Sydney Institute Address

Sydney Institute Address
Senator the Hon Mitch Fifield
Wednesday, 26 October 2016

 

Introduction and acknowledgments

 

Thank you, Gerard.

The Sydney Institute has not only enriched the thought life of Sydney but also the nation. You and Anne have created something very special.

The Communications and Arts portfolio touches every home and business in Australia. I describe the two responsibilities of Communications and the Arts as the sinews and the soul. The Communications infrastructure and technologies are the unseen connective tissue. As for the soul, I’ll leave that for another day.

We all know, the communications sector is in transition. It always has been.

Tonight, I want to detail some of the economic and public policy considerations of this transition. First, for the nbn, and following that, for Australia’s media sector. That is, what we’re doing to refurbish our laws and realise our communications opportunities.

The nbn is on track, on budget

I want to start by taking a moment to recognise the great work now going on at nbn. Much of this goes unheralded thanks to the white noise of political debates and technology debates.

But before I do, some facts need to be on the table about what this government inherited.

Contrary to popular mythology, Labor did not achieve broadband Nirvana, nor were they in any danger of getting near Paradise anytime soon.

Under Labor, the NBN was, quite simply, a failed project:
—     contractors had downed tools in four states
—     after four years and $6.5 billion, only 51,000 paying customers had been connected
—     every financial and rollout benchmark had been missed
—     the rollout was running two years behind schedule
—     the rollout was not likely to be completed until 2024[i]
—     costs had blown out from Labor’s original plan by $30 billion

We inherited chaos, and brought order to bear.

What Malcolm Turnbull did as Communications Minister was to usher in a new Board, a new management and a new plan. As a result, the nbn team have effected one of the biggest corporate turnarounds in Australia’s history.

At the heart of the change of plan was a new mandate for NBN. Labor had taken a theological approach to the NBN. Fibre everywhere. Regardless of the cost. Regardless of the time.

Former Senator Conroy was the high priest. He had his own theology and a small but devout group of followers.

Anyone who questioned this approach was a heretic. A fibre denier.

The great irony of the Labor approach is that in the most dynamic and unpredictable policy area — communications technology — Labor had embraced dogma. And this dogma was presented as proof of modernity. It wasn’t modernity. It was perversity.

What Malcolm Turnbull did was to replace a theological approach with technological agnosticism.

What this meant was rather than fibre everywhere and always, the NBN’s new mandate was to use the technology that made sense in a given area. Use the technology that would see the NBN rolled out fastest and at lowest cost.

Whether that be fibre-to-the-node, fibre-to-the-curb, using the existing Pay TV cable network, fixed wireless or satellite. This approach means nbn will now be finished by 2020 — six to eight years soon than Labor’s approach.

The proof of this approach is in the company’s results. nbn has met its financial and operational targets for the ninth successive quarter. That’s an unbroken run of more than two years.

The company achieved an unmatched rate of growth last financial year – doubling its service footprint – and exceeding overall revenue and activation targets.

Today the nbn is available to 27 per cent of the nation. It will be available to half the nation by the middle of next year. And completed by 2020. nbn is on budget and on target.

nbn has achieved this growth primarily through the new technology mandate and by establishing effective commercial relationships with the construction industry, vendors and the retailers selling phone and internet plans.

Commercial contracting is one example of the way in which the nbn has been transformed. Last year, nbn wrote fresh contracts with ten separate construction companies, each of which now vie for ongoing work by demonstrating they can meet quality standards within rollout deadlines.

The new approach departed from the model under the previous government that guaranteed large volumes of work to suppliers in specified regions regardless of performance.

These contractual arrangements are a good example of why Australians can have confidence that the nbn rollout will reach them soon, and that peak funding will remain on target at $49 billion.

The nbn policy debate

Too often, discussion about the nbn gets bogged down in a technology debate. But at its heart the nbn is about business models rather than technology choices.

One of the most recent contributions to the nbn policy debate was distinguished business writer Alan Kohler’s public mea culpa.  He noted that he was formerly a champion of an all-fibre NBN vision, but the cold shower of economic reality had changed his views.

The key factor that changed Alan Kohler from supporter to sceptic was the realisation that the success of the nbn comes down to its business model rather than its technology choice.

In Kohler’s own words, “the numbers are simple, and inescapable.”[ii]

While I don’t necessarily agree with all aspects of Mr Kohler’s characterisations — and I will address nbn pricing issues shortly — I welcome the scrutiny, and I welcome a counterbalance to the technological zealotry that often clouds this debate.

It’s an important debate. In some ways not dissimilar to recent debates over electricity distribution networks being gold plated at the expense of household budgets.

Economic and public policy challenges

Since taking the reins of the nbn in 2013 the Coalition has focused on completing the rollout as quickly and cost-effectively as possible. To enable all Australians to participate in the digital economy.

But to be frank, creating a huge new government-owned monopoly would not have been the Coalition’s preferred means of supporting the upgrade of broadband across Australia.

But, turning back the clock in 2013 simply wasn’t a practical option.

The way the enterprise was structured from 2009 to 2013 meant that the nbn was an inexperienced government start-up entangled in contracts and entrenched in legislation.

NBN Co had been anointed as the vehicle for delivering the then Government’s unrealistic policy objectives.  And by inking multi-billion dollar deals with Telstra and Optus to migrate all of their fixed line customers, nbn had become the commercial linchpin in a massive market transformation.

The negative consequences of further disruption for the sector can’t be overstated. This was a domestic industry generating revenue of $16 billion in 2013-14 from fixed line services.[iii]

Resolving the countless policy and operational legacy issues connected with the nbn has been like untying a Gordian Knot.

It was in this context that last week I was bemused to find a group of Opposition Senators chiding the Department of Communications and the Arts during Senate Estimates for not updating the cost-benefit analysis of the nbn.

Never mind that the Coalition initiated the first and only cost benefit analysis of the National Broadband Network through the Vertigan Review in 2014 – a full four years into Labor’s project.

By contrast the Labor Government’s original $4.7 billion election commitment of 2007 had morphed into an estimated $43 billion project by 2009 without even the most cursory cost-benefit analysis or even a detailed business case.[iv]

In fact, the Scales Audit of NBN Public Policy Processes under Labor found that the entire project, involving government expenditure of $43 billion and an effective renationalisation of the nation’s domestic communications infrastructure was conceived, scoped, and signed off in just “11 chaotic weeks”.[v]

And we all know that the $43 billion figure was itself a dramatic underestimation of what an all-fibre NBN would actually cost.

For the record, the highly detailed Cost Benefit Analysis found that the FTTP scenario had a net economic cost of $22 billion relative to an unsubsidised rollout scenario, “because it is more costly and slower to deliver, which delays the realisation of benefits.”[vi]

The speed that matters most…

In today’s economy, information is one of our most important resources. The transmission of information over high speed communications networks is one of its defining features.

By supporting the transmission of information the nbn is facilitating growth in the Australian economy through innovation, improved business practices, greater competition and increased international competitiveness.

And importantly our policy has always been to deliver the nbn sooner, and to manage the project’s costs to keep broadband affordable. The benefits of this approach are obvious for consumers and taxpayers alike.

As I’ve said before, at its most fundamental level, the nbn speed that matters most is actually the speed of the rollout.

That is because most of the social and economic benefits derived from fast broadband result from more Australians having access sooner.

Today the nbn is available at 3.2 million addresses and there are 1.4 million paying customers.

In just the past four weeks, 85,000 customers have been hooked up to the nbn.  That’s an average of 4,200 new activations every working day.

Bridging the digital divide

It is in the previously underserved regional and non-metropolitan areas where we are seeing some particularly exciting progress.

In non-metropolitan areas the rollout is now more than 43 per cent complete.

About 800,000 homes and businesses in regional areas are able to access services over nbn fixed line technology.

The rollout beyond the fixed line footprint, which is using wireless and satellite technologies, is also progressing well. nbn has indicated that it expects it to be largely finished in 2018.

Tasmania is now more than 60% complete[vii].

We are starting to see entire cities and regions declared nbn-ready, including Darwin, Launceston, Cairns, Geraldton, Wollongong, Bundaberg, Armidale, and New South Wales’ Hunter and Central Coast.

On completion, the network will cover around 3.6 million premises in rural, regional and remote Australia, providing the opportunity for many more regional businesses and individuals to harness the technology they need.

The difference the nbn is making to regional business opportunities and lifestyles is already starting to emerge.

The latest findings released from the nbn Broadband Index, a report commissioned by nbn, show that regional nbn users are twice as likely as those with a non-nbn connection to use the internet to sell products and services or source business opportunities.[viii]

nbn’s scale is delivering new market opportunities

Vodafone’s announcement last week that it plans to join the fixed-line broadband market next year selling services over the nbn, points to the network’s growing scale and the new business opportunities being identified.[ix]

The nbn undoubtedly will enable retailers to provide a broader range of services to consumers over vastly superior technology and at prices in line with consumers’ willingness to pay.

Wholesale pricing

There has been some talk in the press about nbn’s wholesale pricing, so I would like to take a moment to outline the rationale and arrangements in place.

A detailed regulatory framework governs the nbn’s pricing and access terms. The framework allows for a modest return on the Government’s $29 billion equity investment — about one per cent above the long run inflation rate, and calculated over an extended period out to 2040.

Indeed, it is the ability of Government to take on the high capital investment risk and accept a low return that has meant Australia’s retail telecommunications sector can benefit as a whole.

Significantly, retailers are gaining access to a vastly upgraded broadband network for their customers without making much infrastructure investment themselves.

They are also benefiting from a changing market structure based on the replacement of Telstra’s Customer Access Network with the new national broadband network — as well as the nbn’s ongoing investment in R&D to support future network upgrades.

With this in mind, nbn’s pricing model was developed to foster broadband take-up and give retail phone and internet providers flexibility to differentiate their products and cater to various market segments.

The nbn already represents a clear step up the broadband technology ladder, whether it’s serving users on the Sky Muster satellite or the city-dwellers on fixed line technology such as HFC or fibre-to-the-node.

And, while the network speed baseline is nominally set at 25 megabits per second, nbn estimates that at rollout completion in 2020, 45 per cent of premises nationwide will have access to up to 500 megabits per second, and around 86 per cent will have wholesale speeds of at least 50 Megabits[x].

With these changes afoot, the pricing and access arrangements of the old networks are not easily comparable with the new nbn model.

When looking for benchmarks, Telstra’s unitised wholesale prices are probably the best guide. These are published on the ACCC website as part of Telstra’s Structural Separation Undertaking.

The latest quarterly report from the end of FY16 showed that Telstra’s wholesale revenues per service for a ‘voice and ADSL bundle’ averaged out at around $49 per month.[xi]

Another measure of the costs to retailers accessing Telstra’s ADSL and phone network is the ‘total bundle of fixed wholesale services’. This represents a mix of services supplied by Telstra and accounts for some retailers having invested in their own infrastructure and electronics in Telstra’s exchanges.

The average across this range of services is around $33 per month.

In comparison, the average revenue per user on the nbn is currently $43 per month and take-up has continued strongly across all technologies.

Our focus on the most economical nbn is important for both the customer’s wallet and for the amount of tax we ask of companies and of households. And, it’s why the turnaround of the nbn under this Government has been so important.

As I mentioned earlier, the success of the nbn comes down to its business model rather than its technology choice.

In addition to fixing nbn’s business model, the Government’s focus has been to take a considered and pragmatic approach to the needs of the sector.

After six years of the previous government taking an extremely interventionist approach, creating years of investment uncertainty, the sector has responded positively to Coalition Government’s approach to reform.

Government doesn’t know best. Our goal is to get out of the way.

Which brings me to media law reform.

It’s one of the truisms of Australian politics that media reform is always just on the horizon. And so it remains today.

Media law reform

All of us here have seen in our homes, or on public transport, or in waiting rooms, how rapid developments in technology are driving seismic shifts in how media is consumed and produced in this country.

It is difficult to overstate the pace and magnitude of this disruption. The traditional media business models – the bulk of which rely on advertising dollars – are under extreme pressure.

Without labouring the point, it is worth reminding ourselves of some of these developments.

Changes in media

Today, large overseas online-only media companies – such as Netflix, Google and Apple –  compete strongly with ‘traditional’ regulated sources of news and entertainment content (television, radio and newspapers). And the pressure on these established operators is continuing to mount.

In just five years, newspapers have gone from having around 30 per cent of the advertising “pie” to just over 13 per cent.  And online advertising has grown from 18 per cent to over 42 per cent.[xii]

In particular, both telcos and media companies face the ever-increasing use of ‘over the top’ services.

Eight months after Netflix launched in March 2015, it had 1 million subscribers. By May 2016, this figure had risen to more than 1.8 million.

Today, more Australians have Subscription Video on Demand services than Foxtel’s traditional ‘pay TV’ service.

A dramatic change for a platform available in Australia for less than two years.[xiii]

The impact is clear. Hundreds of jobs have been cut across major media organisations. And the financial results of Australia’s largest media companies over the last five years highlight that they are, with few exceptions, stuck in a ‘pincer movement’. Flat or declining revenues and increasing costs.

Regulatory reform essential

In this environment, with these revenue and cost pressures, our domestic media businesses are under real pressure.

Industry must shoulder the responsibility to innovate and adapt.

However, regulation also plays a part. We cannot afford to retain laws that inhibit Australian media companies from operating with the scale and scope necessary to compete in a global media space.

I’ve stated before my view that many of our telco and media laws, which once made sense, are now an anachronism.

My focus today is on one arm of that reform agenda: the media control and ownership rules.

The Government’s proposals are well known. We are seeking to repeal two of the five media control rules that do little to support media diversity, but do a lot to undermine local content.

These are:

The 75 per cent audience reach rule, which prohibits a person from exercising control of commercial television broadcasting licences whose combined licence area populations exceed 75 per cent of the Australian population.

And, the 2 out of 3 cross-media rule, which prohibits a person from controlling more than two out of the three regulated media platforms in any commercial radio licence area.

The case for these reforms is overwhelming, especially when the myths and misconceptions surrounding it are busted.

Media diversity remains important

To begin, these reforms are not a threat to media diversity. To the contrary, viable Australia media organisations are an underpinning of diversity.  Our changes to Australian media laws are intended to bolster that viability.

While we are seeking to repeal two of the five media control rules, this should not be read as a belief that media diversity is no longer important.

A diversity of media ‘voices’ is pivotal to supporting an informed citizenry and an effective democracy. This is as much the case today in the digital media environment.

What has changed is the way ‘voices’ can be articulated and heard in the media.

New technology has fundamentally changed the way news and news-like services are produced, distributed and consumed.

§  Close to half of all Australians (44 per cent) actually identify online sources of news, including social media, as their main source of news, ahead of the more traditional platforms.[xiv]

§  Consumers spend more time accessing news online on websites or apps than reading printed newspapers (3.3 hours versus 2.8 hours).[xv][8]

§  Online-only or predominantly online sources, which compete for audiences, now include The Conversation, Crikey, New Matilda, The Huffington Post, The Daily Mail, The Guardian Online and BuzzFeed, and online aggregators such as Google News and Apple’s News app.

§  More than half of the audiences for Australia’s major mastheads, such as The Australian, The Age, The Sydney Morning Herald, access content online.[xvi][9] However, generating a return from those audiences is difficult: only 13 percent of those who access the news online currently pay for the service. [xvii][10]

Social media and online platforms have diversity-enhancing effects. They lower barriers to entry. Permit new ‘voices’ to be heard outside the mainstream. And they speed up and widen the distribution of news and analysis.

They don’t, however, ‘solve’ the media diversity puzzle. We are not at the point where we can consider doing away with all media diversity rules, not least of which because traditional media operators still have a strong presence in the online news space.

To maintain a balance, media transactions will continue to be subject to the ‘5/4 rule’ and platform specific licence limits.

§  The ‘5/4 rule’ provides that at least five independent media groups must at all times be present in metropolitan commercial radio licence areas and four such groups in regional commercial radio licence areas.

§  The licence limits provide that a person may control only one commercial television licence in a licence area and a maximum of two commercial radio licences in a licence area.

These rules still have a role to play in supporting media diversity, particularly in regional areas where there are generally fewer major media ‘voices’.

Mergers and acquisitions in the media sector will also continue to be subject to Australia’s general competition regulation under the Competition and Consumer Act 2010, overseen by the Australian Competition and Consumer Commission (ACCC).

In short, the Government won’t be demolishing our media laws — rather we’re proposing a substantial renovation. The Government is seeking to repeal the ineffective elements of the control framework, while retaining the rules that still matter, particularly in the regions.

These reforms are not a threat to media diversity. In fact, the greatest threat to media diversity would be to fail to support and pass these reforms.

We must give our local industry the ability to compete by creating opportunities to gain scale and pursue horizontal and vertical integration.

The 2/3 Rule

Our media reform legislation current before the Parliament contains three parts. The repeal of the 75% audience reach rule, and some additional local programming obligations after a trigger event, for regional areas. These measures have attracted broad support.

Debate has centred around our proposal to abolish the two-out-of-three rule which prevents anyone controlling more than two of the three traditional forms of media in a market – commercial television, commercial radio and associated newspapers.

In this debate people are asking – “why should the 2/3 rule be abolished”? But in many ways this is the wrong question.

The right question to ask is – why should we keep this rule? Governments should examine regulation and justify why it should be there.

And with all of the evidence about changing technology and rapidly shifting consumer preferences, I have not heard anyone able to articulate a reason why this rule should remain.

And what our media organisations are overwhelmingly telling us – particularly those in regional areas – is that the regulatory status quo is unsustainable and will lead to a continued decline.

The time for delay is over.

The Government has had on the table for the best part of a year a clear reform plan that will unshackle Australian media companies from redundant regulation that is holding them back.

We want to give Australian companies the best chance to continue serving local audiences with Australian news and local content. We want the profession of journalism to flourish. We want to see the media industry growing and creating jobs.

But the Parliament must do its part. And Labor need to step up.

There is a paradox in Labor’s position. On the one hand they say our media reform doesn’t go far enough. But Labor’s own answer to ‘not enough’ is to actually do less.

Thus far, Labor only support the repeal of the 75 per cent audience reach rule. The only reason put forward by some in Labor to oppose the repeal of 2/3 is that it may benefit (insert name of media bogeyman of choice).

Apart from supporting abolition of the 75 per cent reach rule, all Labor are proposing is yet another inquiry as a substitute for action. No area of policy has been more inquired into than media law.

Just in the last few years we have seen:
§  in March 2013 – The Convergence Review

§  in June 2013 – The Joint Select Committee on Broadcasting Legislation

§  in March 2015 – the Competition Policy Review conducted by Ian Harper

§  in May 2016 – The Senate Standing Committee on Environment and Communications

§  and, in September 2016, the Senate Standing Committee on Environment and Communications. Covering the same territory as the inquiry only three months earlier.
As the Manager of Government Business in the Senate I am by nature a legislative optimist. I’ll continue to work with my Opposition counterpart, Michelle Rowland, and my crossbench colleagues to secure media reform.

If I have a wish or a benchmark against which I might be judged after my tenure in this portfolio, it will be that as a country we no longer talk about the nbn as an end in itself, but rather what it is achieving and how it’s being used. And in terms of media law, I’ll be happy if it’s in a state where it’s just no longer talked about at all.

 

ENDS

 

 

NOTES