so given the increasingly vital role played by mobile services in the social and business life of communities.

Strategic options available to governments to address this level of disadvantage will include the range of strategies discussed above, and summarised as: - Continue to promote competition and the commercial roll-out of services, through the regulatory environment; - Stimulate the extension of services through providing opportunities under a competitive USO framework; - Leverage government demand for mobile services to extend service delivery to unserved areas; - Continue to stimulate the extension of terrestrial services through targeted support for capital infrastructure; and - Support the growth of satellite services through subsidising the cost of handsets for a limited period.

Commercial satellite service delivery is now well established, and is offering unserved communities a genuine alternative to extending terrestrial infrastructure. Therefore, it will be important to ensure that targeted funding approaches, such as through NTN, provide, to the greatest extent possible, equal opportunities for both satellite and terrestrial (CDMA and GSM) mobile providers in the future. This approach should apply to all areas of Australia and the external territories that are currently unserved by terrestrial mobile infrastructure.

Tenders and/or proposals will need to be structured to allow bids that, although targeting different areas of subsidy support, could still be evaluated and compared in terms of cost to government, effect on the industry and the market, and resultant service benefits and utility for consumers.

All strategies to promote universal access to affordable mobile services, and to stimulate commercial development, should do so in a way that is to the greatest extent competitively fair and transparent. They should also have the objective of achieving enhanced and sustainable competition in the mobile phone market.

July 2000

• Document ID: 3464 |
• Last modified: 6 February 2008, 12:17pm