VZCZCXRO9248
RR RUEHPT
DE RUEHBN #0038/01 0670613
ZNR UUUUU ZZH
R 080613Z MAR 07
FM AMCONSUL MELBOURNE
TO RUEHC/SECSTATE WASHDC 4420
INFO RUEHBY/AMEMBASSY CANBERRA 3140
RUEHGP/AMEMBASSY SINGAPORE 0223
RUEHWL/AMEMBASSY WELLINGTON 0078
RUEHDN/AMCONSUL SYDNEY 1808
RUEHPT/AMCONSUL PERTH 1279

UNCLAS SECTION 01 OF 02 MELBOURNE 000038 
 
SIPDIS 
 
STATE PASS TO USTR MCHALE, BOLLYKY 
STATE FOR EB/CIP 
 
SENSITIVE 
 
SIPDIS 
 
TAGS: ECON USTR ECPS AS
SUBJECT: AUSTRALIAN REGULATOR SAYS TELSTRA DOMINANCE OF 
TELECOMMUNICATION MARKET LIKELY TO CONTINUE 
 
 
¶1. (SBU) SUMMARY: The Australian Competition and Consumer Commission 
(ACCC), the Australian government's anti-trust regulator, believes 
that the telecommunications giant Telstra is even better positioned 
to increase its market dominance following the final government 
share sell off (known as T3).   While the ACCC has extended a series 
of challenges to Telstra's market dominance, the GOA's refusal to 
split the company will make it more difficult to prove any 
cross-subsidization within Telstra.  As a result, while competition 
from cellular telephone companies remains a possibility in the voice 
market, potential competitors will hesitate to go head-to-head with 
Telstra in the critical data transmission market, where it may well 
be able to get away with cross-subsidization of a new fiber optic 
network through an opaque accounting of costs.  If Telstra does 
capture the growing demand in the data market, it will succeed in 
undermining competition and securing its own dominance in 
telecommunications.  In that case, we can expect Australia's 
competition regulator will continue to challenge Telstra in court 
but it and U.S. firms that wish to compete in Australia's 
telecommunication market will continue to face an uphill battle. 
END SUMMARY. 
 
¶2. (SBU) Joe Dimasi, Executive General Manager of the Australian 
Competition and Consumer Commission (ACCC) met with Economics 
Counselor Matt Matthews and Melbourne pol/econoff Maya Dietz on 
March 5.  Dimasi said that not only did Telstra remain a dominant 
player in the telecommunications market post T3, it likely would 
become even more so in the future.   Although the Howard government 
made no changes favorable to Telstra in the privatization process, 
according to Dimasi, the Government's failure to split the company 
and create only weak separation of operations left Telstra well 
positioned to exploit cross-subsidization opportunities in future 
ventures. 
 
¶3. (SBU) "If the story was voice, Telstra dominance could be 
threatened by mobiles," Dimasi said.  "But the story is data 
transmission, which is where all the new money is coming from." 
Cellular telephone companies, or mobiles, as Australians call them, 
have increased capacity to carry data, "but wireless can only take 
you so far before congestion becomes a real issue," he said.  At the 
moment, this really meant looking at fixed line networks.  The two 
fixed lines options, as he sees them, are to use the existing copper 
network (which Telstra controls), or invest in fiber lines.  "You 
are not going to get competition with fiber," Dimasi said. 
 
¶4. (SBU) Telstra's initial proposal to the ACCC to increase the 
speed of its current copper network was rejected by the regulating 
body because of the high price Telstra wanted to charge competitors 
to use the network.  According to Dimasi, Telstra is using the press 
to convince users that the ACCC has tried to force the company to 
price below cost, and that it is the ACCC that has prevented the 
networks from reaching the rural areas.  Both are lies, according to 
Dimasi.  By law, the ACCC cannot require a company to price below 
cost.  Second, Dimasi believes Telstra never had any intention of 
networking rural areas, because it was not commercially viable. 
 
¶5.  (SBU) A consortium of nine smaller telecommunications companies 
(led by Optus and comprised also of AAPT, Internode, iiNet, Primus, 
Macquarie Telecom, Powertel, Soul and TransACT), known as the G9, 
also has put forth a proposal that would allow for open access to 
the network.  An important distinguishing element of G9's plan is 
that whoever owns the network will not have a retail arm, and 
therefore would focus on access seekers rather than access 
providers.  Although a seemingly good alternative to a Telstra 
monopoly, it is not yet clear whether the consortium can "pluck up 
the courage" to challenge Telstra, Dimasi said.  "Telstra has enough 
money to roll out its own [fiber] network...and the market cannot 
afford two."  If the G9 fails to raise the financing, or simply 
backs down under Telstra pressure, it would entrench the dominance 
of Telstra's position, he affirmed. 
 
¶6.  (SBU) Telstra has lost all of its challenges of ACCC rulings 
before the Australian Competition Tribunal, according to Dimasi, 
including its claim that the ACCC was unfairly forcing the company 
to lower its price for line access.  Dimasi also thinks that Telstra 
will lose a case it has pending before the High Court, in which the 
company alleges that its property has been taken without due 
compensation, referring to the fact that it cannot price as it wants 
for competitors to use its lines.  Telstra is making "a last ditch 
effort before the elections", Dimasi said, to strike fear into its 
competitors and win concessions from the government.  In the end, 
Dimasi thinks that ACCC will spend its time dealing with concerns 
about cross-subsidization, and term and conditions of access by 
other providers to Telstra's network.  "There are long, hard battles 
in the courts ahead", he concluded. 
 
MELBOURNE 00000038  002 OF 002 
 
 
 
¶7. (SBU) COMMENT:  Splitting Telstra's infrastructure and product 
divisions would have made the transition to fiber networks more 
rational and easier to regulate.   However, this was politically 
untenable at the time, likely because the government wanted to 
maintain the company's share price before the sell-off.  As the 
benefits to making the switch to a fiber network are substantial, 
especially in a country with Australia's geographic peculiarities, 
it will likely go forward, with Telstra in the driver's seat.  How 
opaque the operating environment will be for other telecommunication 
companies, and how much profit Telstra garners from the transition, 
remains to be worked out in the courts.  END COMMENT. 
 
¶8. (U) This message was cleared with Embassy Canberra. 
 
IRVING