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Summit paper for the Australian Consumer Council
by Stewart Fist
Preface1.1 Is bandwidth all that important?
We are at the watershed years between our traditional forms of telephony and broadcasting which had their origins over a hundred years ago, and new forms which are vaguely categorised under the rather pretentious and misleading name, the Information SuperHighway. This is seemingly a period of with numerous streams of technology converging to produce new networks which have different characteristics from the traditional telephone services we use today. The characteristics of the new networks are:
- Transmission (one-way) and telephony (two-way) combine and use a common network, but in a much more efficient way.
- Broadcast (one-to-many) services can coexist with personal (one-to-one) services. A single network is capable of handling broadband (video and virtual reality) requirements equally with mediumband (CD-quality music) and narrowband (telephony and messaging); the network is flexible enough to handle everything.
- The network remains efficient when handling steady streams of low-rate information over moderate periods (telephone conversations), high-rates over very long periods (television), massive short bursts of data for fractions of a second (image transfer & transaction processing) or occasional transmissions of only a few bytes of data (electronic metering and messaging); a network which is infinitely adaptable to requirements.
- A network which can react fast enough to allow real-time delivery of video and telephony traffic, but also handle store-forward services (messaging, information retrieval).Many of these concepts are new and some people may find it difficult to see value in them, but they will change the way we use our telephone networks.
It is a mistake to only see these new networks as simply combining the old requirements into one service; they aren't just broadcasting + telephony. Messaging, image transmission, information retrieval, metering, computer transactions, banking, billing and a whole range of other services have never been conducted before across public-access network (although The Internet has recently filled the gap), because the facilities haven't been available from either the telephone or the cable TV providers. These new networks include these new services, and extend them. So the new networks incorporate ideas that are developing around:
- the broadband (video) and the narrowband (Internet messaging) extremes,
- for one-way (broadcasting) and two-way (interactive) services,
for one-to-one conversations, or one-to-many discussions (conferences or forums) with real-time (telephony) and store-forward (messaging) requirements,
- for high security and low-security communications, where authentication (certainty as to who you are dealing with) or where anonymity is required.
The simple view of the SuperHighway being related to Pay TV and other forms of video requiring broadband networks is totally false in the long-term. And, from the national viewpoint, it isn't Information SuperHighways which are productive so much as 'Ubiquitous GoatTracks'. The idea that this is all about bandwidth (the ability to carry more and more information at faster and faster rates) is misleading.In fact, "productivity' seems almost to be inversely related to the bandwidth of a service.
The most highly productive telecommunications applications we are introducing today generally don't require any more bandwidth than we have already. And many of the services to be introduced in the future will benefit more from the new "fast-packet' switching and highly interactive functions of these new networks, than from the bandwidth.
2.0 Outline
I am dividing this paper into two distinct sections:
Part 1: Is an overview of the telephone service as it exists today, with emphasis on the costs of supplying this service; the value (or not) of competition in the provision of telephone services; and on costs and the potential costs.
Part 2: Is an examination of the Information Superhighway. How does it relate to Australia's development of Pay TV cable networks, and what are the implications for the future.
3.0 Part 1: An overview of the telephone network.
Australia has a very good telephone network, and taken in total, the overall prices are somewhere near the world-wide average - slightly on the high-side. However it is very difficult to compare telephone prices globally because of the wide range of ways in which telephone calls and services are charged, and because of the different physical environments in which the networks exist. In some ways Australia is a very difficult country for telephone services - we have long distances and light population densities. In other ways it is one of the easiest countries - we don't have ranges of mountains to cross nor are our cities and suburbs concrete jungles. We don't have snow and ice to contend with, and long-distance cables can now be buried to escape heat and floods. We now have satellite systems to cover the outback, and we don't need to share our radio spectrum with border nations.Telephone systems are very complex but they are progressively becoming more simple. We are now moving to integrated digital networks where one network, one cable-type and one form of equipment will handle everything.
During the transition stage however, our networks include both the latest in technology and also legacy items from a bygone era. In 1992, for instance, Telecom/Telstra closed the last of the manual telephone exchanges (with 'switchboard girls', plugs and cables) at Longreach, Queensland - museums from around the world wanted to acquire it. 1992 was the year when the US industry celebrated the centenary of the invention of the automatic telephone exchange - so Longreach was a 100 years behind the rest of the world. Yet a lot of the Australian network is ultra-modern.We are not alone in this problem. Most developed countries, including the USA and Europe, still have many ancient 'legacy' exchanges in operations in rural and outback areas, because the cost of upgrading rural services has, in the past, been closely related to settlement density and distance. However, this is now much less of a consideration. Subjectively, change to these networks may appear to customers to be dramatic - when in fact, they aren't.
The Longreach exchange was replace by a modern exchange, and the following year it was linked via a 6- pair optical fibre cable being laid as a secondary (back-up) line from Brisbane to Mt Isa. Overnight Longreach increased its potential to contact the outside world from a dozen simultaneous calls on copper wires, to approximately 52,000 simultaneous calls, if all the fibres had been fired up for use - more than one channel per household for the whole of outback Queensland. This is typical Telecom over- engineering.At the same time the technical staffing at Longreach, was reduced once again. The district headquarters now only has a staff of 5; down to a fraction of the dozens of linesmen and engineers needed to service the region twenty years ago.
The new exchanges and the optical fibre cables don't require constant maintenance like the old mechanical or manual switches, or the old transmission systems with wires on open poles and/or microwave.This change highlights how slow technology often progresses in some parts of what is otherwise a modern network.
It also illustrates that change doesn't necessarily happen in incremental upgrades, and why it sometimes appears to users to be revolutionary - even if replacement is evolutionary, and the replacement technology is relatively mature.It also illustrates how difficult it is to calculate costs - and economists love to judge Australian Telecom on the 'Rate of Return' on capital. But what is the value of a 100 year old exchange?Sometimes the payoff period for new telecommunications equipment is extraordinarily long by conventional business standards and sometimes it is extraordinarily short, especially at the exorbitant prices being charge for some services.
The $25 million (approx.) cost of the new Brisbane-Longreach cable, for instance, could well be recovered in the first two days of operations, if the full capacity could be used for the full 8-hours of the working day, at a price for the distance-component of $0.50 per call per minute - but of course, it can't be.
3.1 The world's largest machine
The global telephone network is the world's largest machine. Every telephone in the world must connect to every other telephone. The most modern equipment in a Sydney exchange must communicate with a 100 year old phone box in rural China. So interconnection standards are all important, and new developments need to be related to past technologies.Telephone networks must evolve; they must interconnect. The global carriers must jointly devise and agree on the same new standards; they must use equipment which essentially works in the same way and which performs identical functions. At the network level, there really isn't much room to innovate.
Since this is a background paper, not a text-book on telecommunications, there are many concept that need to be understood about telephone systems, but which are secondary to the main theme. Readers need to have a conceptual overview of telephone networks, and to take many of the following points on trust.
Universal Service Obligations
- You can broadly divide telephone technologies into two categories: transmission and switching. Both have changed dramatically in the last few years. Transmission because of optical fibre (and to a lesser degree new mobile radio technologies), switching because of the use of microprocessors, digital signal processors and other integrated circuits (ICs). Both categories are now dependent on the use of digital, rather than analog, techniques - except in the local loop (the wire between your home and the local exchange)
- Capacity in "transmission' (as distinct from switching) is now almost infinite. The town of Longreach only has 4,000 residents and Mt Isa only has a few thousand more, but it is economical for Telecom to install a standard fibre cable capable of carrying 52,000 simultaneous calls. The fibres are such a minor part of these costs that it just doesn't pay them to installing anything less.
- Capacity for "switching' (which includes other exchange functions such as multiplexing) is still reasonably expensive, but about half the real costs of a decade ago. More importantly, new switching and multiplexing techniques are almost maintenance-free. Switching and exchange costs are related more to the number of calls handled during peak-periods and to the duration of these calls, than to the number of lines connected.
- Standards conformity is all-important in telephony - much more important than having the latest in innovative technology.
Reliability is often also more important than having the latest and fastest wizardry. The wise carriers will not take a gee-whiz technology out of the laboratory and build it into a submarine cable. If the electronics are expected to sit at the bottom of the ocean, providing reliable service for 25 years, then the carrier needs to use technologies which have been subject to years of stress-testing.
- As a consequence of the above, we often have a very good idea which new technologies will be used in the network for at least the next decade, because these will have already been proven in the labs. This industry is not like computing, where a new discovery or development can be introduced overnight.
- Networks are so complex, components are so interconnected, technical solutions are so different, and cost-price relationships so erratic, that it is almost impossible for economists, politicians and accountants to make sense of telecommunications price-structures.There is no standard way to calculate the reasonable prices for telecommunications services - a fact that is well-known to telephone executives. Everyone attempts to fall back on "Rate of Return on Capital' or "International Best Practice' (which, in a global interconnecting cartel such as telecommunications, is a bit of a non sequitur.).
- Deliberate confusion and technological mystification is stock-in-trade for telephone companies dealing with the public and politicians. A regular ploy is to create Fear, Uncertainty and Doubt (FUD) in politicians by making regular claims of dramatic new developments which are just over the horizon, and 'well worth waiting for'. Fibre-to-the-home has been promised 'next year' for the past half-decade in order to keep competing Pay TV technologies (such as satellite) out of contention. Only when the satellites were licensed, did Telecom decide to build a coaxial network - and then it did not use 'Fibre-to-the-home' but coaxial links. Only in recent years has there been the development of external experts who are able to challenge many of these claims. Telecommunications has long been a 'closed shop' where both unions and executives have a commonality of interests in repelling inquiry or even interest in how the networks operate. The 'Telecom culture' is at least as strong and resistant to outside interference as the notorious 'Police culture'.
- This is a global industry which interconnects and needs to work together. An Australian company wishing to have a line to Los Angeles, for instance, will be renting a "half-circuit' from Telecom (previously OTC), and the other "half-circuit' rented from the American company AT& T. The Australian price will be about twice the normal American price - but as part of the international agreement, AT& T will mark-up its half-circuit price to match Telecom. This results in both overcharging (2.8-times) rather than just one.Each nation has a uniquely different physical environment, settlement pattern and cost structure. This is why "International Best Practice' is almost a meaningless term here. Sometimes it gives a rough guide, but only where extreme cases of overmanning and feather- bedding are apparent.
- The International Telecommunications Union (ITU - 1865) predates the UN and even the League of Nations by fifty years. Members of the ITU share common ownership of the international cables and satellites, and these cartels decide what prices are acceptable to each end of the link and they pay each other for services ("settlements') using confidential arrangements. They are outside the collusive trade practices laws of most countries, and the UN doesn't have such laws. This is the world's oldest and closest cartel which constantly acts in a collusive way, even though there is sometimes some competition between some members.
The value of the telephone lies mainly in its ubiquitous nature. One telephone on its own is useless; two interconnecting telephones, aren't as useful as three, or four ... and so on. The last phone to be installed still adds value to all, because it extends the network's reach. Metcalfe's Law states that the value of a network increases geometrically with the number of people who use it. So a network which reaches only 80% of Australians is substantially less in value to me than one that reaches 99%, since I can never predict who I may need to call, or who may need to call me.
Despite the fact that I may know no one in Longreach, I still get value out this rural town having a good phone services. A national ubiquitous communications service keeps the national wheels in motion - as does a national postal service. It is not just an individual service which should be totally funded by the individuals who use it. USO or Universal Service Obligations (subsidies to supposed 'uneconomical' outback services, pensioners, etc.) are often portrayed as a charity to rural residents, but they are also of immense national value. This is true generally, and even more when national defence is considered. Optus contributes to the cost of USO through an incremental payment whenever it uses Telecom links. However, if the development of the Australian telephone network had been left to competitive free-enterprise with profit as the sole motive, there is little doubt that Australia (or most large countries) would not have achieved a 96% coverage rate.
3.2 Directories
As networks grow internationally and widen locally into SuperHighways, they will also begin to make connection to millions of machines (most holding data) - not just people. In the future, the problem of "information overload' and of finding the appropriate contact/source of information will become critical. Directory functions (in the wider sense, meaning services to help us find useful and productive information) will begin to play a much more important part.
Currently Telecom runs directory services on behalf of Optus and Vodafone. Telecom often portrays this as an imposition, and it's been lobbying politicians for many years to be allowed to charge for 013/0175 Directory Assistance. It already makes very high charges for its highly restricted electronic directory service, and it charges thousands of dollars for the CD-ROM disk version - even though CD-ROM disks only cost a few dollars to produce.There are four national directory services:
For some reason, never explained or even revealed to the public, a few years ago half the marketing rights in these extraordinarily profitable Yellow Pages were sold to a consortium of four North American phone companies (one is an Australian company listed in Texas) for $6 million each. For this they received exclusive rights for 12 years. Marketing the Yellow Pages, consists of having 200 phone sales staff who ring up potential customers and ask if they want to increase the size of their display ad, or change to a bold listing. This is not an area which would benefit from overseas experience.
- Directory Assistance: Telecom claims that this costs it $130 million per year to run this service, and it wants to make a charge. In some parts of the USA, directory assistance costs up to $1 a time and is a major money-earner for the telephone company.
- Electronic Directories: Telecom claims that it can't make the electronic listings of names and phone numbers directly available to the public (those with a PC and modem) because the system would not handle the load. However, every time you ring Telecom's Directory Assistance, the operators use the same electronic directory to answer each local/national query. In fact, direct access would free up staff costs, and allow many staff to be replaced by relatively cheap directory servers.Telecom reluctance to provide electronic services, comes about because it wants to use electronic directories as an avenue into charging for human-assisted Directory Assistance, and it makes money from the sale of CD-ROMs.
- White Pages: These are seen as an obligation tied to the local connection monopoly. But it isn't much of an imposition; because of payments made for Bold listings, the White Pages (collection, printing and distribution) are a break-even operation. The listing information comes directly (and automatically) from the electronic directory database.
- Yellow Pages: Many of the American regional phone companies (the RBOCs) make more in profit from their Yellow Pages than they do from telephone services. In some years this has also been true in Australia, if you believe the annual corporate accounts. The public is not permitted to know actual figures, but it's estimated that Yellow Page publishing earns about $650 million in profits out of $850 million in revenue.This makes it the most generous cash-cow in Australia by a long, long way. Telecom takes a substantial part of this into its general accounts.
Yellow Pages
The significance of this probably arises from regular moves to privatise the directory business (by which they mean the Yellow Pages). Telecom's pre-emptive move in half-privatisation, seems designed to block full privatisation, because any new company would still be dependent on Telecom for the source of its listing information.The ridiculous levels of profit made by the Yellow Pages is a reflection of the de facto monopoly position (the government maintains that is area is open for competition!), and so Telecom's Yellow Pages profits are nothing more than an indirect tax on small business. It is the local tradesmen, specialist retailers, garages, car-repair shops, who must be listed in the Yellow Pages to survive, and it is these small businesses who pay exorbitant amounts for each special/display listing.A single page in the Sydney Yellow Pages alone can earn Telecom $75,000 and there are 3000 pages in the current directory pair. It's not difficult to see why the sale of such a monopoly service could be attractive to a government wishing to balance its budget - but only at the cost of heavy, and possibly increased long-term charges to Australia's small business operators.
Centralised directory services
Privatisation of directory services is also extraordinarily short-sighted. This is the one part of the future network that no one will want in private hands - because computerised directory services in the future will control information flows in telecommunications networks.With competition and the new network services, it is essential that Australia has a single source of electronic information available for call-forwarding, number translation, etc. which is part of modern directory functions. When people shift homes, or businesses, or travel, call redirection and forwarding must be done on a temporary and a permanent basis - between states, carriers, countries and networks. We are entering an era of Universal Personal Telephony (UPT) where numbers are attached to people, machines and job- descriptions, not just to telephone lines.
Phone numbers must be portable, and this means that they are not owned by a carrier, but by the person - and that person must be able to take their number with them if they change carrier or location. When they change jobs, some numbers should follow them while others should remain with the job/company.
For numbers which are not portable but have changed, the computerised directory must offer translation and call-forwarding services, and be able to advise the source automatically to make changes in its internal directory. For incoming international calls, some form of independent computerised directory must define which carrier is to carry the call across the country - Telecom should not automatically get all this business if competition is to be free and equal.
Electronic networks will also be involved in the future in home banking, the exchange of contracts, payment for services, etc. which all require a highly secure authentication, security and financial exchange mechanism - and this is all intrinsically linked to a central directory service. Future directories may (if you require) list all names associated with your residential phone (not just the single customer), and they may list fax, electronic-mail, and work-phone information also. Two competing directories provide us with much less value than one monopoly service, (if costs can be contained) because call- forwarding changes constantly need to be made to both. Future directory entries will be under the control of the user, and changed by him/her on a daily basis.
So if we are to have a true competitive environment and a range of new messaging, payment, conferencing, etc. services (often supplied by other companies or organisations), then the core directory function needs to be separated from Telecom and re-designed as a central independent government business enterprise. The electronic services provided by this organisation, must be equally available to every carrier.
While remembering that these databases generally hold name-address and number information which people desire to "publish', there are still enormous privacy implications. This organisations needs to be under some form of Privacy Commission's supervision, and linked to an official Telecommunications Ombudsman's function. Such an organisation would be self-supporting to the tune of about $650 million per year if it were permitted to keep the money (some hope!).
4.0 Network overview
We can conceptually sub-divide the telephone network into four main sections - each with its own problems, prices and standards.Customer Premises.
The CPE (Customer Premises Equipment) is the first obvious category. This is the home phone, the modem for a home or office PC, the switchboard of a larger company and all the extensions, fax machines and the like. This is outside our key area of interest here.The public access network consists of three parts:
Local loop
The local-loop or CAN (Customer Access Network). This consists of the pair of twisted copper wires from your home or office to the local exchange, plus some "line-card' electronics on the end of those wires which detect dialling, trigger billing, and connect you to an exchange switch. This is the one part of the network which is exclusively reserved for the use of one telephone connection - and as such, it imposes a high overhead on the capital cost of the network since there are 8.5 million of these in Australia, and most are only used for minutes in each day. Roughly 40% of the cost of the whole telephone network is tied up in local loop costs, and this sub-section is very unproductive in commercial terms. You supposedly pay for the local loop through an annual rental fee, rather than usage charges.
Which ever company owns this part of the network is the "dominant' company in a competitive environment since the exchange end of the local loop will automatically be connected to that company's inter-exchange network by default, and most likely use the same company's long-distance services.
However, note that there is no technical reason why ownership of the local loop cables and ducting isn't independent of either/any phone company. It could be owned and operated by the local council, or a local cooperative, and each line rented to its user. This then creates a true competitive environment, and avoids any need for costly cable duplication.
The exchange itself with its switches and the interexchange network, needs to be seen as a separate sub- section of the overall network. All phone calls tie up certain exchange electronics and inter-exchange cable connections for the duration of the call - but these are shared by all users. This part of the network therefore has high productivity and, these days, it has very low maintenance costs. The capital cost of providing the inter-exchange network is related to the number and length of calls. However the amount of switching equipment and connection channels provided is not related to "average' usage - but to "peak' usage - which is usually for an hour between 3 and 4pm on working days. All telephone networks are engineered to a level which avoids problems at these peak-requirement periods- which is why it makes no engineering sense to introduce "timed-local' calls other than during the peak hour in working days. In all off-peak times, the vast majority of equipment is just sitting idle - and telecommunications equipment does just as much work in idle periods as it does when it is being used.
The concept of "wear-and-tear' is ridiculous in telephone networks, and the power consumed in making a phone call is trivial. The only costs directly relatable to making a phone call in non-peak periods, is that of the billing system. And the greatest attributable additional cost here, is probably that of the ink on the bill.
The last sub-division is the long-distance network; the intercity cable system, and the international submarine cables, microwaves and satellites which carry the signals outside the national call area. This is the part of the network which has changed most dramatically in the last few years. Satellites which once carried a very high proportion of overseas calls, now only carry calls to out of the way island nations, etc. Microwave systems, once used extensively on the major inter-city routes, now remain in use only in the Northern Territory, North Western Australia and outback Queensland. Optical fibre is replacing the other technologies very rapidly - and has done so since 1983.
Every two-to-three years over the last decade, new fibre technologies have roughly doubled the capacity of the national and international network connections between our major cities. International cables have also be increasing in potential capacity at roughly the same rate (although not all circuits are made available).
At the same time, the cost of establishing these services has roughly halved (quarter on a per-call basis) every two-to-three years - so the cost-per-call-channel drops to about 25% of previous - and this has compounded for the last 12 years. However, around the world, the price charged by telephone companies hasn't reflected this cut in the real-costs/capacity relationship. Prices are maintained by international agreements, and by deliberate actions to under-provide capacity. This is the one area in information technology where the companies go to extraordinary lengths to under-rate improvements arising out of new technologies. And in order to maintain higher prices, cable systems are generally not "provisioned to their full capacity, to deliberately create artificial scarcity. In Australia, it is common to have only one-pair of fibres active in a 36-fibre cable. Our next international undersea cable will only have one active pair of cables, even though it is designed for 6 fibres.
The long-distance sector has become the global "cash cow' which has been driving the telecommunications industry profits and every company and government around the world appreciates the value of high-charges for profits and as a de facto taxing mechanism. Some small Pacific nations earn a large part of their government revenues from long-distance telephone call profits.
So in most countries around the world long-distance charges are responsible for providing the high levels of funding which have gone into technical R& D - which is why changes are happening so quickly. But these charges are also responsible for the excessive profits which allow billion dollar international corporate take-overs, for generous gifts and donations made to politicians and political parties (mainly in the USA), and for "commercial-competitive' decisions to throw extraordinary amounts of money into advertising and marketing in order to convince the public, regulators and governments that these cartel/duopoly operations are highly competitive.
Excessive profits have also been used to cross-subsidise a higher level of "value-added' services and peripheral businesses (Electronic Document Interchange EDI, Credit cards, satellite earth station construction, etc.) in competition to other independent service suppliers. And in Australia, it shouldn't be forgotten that Telecom provides the government with a pre-tax profit of $2.8 billion in the last financial year (they get both tax and profit) plus about $1 billion in undocumented and uncharged long-distance services to Defence, Customs and other government bodies. Some Yellow Page profits are also paid to the government.This gives Telecom immense lobby power with the government (quite apart from the Telecom union relationship) because they need Telecom to balance their budget.
4.1 Recent economies
There's no doubt that the quality of the global telephone service has improved out of bounds in the last ten years, and the cost of both local, interstate and international phone calls has been steadily dropping. Telecom and Optus constantly promote the idea that the improvement and cost reductions are due to a new spirit of free-enterprise competitiveness - and there is probably an element of truth here - but the same changes have been happening in other parts of the world in monopoly environments.The problem is in relating these improvements to competition in an industry where capacity increases constantly, and maintenance and capital cost requirements decrease rapidly. It is generally accepted around the world that prices should decrease, in compound real terms, by between 7% and 9% per year to account for technical improvements since 1983.
At this compound rate of reduction, any service costing $1.00 in 1983 should now be priced at about 36 cents in real dollar terms. In fact, we've only had reductions in the order of 3% to 4% compound over this period.
One reason why costs are going down around the world is that the new networks need less technical and engineering staff. The American AT& T, for instance, has lost over half its work-force in the last decade - but it is involved in long distance services only, where the changes have been the greatest.
However in companies similar to Telecom - for instance, British Telecom in the UK, and Nynex or US West in the USA, the average staff reductions have been about 45% since 1989. Telecom Australia, by comparison, has only dropped by 29%.So where has the money gone? There are three "sinks':
- Until recently, it has mainly funded enormous over-engineering of the national network to counter the anticipated competition. Recently the government has woken up to this, and now the excess cash appears as profits, which flow to the government.
- As engineers have retired, they've been replaced by new staff engaged in marketing, sponsorship of sports, advertising, etc. The old engineering staff have gone, but they've been largely replaced by ad men.
- Telecom has sloughed off some of its business enterprises (e.g. Yellow Pages, and its International Operations) so these staff numbers no longer appear on the books as Telecom staff.
So the cost of telecommunications in Australia has dropped at about half the expected rate - but massive advertising campaigns promoting "discounts' and special service plans convince us otherwise. Service has improved, but much of this is due to better and more reliable equipment. Service in country areas (where Optus doesn't have a presence) has deteriorated. At least three recent studies have shown that Australia has achieve no appreciable cost reductions or quality improvements which can be credited to the duopoly competition - and it is unlikely that "open competition' after 1997 will make much difference either.Technical changeTelecommunications has received an enormous boost from the development of personal computers and the construction of very large assembly-line chip fabrication plants to make the components needed for PCs. These plants also make the chips for telephone exchange switching. So most of these changes are being driven by technical improvements made outside the telecommunications industry.
The industry's own development of optical fibre has also made an enormous difference. Fibre has now replaced coaxial cables and microwave systems in most long-haul telephone applications, and it is making inroads into the market previously serviced by satellites. Fibre is cheaper, has much more capacity, provides better quality, and is more long-lasting than any of the above in almost all applications and at distances over, say, 50 km.This doesn't necessarily mean that fibre is better as the cable TV feed to the home, however. Coaxial appears to be better and cheaper here - which is why the world has now settled on Hybrid Fibre-coaxial (HFC) broadband networks. Also, satellites are better than fibre cable when signals need to be distributed to numerous receivers, say, for the distribution of television programs to the transmitter sites across the country. Satellites are also having recent success for direct broadcasting TV, for telephony and broadcasting to scattered island nations in the Pacific, to reach mobiles (ships, trucks or trains) in widespread locations, and for remote outback telephony to homesteads beyond 50 km from a town. Each technology has its value.Future directions
The combination of integrated circuits and optical fibre together in the core (inter-exchange) network, have provided the noticeable improvements in quality to our older-style analog telephones. But the full potential of fibre and ICs will only be realised when we advance to full digital networks - those which are digital end-to-end. The change necessary to introduce digital techniques in the last-mile connection is known as ISDN (Integrated Services Digital Network). This will lead in turn to an entirely different digital approach called ATM (Asynchronous Transfer Mode) which was originally called B-ISDN (Broadband ISDN) because it could also carry video.This is why, to a limited degree, it is correct to talk about modern telecommunications as being an extension of the "digital revolution'. Although the "digital' aspect is only one of many factors.
5.0 The coming of full-digital.
5.1 The digital telephone network
So many people relate these changes to the introduction of digital systems, that it is important to put this in perspective. The digitisation of the phone network is only one aspect of the changes we are seeing, but it is important because most of the other changes rest on a digital foundation. Digitisation is important because it allows us to process signals easily - analog processing is always more limited.Digital voice telephony has actually been around since 1938. But until recent developments in chip technology, we didn't have the low-cost techniques needed to handle the telephone signals economically in digital form.
As the cost structure has change, digital techniques have come into the telephone network. As you would expect, they first came into the long-distance and international market (where cost is less a consideration); then into the exchange-switch and inter-exchange network (where costs could be shared out among the many users); and only recently into the local loop.
Progress in digitising the local loop has been slow because the advantages aren't always apparent to the customer - the real advantages in digital techniques are to the telephone network in general, through standardisation of the technology. When you have analog networks, you need a separate network for voice than for Telex - and another consisting of specially "conditioned' lines to carry data. Digital networks avoid this complexity because one network can carry everything.
The "core' telephone network (inter-exchange and long-haul combined) in most developed nations has been largely digital for most of the last decade and, from the first, optical fibre has used digital transmission techniques. Digitisation was originally driven by the requirements of optical fibre.The transition from the older analog network to the modern digital network has progressed in an evolutionary way. City and intercity networks are digitised first, then suburban, then outer suburban, rural/country and outback. Older analog elements are almost always replaced by newer digital devices whenever equipment fails or needs to be upgraded for capacity. In general, the core telephone network in Australia is fully digital; this includes:
Eventually, about the year 2010, the whole of the Australian core network will be digitised - although at the slow rate we are progressing in digitising the local loops, it may be well past this date before the last of these connections is upgraded.
- The major city and regional exchanges with most of the switches,
- The inter-exchange links within all major cities, and suburbs,
- The long-distance fibre-cables connecting the major towns and cities,
- The international submarine cable links,
- The international satellite links.
In the last mile (local loop), direct digital connections were first provided to businesses with heavy data requirements as leased DDS (Digital Data Service) lines, then for general business which needed ISDN (Integrated Services Digital Network), and more recently for some residential applications -but this is certainly not common.The average telephone user doesn't notice the introduction of digital techniques in the core network (except perhaps that the voice quality is better), and most people are not aware that any long-distance voice call may be changed from analog to digital, and digital back to analog, even two or three times across a single connection. Conversion from analog to digital or vice versa is now done in standardised chips costing only a few dollars.
When making a call, most people also aren't aware that the call may begin as an isolated signal in copper wire, be translated to occasional bursts among many millions of light-pulses travelling over an optical fibre, then become modulated radio waves over a satellite link, then pass through another fibre, microwave link, or copper wire phase before reaching the person at the other end. Different parts of the network may use different transmission "media', but these changes are made relatively easily if they all use the same digital techniques. At the present moment we use a "switched circuit' technique for both analog and digital telephony, but from 1995 on, we are progressively changing over to use digital "fast- packet switching' techniques.
From the carrier's viewpoint, networks are "digitised' for the most obvious of commercial reasons - and this has nothing to do with future superhighways, or convergence or multimedia. The phone companies use digital equipment because it is cheaper, more compact, more reliable, requires less electric power, generates less heat, and requires less maintenance than the older analog equipment it replaces. It is quite secondary that digital equipment also extends the digitisation of the network for computerised data. Most of the user-benefits of digitisation are well in the future. Currently analog links (in wireline and wireless connections) carry computerised data just as well (sometimes even better) than current digital links. So the real value of digital is in having only one transmission standard, instead of two or more.
The digital standard currently used for the local loop is called ISDN (Integrated Services Digital Network), and despite the fact that Australia was a world leader in introducing ISDN nearly a decade ago, we have been extraordinarily slow in upgrading the links to homes and businesses. There are three main reasons:
The main value of universal ISDN should have been in allowing Telecom to progressively upgrade the network and to introduce a whole range of new and innovative services (which are impossible while half the network is analog). If Telecom had actively promoted ISDN a decade ago and not greedily charged it as a premium service, the PC and network users in Australia would have benefited enormously, and Australia could even have developed a leadership position in the provision of on-line information services.
- Telecom has chosen to promoted ISDN as a "premium' service rather than an evolutionary upgrade to the nationwide telephone network. They do this because ISDN had the potential to compete with some of their more profitable data services.
For this reason, they have loaded ISDN with very high ($400) connection and ($960) annual rental charges - then added a 20 cent flagfall for local data calls (14 c for voice) PLUS a timed local-call incremental charge.
They did this despite the fact that the same core network is used for all links past the exchange POTS and ISDN. ISDN is little more than an extension of the existing core network out to the customer - it is a very cheap technology to provide. There is no significant extra equipment penalty for Telecom in providing ISDN. Nor is there any additional operating costs. In fact, elsewhere in the world ISDN carrier equipment is now as cheap as the old analog system, and it has the potential to be even cheaper.
- Telecom's insistence on time-charging local calls with ISDN, makes the cost of changing-over from one to the other quite unpredictable (and potentially very expensive) for small businesses and residential users.
- Unless you use a computer regularly for large file transfers, and unless the computers that you communicate with regularly also have an ISDN connection, you get almost no discernable benefits from ISDN. Other than this, it looks and sounds like any other telephone.
Telecom has a history of painting itself into a corner by overcharging anything new and different. It acts like a greedy for-profit corporation, instead of a government infrastructure provider.This is also true for DTMF (Dual Tone Multiple Frequency) which is tone-dialling. This has been available for twenty years, and for half this time it has been as cheap for Telecom to use as the older "rotary' or pulse dialling. Most telephone line equipment provides both methods, changed by a simple switch - yet pulse dialled phones are still being installed today. If DTMF had become the standard a decade ago, then a whole range of banking and information services would now be available over the phone lines. But Telecom never got around to making this decision, so now the cost of changing over is immense. A further example is the provision of alpha-identification on telephone keyboards, to enable people to spell out words in a standardised manner. We haven't got this today in Australia - although we had it in the 1920s and 30s.
So, the real cost of Telecom's lethargic and greedy attitude to ISDN, is with opportunities lost in the future.
Digital in the future
While most of the current benefits of digitisation of the network have been cost- saving by the carriers, the future benefits are in the extension of service possibilities well past those which analog techniques can provide. This will come from new fast-packet techniques which will be used right across the network, not just in the local loop, as with ISDN. Fast-packet switching (also called ATM or B- ISDN) is entering our networks from this year (Telecom has a pre-commercial trial of 30 companies in Sydney, Melbourne and Brisbane), and it will be progressively introduced until it dominates the global telephone network in about a decade. ATM is suited to networks carrying high-bandwidth services like video and also to very low-bandwidth services such as EFTPOS, home banking, messaging, remote monitoring (health, machines, etc.).
ATM is both a switching and multiplexing (transmission) technology - it allows many thousands of user- channels to share the same cable system (multiplexing) and the digital data associated with each channel carries a tag which automatically triggers any switches in the network. It does this at a high-enough rate to carry voice and video - and the same system can carry small amounts of data in a channel, or enormous bandwidths.We are also seeing developments in "Advanced Intelligent Networking' (IN or AIN) which applies to personal services like Call Waiting, Call Forwarding, and the like.
Basically, AIN is nothing more than the applications of computer database management systems to the handling of telephone signals. For instance, you may leave instructions (hopefully with a central national database) that all calls are to be forwarded to a different number, and the signal-handling system in your local exchange is intelligent enough to look-up the database and translate the signal information. This is relatively low-level intelligence by today's standards.
With a couple of exceptions, telecommunications does not put a high-demand on computer power. The most common processor used in modern digital exchanges is the Intel 8086 which was developed for the IBM PC XT back in 1979 - so it's not actually at the forefront of the computer revolution, and nor does it need to be. Most computing power used in telecommunications today, is applied in equipment which is designed to get over some of the problems intrinsic in having part-analog, part-digital networks; and part high-speed, part low-speed networks.
For instance, to send television level signals over a telephone cable (a technique called ADSL) requires an enormous amount of processing power - equal to the most modern of the high-powered PCs on sale today. Similarly, with digital cable TV networks (until now, all have been analog) it is necessary to have special set-top boxes with digital signal processing.Modern modems also incorporate the power of a PC, and multiplexers, routers and bridges are all just sophisticated microprocessors with built-in applications and databases. Most of these will disappear in the next few years as the network becomes 'AToMised'.
6.0 Cellular mobile phones
6.1 Analog (AMPS)
Australia made a wise choice back in Feb. 1987 when it introduced the American AMPS (Advanced Mobile Phone Service) technology. AMPS turned out to be the best of the technologies being developed at this time, and with slight modification it became the European and Japanese TACS. AMPS still has many more users around the world than any other technology, and AMPS/TACS combined still account for nearly 70% of all mobile phones.
Telecom's MobileNet AMPS network is one of the largest in the world, and it provides good coverage of the more remote parts of the country, because the AMPS technology is ideal for large open-spaces with light population densities. (GSM is really a city and main-highway-only system)
Telecom owns and operates the MobileNet network, but Optus has the right to resell air time on the network under its own name. It only needs to print the bills - and it makes a small fortune each year from this activity, however it is always limited to following Telecom in providing services and technical upgrades.
Cellular phone services are expensive to build. The MobileNet Australia-wide network has cost Telecom about $1 billion, but it now has 1.8 million users. It is impossible to accurately calculate how much each mobile handset earns for Telecom and Optus: they receive monthly access fees, and call charges - but each person calling a cellular phone also pays a high per-minute rate. A good estimate is that each handset provides additional average income of about $1600 per year ($2.88 billion) for the carriers.
AMPS was designed with both A and B radio bands for two competing companies, but in Australia both are owned and used by MobileNet. AMPS handsets were originally designed to use 666 channels in these two bands, but the popularity of this technology proved to be so great that later model handsets were extended as high as channel 1023 - with extra bandwidth being provided where capacity was a problem in the major US cities.
However, in Australia, despite the fact that we have capacity problems in both Sydney and Melbourne, AMPS was not even provided enough bandwidth for the original 666 channels - let alone the extension. We provide only 2/3rds of the spectrum needed, and then only in Sydney and Melbourne.And remember: Australia has more radio spectrum than any country on earth - it doesn't need to share spectrum with neighbours.Why are we so frugal with the required radio spectrum for AMPS? After all, more people use this 38MHz of spectrum every day, than use the rest of the two-way radio spectrum every year? The answer is with GSM.
6.2 Digital (GSM)
Austel, the telecommunications regulator, was told in 1990 by the government to introduce competition into the cellular network in a meaningful way - not to just allow Optus and Telecom to share the same network.
So, in their enthusiasm, Austel chose a new digital technology called GSM (Global System for Mobiles) to be Australia's second-generation mobile standard. At the time GSM and a couple of rival technologies were still figments of imagination; they were still on the drawing boards - but Austel believed what it was told, and liked what it saw in GSM.What it especially liked was that GSM could accommodate 5 competing carriers.
GSM was being developed as a pan-European standard under the auspices of the European Union - and it was aimed to solve the capacity problem of Europe with multiple national overlapping networks, and many small cities.
One problem was that the spectrum required for GSM overlapped with the Australian AMPS extensions - so it was decided not to provide these extensions. By the time GSM actually appeared as a working network, it was also widely known in the industry that the technology was well below expectations:
On the good side, GSM provided good phone call security which AMPS lacked, and since it was a European standard, it is possible to use your GSM phone across Europe - provided you carrier has agreement with the European carriers. AMPS can also be used in Asia and America provided Telecom has agreement with these carriers - but it hasn't negotiated these agreements.
- It was not suited to wide-open spaces, it could only cover about half the area of AMPS from each base station.
- Moreover it did not provide the capacity increase, which was the rationale for designing a digital system in the first place.
- The digital TDMA techniques used created a very high level of radio pollution - to the point where 5MHz of guard-band needed to be left on either side of the radio spectrum. When it was placed originally alongside AMPS, it interfered with analog cellular users.
- It also produced a loud buzzing noise in hearing aids, cassette recorders, car radios, telephones, and it created problems with PCs and telecommunications equipment.
- The audio quality was better than AMPS, but it had the disconcerting habit of dropping out (losing the connection) without warning.
- It was far more expensive than AMPS. Ex-factory costs of GSM handsets (without any carrier subsidy) are about 8-times that of an AMPS handset.
In short, GSM has proved to be inferior to the technology it is replacing - but, by the time this was widely known, the government had signed agreements with Optus and the third carrier Vodafone - and, as part of this agreement, they passed legislation to remove the AMPS spectrum between 1 Jan. 1996 and 1 Jan. 2000 (just before the American's arrive for the Olympic Games with their AMPs handsets!).
The official reasons given are in the Ministerial Declaration: �This will enable the AMPS spectrum to be recovered for other uses and should help encourage the development of competition in the PMTS [cellular] market.�And more honestly: �Certainty about the withdrawal of AMPS services is fundamental to industry's ability to develop sound business plans.�Australians still continue to vote with their feet. On the advice of many dealers, and following word-of-mouth advice more new cellular customers still choose AMPS over GSM, despite the sunset clause. The government would now like to back out of their agreement to withdraw the spectrum (with Telecom's support).
Optus and Vodafone, however, insist that this is part of their license conditions. Vodafone paid $400 million for its license, and all three carriers (Telecom has a digital service as well) have now spent over $500 million each on building three overlapping networks, and further unknown amounts on subsidising the cost of handsets. Sometimes $800 handsets have been given away free for customers who sign up to long-term contracts, but generally handsets are only subsidised to the tune of $4-500 each (plus some free call periods).
With less than 250,000 GSM users now divided between these three network, these companies are losing money hand-over-fist. They can only survive if the AMPS network is removed as a competitor in the cities, and the 1.8 million AMPS users will then be forced over to the GSM digital network. Many will need to keep their AMPS handsets to use in the country and outback (if current plans to keep AMPS in rural areas eventuates).
When AMPS finally dies, prices of GSM connections and calls will obviously go through the roof. These companies have years of backlog in unrecovered capital outlays and in handset subsidies, to recover.
7.0 The cost of telephone services
Local calls
Australians make 10 billion local calls each year. This is about 4 per day, per line.
Because of the complexity of the exchange and inter-exchange network, and the confusion of having old (amortised) equipment which needs high maintenance, and new digital equipment which needs almost none, it is almost impossible for an outsider to come to any conclusions about the cost of local phone calls, based on the real-costs of supplying these services. No one knows (including Telecom) what these real costs are.
For instance, it is impossible to put a price on the local loop. Today this is a monopoly pair of twisted wires down a suburban street which may have been in the ground for a quarter of a century, so it's amortised accounting value is probably zero. But if it gives the cable owner exclusive access to supply all phone services to your home homes it's privatised value could be many thousands of dollars. However, that may only last until coaxial cable comes down the same street offering cable TV and telephony - when it will obviously drop sharply. This is why it is impossible to calculate meaningful prices (or economic efficiencies) using concepts such as "Rate of Return on Capital', etc. The foundation figures on which these calculations rest are always highly suspect and highly disputable - and depend more on the legislation controlling them than the technology.
The local loop is currently a Telecom monopoly, so it is in Telecom's interests to keep local call prices high, since these prices disadvantages Optus and any new players like AAP and WorldXchange. It has this effect because Optus, AAP and WorldXchange must pay Telecom for half-a-call at each end of its long-distance link - this is the so-called "interconnection' fee. When you ring Melbourne-Sydney using Optus as your long distance carrier, Optus will pay Telecom an interconnection fee for the use of their local-loop and primary exchange switch at each end, and retain only the distance component. AAP and WorldXchange, being "resellers' not a carrier, must pay even more.
However, we can calculate some costs very accurately because:A long distance call is considered to be nothing more than two halves of a local call - with a few hundred kilometres of fibre-cable between. So is an international call - but here the submarine cable is a few thousand kilometres.
In the original calculations of the interconnection fee done under government supervision, it was decided that Optus would pay Telecom 3.14 cents a minute (for half a local call) - and note that the resellers pay considerably more. Since most local calls are about four minutes on average, the Optus interconnect charge calculates out to a figure very close to the flat-fee call charge currently being made by Telecom for local calls - 25 cents. In recent times the government has opted out of active involvement in interconnection agreements and, in the most recent negotiations, Optus agreed to pay Telecom (now Telstra) 3.5 cents a minute, which puts their estimate of the flat-fee local call cost at about 28 cents. This gives us some indication that the local call charge is roughly about right - otherwise Optus would have dragged Telecom through the courts to force the interconnect price down. They obviously have access to costings associated with their overseas principles (Cable & Wireless/Mercury in the UK, and Bell South in the USA).
International Best Practice is also a technique well used by economists to calculate fair price, but here there are other considerations. Telecom New Zealand, for instance, provides domestic local call costs free - and only charges for long-distance and business phone calls. It would be easy to argue that this proved Telecom's local domestic charges were too high. However, the annual rental of a domestic phone in New Zealand is about twice that in Australia, so the New Zealanders are pre-paying for many local calls annually, and Telecom NZ has loaded business phone costs to cross subsidise domestic costs.
Similarly, in America, many cities have user-selected packages for local calls. One option is often high- rental and free local calls; another may be lower rental and flat-fee local calls, and another may be very- low rental and timed-local calls. You choose which every package suits your call expectations.This makes comparison very difficult - but it is generally accepted that Americans pay about 40% less in total for their local calls than Australians (and much less for long distance). And Americans also make nearly twice as many local calls as Australians. They do, however, pay more for calls in the 10-100km range (which are local in Australia) which are classed as intra-LATA tolls in America. They also usually pay for directory services, and have loadings for touch-tone phones, etc.Telecom rightly points out that it depends on what you mean by "local'. Sydney probably has the largest local call area of any city in the world. Ameritech, one of the major US city phone companies, for instance, charges a flat fee for local calls up to 8 miles, then time-charges apply in a series of radiating rings using "as-the-crow-flies' calculations. In other parts of America, a local call is one made entirely within the bounds of a satellite local community, which, in our terms, would be a suburb.Attempts are constantly being made by international economics think-tanks like the OECD to quantify the cost of local calls, and generally Australia is place at the top of the list (usually just behind the UK) as the most expensive in the developed countries. Long distance and International calls
A few decades ago, telephone wires were strung between poles down suburban streets, and across the nation. Using the most modern equipment, a single pair of wires could only carry about 6 simultaneous phone calls, and a five-bar pole may only carry 40 wires - about 120 calls at any one time. The cost of maintaining those 120-odd channels across the Nullabor to Perth, for instance, was extraordinarily high by modern standards. They needed hundreds of boundary riders to fight termite attack on the posts, keep eagles from nesting on the wires, and splice lines together after each local willy-willy.A decade or two later, Telecom was burying 12 (or more) fibre cable a metre down in the ground, and each fibre pair could carry nearly 9000 simultaneous phone calls (it is now much higher still). In the ground, the cables would often lay undisturbed for ten to twenty years, unless a repeater component failed. One man in a truck could probably service the whole of the Nullabor link. This is the order of change that has taken place in long-distant connections - and while the cost of providing these services has been rapidly reducing, price- reductions have been minimal and grudgingly given because most people expect to pay a lot for long distance calls. They can only judge on past experience, so any price reduction is greeted with enthusiasm (and with thanks) even though costs have been reducing faster.
This is not just an Australian problem, long-distance call profits have become the cash-cows or golden geese of telecommunications carriers all around the world - which is why International Best Practice tells you nothing. It is long-distance calls that fund all the radical superhighway developments, the corporate take-overs, the highly speculative ventures, and the massive advertising campaigns.Optical fibreOptical fibre was developed by Corning Glass in the early 1970s, but it only really became practical around 1982- 3. However, from that time on, the increase in capacity and carriage distance and the decrease in cost, have been spectacular, year after year. For the first time in human history, we have had a technological development which is so rapid and extensive that it has outstripped our ability to utilise it.
This revolution includes the development of lasers and detectors which make the fibre work. These can now span distances of 150 km before the signals are detected and regenerated for the next stage. Recently we've also had the development of erbium amplification which now makes regeneration superfluous; these new techniques allow the light pulses to travel thousands of miles without needing once to be converted back into electrical signals. Erbium amplification has enormous implications in long-distance and undersea fibre cables. It also works at much higher data-rates (two to eight times greater capacity) than our present fibre networks. All of these fibre networks are virtually maintenance-free over an estimated 25 year life-span: they need to be if they are to be dropped 9 km to the bottom of the ocean.Optical fibre is now an mature technology which has constantly improved every year from 1983. The point has now been reached where telecommunications carriage-cost, capacity and distance limitations between exchanges have now become trivial problems with trivial costs. In effect, there is now no significant cost associated with "distance' in a telephone call. 99% of all costs are in the local cables, exchange switching, administration, billing and marketing. In amortised real terms, it now costs more for Telecom to deliver your voice over the one-kilometre of wire between your home and local exchange than it does to send it 3000 km over a shared optical fibre between Sydney and Perth.
Long-distance fibre connection between capitals only represent a few percent of the total cost of the telephone network (even discounting administration and marketing), and these costs are shared by many users. The bulk of identifiable network costs (40%) are tied up in the local loop copper-wire down suburban streets - and these costs are supported by only the one customer - mostly for local calls.Voice compressionThe digitisation of the core and long-distance telephone network has also made it possible to increase the capacity of any cable by using voice coding or compression techniques. The "nominal digital voice call' uses a technology called PCM which needs 64,000 bits per second or bandwidth. However, in the bandwidth set aside to carry just one nominal voice call, up to eight real phone calls can now be easily carried (provided they are all going to the same destination, since the switches only handle the wider path). Telecom occasionally uses a compression technique called ADPCM (32 kb/s) to double the voice- carrying capacity of certain cables, but it only does so on regional and some ISDN circuits where the physical network hasn't been upgraded. Elsewhere they have cable capacity to burn, so they don't bother.
Voice compression at this level is virtually undetectable to the user, and in some links (mainly trans- Atlantic submarine cables) a more compressed (4x) form of ADPCM is used. Other compression techniques are now available to double this again (8x) for existing long-distance and submarine cables, although the careful listener would hear a quality change. Higher compression ratios (16x and 30x) are noticeably inferior in quality.Even these 2-times ADPCM compression techniques cause problems with fax and data-modems however. So, with plenty of network capacity available, Telecom and Optus tend not to use them. But they are widely used in private networks between company offices to save on internal telephone costs. This is one way business is able to discount, while domestic users can't.
Some "resellers' also operate by installing this voice compression equipment on lines rented from the long-distance carriers, and making voice links available at a discount. The resellers need to have voice coders, multiplexers, and simple switches on the end of their rented links - but they can still make a very healthy profit.A whole industry has sprung up around providing this type of equipment to the larger Australian companies, to save phone costs on their internal long-distance links. Voice compression and multiplexing techniques are all capable of being used in private networks because the same company owns both ends of the link. The sole purpose of all this expensive equipment, including the voice compression and multiplexing, is to overcome the artificial cost structures of the public network - mainly in the high cost of long-distant calls. Yet Australia has long-distance capacity to burn.The annual addition to our balance of payments for the importation of the components needed to build this equipment is in the region of $150-$200 million.
From a national viewpoint, this is unnecessary expenditure because it results only from a government- related charging policy - not from any short-fall in technology. If unused intercity capacity was released by Telecom and/or Optus (assuming their charges were brought into line with the real costs of providing these connections) this voice-compression/multiplexing industry would disappear overnight - and Australia's balance of payments would improve by this amount.Optus would also be unable to survive, and the resellers like AAP and WorldXchange would immediately go out of business. When prices are related to costs, the long-distance business is a natural monopoly in Australia.
If we were to add the latest in voice processing technology to each end of a standard Sydney-Melbourne 36-fibre cable using current fibre technology, this single cable could easily carry the total intercity voice/data network traffic for the whole country. This is the current state of the art with optical fibre - it provides unbelievable capacity at very, very low costs.
We already have four of these modern 36-fibre cables across the Syd-Melb gap, and an additional two older 20-fibre cables. We also have three domestic satellites and old standby microwave links from a previous era for backup.This degree of network over-engineering is mirrored around the country on all high-density routes, between capitals and the major country towns.Why such excess capacity? Especially when newer and better technologies come along every year?
Upgrade policy
The development of optical fibre technology has advanced so rapidly over the last decade that it has often been cheaper to a install new parallel fibre cable than to up-grade an existing cable. The prices halved every few years, and the capacity of each fibre doubled in the same time - so it makes little sense to upgrade old cable, even if it has this potential.
Then in the early 1980's, Australia began muttering about the need for a competitor to Telecom - and about the potential for cable Pay TV. Telecom was told to act as a commercial organisation, to make profits, and to be prepared to meet a newer competitor without the legacy of old debt for old equipment.So it also made sense for Telecom to use as much of the windfall profits they made from long-distance calls to increase their dominance. For many years they had an embarrassment of riches from the existing optical fibre, and this was poured into over-engineering the national telephone network. The argument is simple and obvious: If you have twice as much capacity as you need already in the ground, and if that cable is already amortised, it is virtually impossible for any new competitor to challenge Telecom's dominant position or to play price-cutting games.The newcomer can then compete, only to the degree that Telecom permits them to compete - and that depends on the power of the government to direct 'competition policy'.
Kalori's complaint
In 1991, when the second Australian licence was up for auction, we started with 33 potential bidders. By the auction date, this had been reduced to two.An international consortium of French and American telephone companies called Kalori, planned to bid against Optus, but after researching the capacity of the existing Australian network they withdrew their bid, and left Optus uncontested. Kalori's public explanation was that they couldn't compete with Telecom, because Telecom already had four-times the interstate telephone capacity that Australia could possibly need before the year 2020. We also had more satellite capacity (per capita) than any other country in the world, they said.
Optus took up the second license for a song, but only after receiving assurances from the government that Telecom would not rapidly lower long-distance prices. This agreement not to cut prices went under the euphemism of a prohibition on 'predatory pricing' - and the basis for deciding whether pricing was predatory, was to relate it to the previous prices charged - even though these may have been hundreds of times the real-cost of supplying these service. Since then, Optus has won 15% of long-distance calls in the ballot, installed its own independent network, and nearly matched Telecom's inter-city cable capacity across Australia. So on Kalori's estimate, we now have about eight-times the capacity we really need before 2020 - and in these circumstances, it would be crazy to expect that "open competition' in 1997 would make any difference. Any potential new carrier now faces both Optus and Telecom, each with massive excess capacity, and each with fully-amortised cables in the ground.
Telecom alone was sufficient to stop Optus from truly competing.
Dark fibre
Between Sydney and Melbourne, for instance, Optus has two 36-fibre cables, but only one pair of fibres in each cable are "provisioned' (with electronics) and actively used. The other 34-pair are "dark-fibre' without the lasers in place, awaiting a requirement - or a competitive threat! However neither Telecom or Optus will lease the unused fibres - they only rent capacity. A single telephone channel (64kb/s) costs about $16,000 annually between Sydney and Melbourne, and proportionally also to the other major cities.There are good engineering reasons for providing this over-capacity - at least enough to rationalise their actions. Optical fibre itself is only a small part of the cable cost - it is nothing more than drawn transparent glass. The fibre itself is now so cheap that it doesn't pay Optus to put in anything less than 36- fibre cable in the ground ($12 per metre)- it is easier to standardise on one cable size. The cost of surveying and digging the metre-deep trench is almost equal to the cost of the cable itself (Optus says it costs more!). They can generally double the number of fibres in a cable for a 5% increase in cost; and the electronics can then be added later (in terrestrial cables) if, and when, more capacity is needed.
Intercity channel costs
So if you calculate the amortised cost of an inter-capital fully-provisioned 36-fibre cable, with all the design, surveying, trenching, etc.included - and divide this by the number of voice channels it can carry, you have annualised figures in the range of $10-$100 per channel between cities. Even at the low-end calculations, this would pay off any cable in a few years and return an above average profit to investors. Telecom and Optus currently charge $16 - 20,000 per year for these connections - and yet this is still cheaper for many companies than making STD calls which are charged at a higher rate.
Submarine cable
Australia's latest links to America and Asia, the undersea PacRimEast and PacRimWest cables across the Pacific were designed to handle 6-fibres (3 pairs) each, but only one is being used, and even then, the single pair in each cable rarely reaches more than 80% of its peak capacity (satellite links are also used). Telecom says that usage of international cables is not price-flexible, so cutting cost as a way to increase usage, isn't an option. The evidence is contrary to this view.Australia has always suffered the Tyranny of Distance in its business dealings, so while this keep-the-prices-high attitude would be understandable in a privatised or for-profit company, it isn't in a government business enterprise. Telecom has been given a privileged position, and charged with building the international telecommunications infrastructure for the benefit of the nation as a whole - and this should take precendence over making profits for the government shareholder. In national terms, Telecom's attitude is disastrous.
In this Age of Information the cost of international communications will be a major factor in helping or hindering the development of new information industry sectors. And telecommunications now plays a increasing part with trading enterprises in their cost of doing business, internationally and nationally.
International telephone or data circuits are rented on a 'half-circuit' basis. A Sydney company wishing to have private 2 Megabit/second links to a subsidiary in Los Angeles would pay Telecom $88,000 a month to rent the connection to the mid-Pacific; through Telecom, the company would also pay the American company AT& T for the half-circuit at the other end - from mid-Pacific to Los Angeles.
A Singapore company renting the identical circuit from Singapore Telecom would pay only A$30,000 for the first half-circuit. Which is 34% of the Sydney costs for roughly the same distance.
The real scandal, however, comes at the other end - with the USA half-circuits. Under the international agreements which control the prices charged on these international cables, AT& T would charge the Australian company a figure which roughly matched Telecom's price - about $85,000 - while only charging the Singapore company $30,000 to match Singapore Telecom's price for its half-circuit.
So, not only does Telecom overcharge by nearly three times, it also has agreements which force the American company to overcharge by an equivalent amount.
American companies in Los Angeles would get their Australian half-circuit connection at roughly the American price. So they would get their two half-circuits for about $35,000 each - a total of $70,000. Their Australian competitor would pay about $170,000.
It is this discrepancy in pricing which allows Callback services to work. Callback is the same principle, but applied to dial-up calls rather than leased circuits. You ring a number in the USA and enter your PIN - then you cut the connection, after having only paid a few cents for the call. The American reseller then automatically calls you back, using the same cables and same equipment and same international and national circuits - but at a much lower price because it is charged from the American end.
Trading blocsTelecommunications is also the key to the development of trading relationships in the Asia- Pacific region. For instance, we currently have a Tasman 2 fibre cable with six working fibres, which can support up to 100,000 simultaneous links across the Tasman, Sydney to Auckland. This cable is now fully amortised, but it carries New Zealand traffic, and also Australian international traffic to America and Europe, and New Zealand international traffic to Asia (via Australia).
The cost of duplicating this trans-Tasman link with another six-fibre cable using the new erbium amplification technology, would be about $130 million - which is the amount Australians spend on chocolate Easter Eggs every year.
This new fibre, if paid for from budget revenue, would have ten-times the old capacity (just under 1 million simultaneous voice calls), and would effectively make Auckland and Sydney appear to be adjacent suburbs, and bring the rest of New Zealand into the Australian network at the equivalent of NSW-regional call costs. What better way to create a special single-market trading relationship?
We should also remember that, while both cables and switching are subject to engineering constraints associated with the peak-load conditions, overseas cables have dozens of 'peak-load' periods distributed around the clock - and over six days of the week - because of time-differences around the world. Costs can be amortised much more efficiently.
A submarine cable which reaches out to New Zealand, then Hawaii, Los Angeles, Washington, and on to Europe is therefore used with a very high degree of efficiency when compared to, say, the Sydney - Melbourne cable which is in the same time zone.
Long-distance in general
The current situation with the technology is that distance in telephony is no longer a substantial, or even significant, part of the costs. It would be quite possible today to have a single-zone, 25 cent call price nationwide - if the government were not to expect profits to balance its budget.
Alternately, a 25 cents flat fee for local calls, plus 1 cent a minute added for long-distance and New Zealand, and perhaps 3-5 cents a minute internationally, would reasonably reflect the cost of providing these services. However international call prices to America and Europe are not just a Telecom or Optus problem, because we are tied into the international cartels, and depend on them for the on-carriage of signals past the limit of our submarine cables. However, it should be noted that line rentals on average from Australia to America are roughly 2.8-times the cost of line rentals from America to Australia - so the problems are not all at the other end or with the cartels.
8.0 Part 2: The New SuperHighway
8.1 Understanding the global picture.
There's a flurry of activity going on in telecommunications that, from the outside, appears to be linked to dramatic changes in technology. Mostly it isn't.The general public vaguely comprehends that something called the Information Superhighway is coming - and since this is related in some undefined way to telephones, personal computers, The Internet, convergence, multimedia and Pay TV, they decide it must be a consequence of some invention or technological development on a par with the Wright Brothers discovery of flight.
Nothing could be further from the truth.
Ninety percent of the appearance of Superhighway activity around the world has little or nothing to do with technology - although there is some which is related to new standards. What we are seeing is largely the natural consequences of old evolutionary technologies, overlaid by powerful telecommunications and broadcasting corporations jostling each other for a dominant position in a new competitive environment. Most of this activity is a direct consequence of 'deregulation' - and most of this is happening in America. It is often hard for Australians to accept that, in American, this far-off land where the dominant religion is laissez fair 'free enterprise', the USA is actually the world leader in regulating their networks and carriers - and that these networks are national, regional and local monopolies. This applies to both their telecommunications and their cable TV networks - there has been very little free-enterprise, open competition, here - but this is now changing. Local US telephone companies (there are about 1,000 of them) are legislated monopolies; the seven RBOCs (regional phone companies) are legislated monopolies; the 1000 cellular operators are legislated monopolies, and most of the 10,000 cable TV networks across the country are local exclusive franchises.Only the 300 long-distance telephone companies operate in a competitive environment in the USA, and three (AT& T, Sprint and MCI) have 90% of this business.
The government is now in the process of throwing the industry open - in allowing cable companies to carry telephony, and telephone companies to carry cable TV, and both to carry long-distance calls, if they wish. The restrictions are not to be entirely removed, but they are greatly reduced - and this is causing all the commotion.In order to understand the significance of this change, we should also remember that in the USA, these monopolies have generally been of the worse kind: They have been privately-owned, for-profit monopolies, and many of them have had a long and very cosy relationship with their local regulators.This has traditionally placed the various layers of regulation in conflict. The FCC (Federal Communications Commission) has tightly regulated technical standards and ownership for any information/networks which carry signals between states; the Justices Department has regulated interconnection, areas of operations, and competitive policy; the Public Utility Commissions and local Cable Commissions in each State (sometimes county) have set price caps, negotiated written agreements over service quality, provided arbitration and played an ombudsman role. There is a welter of legalistic baggage that encumbers the American system.The reason there is so much turmoil in the system now, is because most of these controls and regulatory agencies are about to disappear. The US government is taking control, and is moving the industries towards an open-competitive market - a situation that the rest of the world mistakenly imagined they'd been all along.
So in the USA, the SuperHighway battle is most fierce because there are now dozens of competing billion dollar ex-regional monopoly corporations, fat with cash, trying win the primary place in the new order. In the rest of the world, telecommunications has tended to be a government monopoly, with very little in the way of regulation because the system was largely self-regulating (although not necessarily efficient) by the monopoly itself. Australia is coming from this direction, by way of a duopoly.
8.2 International comparisons
Each country is slightly different here, depending on its regulatory environment (since the technologies are the same). In America the major battle is a three-way scuffle between the cable television companies and the local telephone companies, and between these local network operators and the long-distance telephone carriers. In the USA there's long been a structural separation between local, regional and long-distance telephony - and between telephony and cable TV.In Europe, the scene is a confusion of different national-internal battles of a similar sort, complicated by new pan-European regulations. Supposedly this is to be a EU "open market', but each country is currently fiercely defending its bailwick, and trying to promote its national carriers and electronics companies over the others.In Australia, the main battle appears to be between Optus and Telecom - and then only in areas where their interests are in conflict. The Optus ownership of cable threatens the local dominance of Telecom because modern coaxial cable can now carry switched telephone calls as well as television.
Privatisation and deregulation
There's also the possibility of further competition arriving after 1997 - and of Telecom's privatisation - and also of the government relinquishing its regulatory role over prices, services, standards and the competitive environment. Telecom, and many influential people in the government, wish to disarm both Austel (the telecommunications regulator) and the Trade Practices Commission, and pull the last few teeth of the Australian Broadcasting Authority. They jingoisticly cry �Anything in the way of deregulation that America can do, Australia can do better!� - completely ignoring the fact that America is a closely settled nation of 240 million people, and that it has a mature cable TV industry with the economic clout to hold its own in an open competitive battle. It is also twenty years since the American competitive forces in telephony began to challenge the dominance of their telephone monopolist, AT& T - and yet still AT& T is dominant.Australia is sparsely settled, has only 18 million people, and has a totally dominant Telecom-Telstra, which already has an uncomfortably cosy relationship in some "competitive' areas with its duopoly partner/rival Optus.Optus can only maintain telephone services by interconnecting to the Telecom network, and it depends on Telecom maintaining artificially high prices for long-distance and international calls for the majority of its profits - since Optus doesn't presently draw profits from the local network. With government supervision, it can challenge Telecom for a small share of the long-distance market, but it must also cooperate and collaborate for survival.Some members of the Government still wish to privatise Telecom, and this is certainly still on the cards which ever side wins the next election. The Opposition believes in simple solutions to complex problems also, and the simple solution for simple minds is privatisation and competition - despite the lack of evidence from anywhere that this actually works in telecommunications. Neither political party is willing to spell out how regulation would then operate in a privatised, two company environment - or if, indeed, there would be regulation at all. And even if the market was completely "open' after 1997, unless Telecom was deliberately dismantled, we would still have one dominant national carrier (a privatised Telstra), one long-distance carrier (Optus) and dozens of capacity resellers (all leasing capacity from the two carriers). This is still a duopoly; it is not "open competition' in the normal sense of the term.
So world-wide the superhighway activity is more to do with politics than technology. And most activity is a direct consequence of "deregulation' - a shift away from a highly regulated environment. This includes the removal of artificial advantages given to cable TV suppliers and/or telecommunications companies in the early days to help them expand their networks and provide near-ubiquitous services extending into otherwise unprofitable regions. Until now, telephone companies couldn't offer video services, and Cable TV companies couldn't offer telephones - and neither were permitted to be "content' providers (databases or film studios and distributors).Both telephone and cable networks, even in the unprofitable reaches of the country, were amortised long ago in America, Europe and in most of Australia - so it is very difficult for a newcomer to compete with an established carrier by using the same technology. However, some of the current replacement technologies are cheaper and require less maintenance than the old - so a new carrier may have an enormous advantage if he can fund the original capital through extending the range of services carried. The balance can be either way.There is no doubt that deliberate market-distortions through the maintenance of monopoly operations in the USA, extended for decades past their "use-by date' - mainly as a result of multi-million dollar lobbying efforts in Washington and Whitehall - and, we've see this to a lesser (or less-obvious!) degree in Canberra.
But there's also no doubt that Australia has a future advantage which America and Europe can't match in having a single nationwide network under Telecom control. Telecom can introduce new technologies easily and cheaply because regional interconnection and different standards aren't a problem. Telecom's dominance means that Optus must always follow the Telecom lead - as it has with the cable networks for Pay TV.
9.0 The new technologies
9.1 The two primary technologies
This new order in telecommunications is based primarily on two major technical changes:
1. Electronic and glass fibre communications systems, including lasers and photodetectors, which have now dropped in cost to the point where glass fibre can be used for the inter-suburban distribution of video signals. Previously, it was only practical to use fibre for long-distances and inter-exchange connections where loads were high.Note that this is still not fibre-to-the-home: modern cable systems still use copper coaxial cables for the final 100 metres. The new glass-fibre trunks have, however, provided the higher capacity and the improved video quality over those coaxial distribution links necessary for digital interactive techniques. This has come at a time when most of the old US TV cable 'plant' (coaxial strung on power poles down streets) is deteriorating badly, and needs renewal.So all around the world the old street cables are being upgraded to new Hybrid Fibre Coaxial (HFC) networks where a single remote "head-end' (exchange) distributes signals down fibre to street hubs, where they then split along many coaxial cable feeds down the streets. One hub may service 250-1000 homes, and all share the use of the cables in the network.Digital (ATM) improvements will also allow these replacement systems to be interactive (have a two-way path for data and telephony), to provide more channels, and perhaps to support the new wide-screen and high-definition services that are just over the horizon.
2. Special digital signal processing (DSP) chips have now reached a stage of sophistication and mass production where it is feasible to use them in customer-premises equipment to handle the compression and interleaving of digital signals. This is only now becoming possible - but not all the standards have been set. This phase will be competed towards the end of 1996.Until now it has been much cheaper to use analog components. It is the modern DSP which allows us to compress video images about 100-to-1, and therefore pass hundreds of them over a HFC cable network. The standard for this compression has only recently been finalised (it is called MPEG), and the other standards needed to make digital television a reality are now being formulated under the name DAVIC. The transmission technology that will be used on these networks is called ATM. I'm not going to explain this alphabet soup.
Digital methods allow us to use the same network for personal computer communications (always digital) and still carry both telecommunications and broadcasting signals (mostly analog in the past). Telephony and video can also be carried more efficiently once we change over to digital methods, and the same system can carry interactive feeds back to the head end for video games, or control of video-on-demand, and provide private two- way voice links to telephone networks - even though the HFC network is a "shared network', not a dedicated twisted pair network like the existing telephone network.
10.0 The paradox
The combination of the above two technical changes will create a new form of 'natural monopoly' in our suburban streets. A single coaxial cable running down a street can now provide us with all the broadcasting, telecommunications, and computer-access requirements of every house or business along that cable run. This is true even if you allow for 'unforeseeable' demands of an order of magnitude over the next few decades. The single HFC cable network can be quickly, cheaply and easily subdivided to handle any imaginary capacity increase - so we can easily and cheaply double or quadruple (or more) capacity if and when it is ever needed.So a single HFC network for Pay TV, when fitted out to provide the wider range of applications (using new ATM protocols and digital transmission and compression techniques), is in fact the Information SuperHighway. Any of these cables will be a much 'wider' highway (technically) than we can conceivably use in the next decade or two. But in practice this will only be true if access is open and unencumbered by legislated monopolies, and equally available to all content providers - which is the definition of "common carrier' status.The paradox here, is that in Australia's forced competitive climate, two such Superhighways will probably be built, even though only one is needed. Yet these two are self-defeating; two cables will be less open, than one.These two cable networks can only survive financially, if the cables are locked up tight and controlled by the major international program providers. They will only become involved if they are given exclusive rights of access. Artificial scarcity and the cost of changing suppliers (the cost of getting a second connection) will then combine to prevent open competition from operating, and allow the maintenance of high prices.
The reasons are these:
But even so, the cable roll-out costs can only be guaranteed to be profitably when the services are vertically integrated - when the carriers also supplement their income by receiving income from the content, not just the carriage. Instead of acting as a "common carrier' which makes its money by providing communications services to other Australian businesses, these organisations also want to compete with their potential clients in the supply of television programs, information, and special services (such as home security).This is why Optus Communications (a telephone carrier) has formed Optus Vision with shareholders including Continental Communications (a US Pay TV distributor), the Packer organisation, and Channel 7. It is also why Telecom is in partnership with Murdoch's Fox/News empire in the Pay TV company Foxtel and why it owns some of Channel 7.
- Telecom must build its own cable to maintain dominance. However it gets no value at all out of the telephony possibilities since it already owns the telephone network. It must make its money entirely from Pay TV and the new shopping and games services.
- Optus must build its own cable to compete, otherwise it will always be a bit-player. Optus gets double-value out of its new cable: both Pay TV and local telephony.
- To steal local telephone business from Telecom, Optus will need to cut the price by at least 30% (Telecom will follow them down for a while), and so they won't make much revenue from the local calls at the interconnect price that Telecom will then charge for completion of the local calls (assuming only one party is a customer of Optus)
- However basic economics says that Pay TV-type operations can only really support about half the capital that will be expended to build dual systems. - Optus can possibly justify the costs more, because some of its revenues will come from local telephony, and the local connection will boost their long-distance business. But an Optus gain is Telecom's additional loss. In a price war, they both lose.- Telecom can justify the cable costs less, but it has more opportunity to cover costs by cross-subsidising from (and hiding costs within) their telephony operations. We have already paid for a large part of Telecom's Cable TV network through higher telephone charges in the past; they are now able to turn to their advantage the over-engineering of their inter-exchange network and what was called �Fibre Serving Areas' (FSAs) which were put in place before the cable roll-out, with precisely this application in mind.Vertical Integration
11.0 ATM - Banking on the future
Because of the emphasis on global standards when every telephone network must connect with every other network, we know well into the future most of the core factors that will create the future. The most important change that will happen over the next decade is the introduction of ATM (Asynchronous Transfer Mode) into the telephone networks.This is the side of telecommunications which is truly revolutionary, yet will only be noticed as evolutionary by the average user. The trick is to hide the radical nature of the change from users, and allow them to see it only as new and innovative services.
ATM is a packet-switching technology, while our present networks are circuit-switched. But ATM is a cell-based fast-packet switched technology, which acts so fast that it appears to the user as if it were circuit-switched. So it is a "virtual' circuit technology.ATM handles all forms of digital data in the same way; it is designed to handle video, audio, and messaging services over the same network. It is the presence of ATM which makes the network of the future infinitely flexible, and adaptable.It will work over existing telecommunications network structures, over copper or optical fibre, and over the new Hybrid Fibre Coaxial cable networks - so it is the unifying force. It is fairly safe to say that it will define the shape of the network for the next twenty years - and possibly for the next fifty. The period of rapid innovation will probably cease when ATM becomes ubiquitous in the next decade, because it solves most of the problems that we are currently trying to overcome with these rapid changes.
But, from the viewpoint of the telephone companies, it makes the network into a pipeline service. And it alters the charging policy in a number of ways:
- ATM will not normally be charged on a connection-time basis, but on the volume of bits transferred. If you chose to use a low-rate highly compressed vocoder to conduct your international conversations, then you will be charged accordingly. If you want high quality audio or video, then you will pay for the increased bandwidth over time (volume), not just for connection time alone.
- ATM services, like most packet-switched services these days are independent of distance. It will generally cost no more to send information 1000 miles than it will 10 miles.
- Since video requires nearly 1000 times the bandwidth of telephony, then on a volume basis, an hour of video should be charged at a rate which reflects this. But, if we are willing to pay only $5 to watch a 90 minute video, this means that a 9 minute interstate telephone call should only cost fractions of a cent.
This is the Telecom Paradox. ATM forces the telephone companies to confront the fact that they must abandon the present pricing structure - yet they can't find a new acceptable way to handle these problems. They will probably end up like the Water Board, able only to charge an annual connection fee, plus some metering of the water (packets) entering or leaving the premises - and at the low price the carriers must charge for video, this will effectively make voice telephony and data free.Their only solutions suggested by the carriers to date, is to attempt to tie the use of these new innovations with special value-added services such as Video On Demand (involving themselves at the service level, not just the carriage), and so inflate and control the pricing according to what the market will bear. But most people believe that as ATM becomes more ubiquitous, the carriers will not be able to maintain any artificial distinctions between voice-services and video services, and eventually they will become common pipeline services - priced purely on volume.
The alternative
If the government had standardised the technology to be used, and insisted on Optus and Telecom remaining as "common carriers', then they would be leasing channels to Continental, Packer, Channel 7 and Fox/News on a purely commercial basis (along with other potential program suppliers). We would have had two cables down streets in high- density areas, and only a single cable in the low-density. The race would be on to cable uncabled areas, not those where the competitor already had a cable.
Optus and Telecom would then hopefully establish a competitive price in the competitive areas - and the regulator would be able to use this to confirm that prices were reasonable in un-contested areas.
InfillCable systems around the world generally carry non-Pay commercial services. In the USA, under the "Must Carry' rules, the cable operator is legally obliged to provide free carriage of the major commercial broadcast channels in his region. The reasons for this requirement are this:
- In many areas of a city, or country, the cable system offers better picture quality than can be obtained off-air. This is especially true in hilly country, or where line-of-sight is blocked by buildings or constructions.
- By forcing the cable operator to carry these advertising-supported free-to-air signals, the householder will get better off-air pictures, and he won't need to switch or plug-unplug cables to change from one source to the other since everything now comes down the same cable.
- Good quality free-to-air signals are seen as his Basic Cable rights - the benefit the householder gets from paying for the cable connection. Pay TV is a "premium' payment made over and above that for the Basic Cable subscription.
- The broadcast television channels benefit from the Must Carry rule, because it extends the audience they reach, and so the price they can charge for advertising.
- The spectrum managers appreciate the Must Carry rule, because the don't need to reserve special broadcast TV channels to provide "infill' signals, for those areas in the shadow of a hill or building. These homes are expected to subscribe to Basic Cable.
So, as a consequence of the Must Carry rule on cable, most of the American cities can provide many more broadcast television channels. New York, for instance, has more than twice the number of high-power TC channels provided in Sydney - and if you count low- power TV stations, it has more than three times the number.A natural consequence of cable in Australia, therefore, is that the ABC/SBS and commercial channels can have another half-dozen (or more) competitors. There is no shortage of TV spectrum - the excuse which has always been given to explain why the current commercial networks have been permitted to mint money.With digital terrestrial television (available as from next year), the number of these channels could quadruple (usually four digital channels will fit into the space now occupied by one analog channel) and these could be made available for cheap Pay TV transmission, since no special dishes, cables, etc. are needed.
This, of course, poses a serious threat to the cable systems, and also to the satellite Pay TV licensees. In Sydney, Australia's most spectrum-scarce city, another 6 analog channels could be provided within weeks of a small cable system being installed along the northern beaches. Another six channels could be recovered with a bit more effort. These, released for digital Pay TV transmission, or for normal commercial operations, could support 24 to 48 new channels. Costs for city-wide coverage would be a million or so for each channel - only a few percent of the cable costs.Government reaction
The government's reaction, when presented with this possibility, was to block the Must Carry rule. They have decided to change the Copyright law to prevent cable channels from carrying free-to-air broadcasts without the specific permission of the commercial channels. Since the commercial networks now control the Pay TV system (although they are on different sides of the fence) this has the effect of splitting the viewing - no one cable will carry all the channels, only those of value to the owners of the cable.
The use of infill channels must therefore be maintained, and there are no new channels available to transform to digital and so provide competition to the existing commercial networks. In this way the government has been able to restrict the market, and to create a duopoly of both carriage and content on the new Pay TV (together with their commercial networks), and this is aligned with the duopoly of carriage of telephony.
11.1 The cost of the duopoly
We now have a duopoly telecommunications sector, which is about to become a duopoly cable TV sector - and be owned and controlled by the triopoly of commercial networks in association with a few very large American program providers. At the most conservative estimate, the duplication of the cable network will eventually add about $10 billion to our telecommunications capital (assuming 80% coverage)- and through various ways to the costs of using telecommunications and broadcasting. In both telecommunications and cable networks, it is generally held that companies need a 17% return on capital over ten years to justify risk, capital and maintenance expenses, and to make a reasonable profit.If the cable networks are rolled out to reach about 65% of Australian homes (the practical limit), the total cost will be about $15 billion (assuming that parallel cables run down, say, half of these streets). This capital expenditure requires a necessary total return of $2550 million a year, or about $650 per households passed (not connected!) - $12.50 per week. Remember that this is quite independent of any Pay TV subscription payments for the programming - this is just for the carriage. If only one-in-three households sign up to the cable network, Telecom and Optus will need to recover - for the connection only - about $36 per week, and the programming costs will need to be on top of this. Quite obviously, the Australian economy can't afford household expenditure increases of this order on Pay TV - and people won't pay while the quality of free-to-air television is reasonably high.
But if the capital repayment doesn't come from Pay TV subscriptions (and only about 1-in- 5 will initially sign up for Pay TV), then it must come from the secondary services of telephony, home-shopping, security services, etc. People must also be force over to the Pay system by the content - if they are cricket fans, then they will eventually lose cricket from the commercial channels - despite the pious claims about "anti-siphoning' rules. This has already happened around the world where ever Pay TV systems have been introduced. In the USA, the commercial networks no longer run modern movies - these have all migrated to the Pay services. Sports are being tied up around the world for Pay.
12.0 New Network ServicesThe maintenance of separation between cable and telephone local and regional monopolies has also resulted from their use of quite different technologies:
- Telephone networks are twisted-pair cables radiating out to each home or office from a telephone exchange. Each phone has its own connection. So these are switched, two-way, point-to-point services, with only just enough bandwidth to carry voice.
- Cable TV networks have long used a shared coaxial cable which runs down the street like a power-cable, with short drop-feeds to the individual homes. So these are non- switched, one-way, point-to-multipoint (broadcast) services with enough bandwidth to carry 50 or so video programs.So, contributing to the commercial battle for dominance is the knowledge that, just over the horizon, cable systems are coming (in 1996) with the advantages of both of the above.
- They can be switched or not (at a "packet' level);
- they can be one-way or two-way (interactive);
- they can handle voice, data, and hundreds of channels of video; and
- they can send the signals to one user, or to everyone connected to the cable. In other words, they are almost infinitely flexible, and therefore a single cable network is in a position to challenge the viability of either or both of the older forms of network.
This is the potential of the HFC (hybrid fibre-cable) network that both Optus Vision and Telecom are installing in Australia.
12.1 The range of services.
These are the major services which will eventually travel over these HFC networks:
So the driving force behind the apparent activity overseas is not so much that these networks do anything dramatically new, but that a single cable can provide all these services - it is a war where only one may survive. These are very profitable, very large organisations so it is going to be a long and bitter battle.
- Voice, data and fax telephony,
- Community Antenna TV (CATV - providing free-to-air signals in shadow areas where normal broadcast signals don't reach)
- Subscription television (normal Pay TV - you pay monthly for a package of channels).
- Pay-per-view TV (you pay for only those programs watched)
- Video-on-Demand (you watch at your own convenience, control the replay, and pay for only those programs watched).
- Interactive links to large information resources, video games and virtual reality systems.
- Metering, monitoring, and security systems.We haven't had cable TV in Australia before, so a lot of this looks new and exciting. But in the rest of the world they've long had the first four - albeit on quite separate cable systems.
To complicate matters further, the has been recent success in the USA and to a lesser degree in Europe in the use of direct satellite broadcasting systems for Pay TV. Murdoch's BSkyB in the UK is an analog system which found a niche because of the restricted range of programs available in the UK market, but in the USA a new digital system (the first commercial digital television system in the world), called DirecTV has proved to be very successful - initially with homesteads and communities without a regular cable service, but also where the cable service has been inadequate and/or over-priced.
The Hughes DirecTV satellite system offers 150 digital television channels, and the cost of the small home dish is under US$1000 - so it is highly competitive with cable - although it can't offer interactive services.
MDS (Multipoint Distribution Service)"Wireless Cable' or MDS (Multipoint/Microwave Distribution System) is also competing in the same market, and it also has a cheaper capital cost structure than cable. However MDS suffers from variations in local signal propagation, and in the limited range of radio spectrum made available in Australia.
To the householder, the costs fall somewhere between satellite dish units, and a cable connection. It is one way also, but there is some two-way potential in the new digital MDS systems being developed in a higher part of the spectrum.
13.0 Appendix
13.1 Suggestions:
What do we need? Rather than an expensive Information SuperTollway, part-owned and often operated on behalf of a few flashy large entertainment trucking corporations, what we need is a national electronic pipeline.Australia needs an infrastructure organisation called Telecom which provides pipelines for electrons from one source to another - in the most flexible, and economical way. I should be able to put in signals at my end of the pipe, and have them come out at the other end - and be charged proportionally to the cost of providing that pipeline service.
This is infrastructure, not industry.
- It should not be in business to make a profit any more than the Main Roads Department is in business for profit: it should be "user-pays', but not "Keating profits'. Telecom's profits are simply another form of Federal Government taxation - and this is a form of tax which falls hardest on small business and the smaller States, because it is mainly derived from long-distance calls.
- It should not be overseas running the Saudi Arabian telephone network - any more than the Main Roads Department should be building roads in the Middle East rather than building and maintaining roads in Australia. If Telecom executives feel that there is a profitable business here, they should resign from Telecom and start their own company to provide such services. Cross-subsidising overseas adventures from local call charges also destroys any chance that Australian private companies can compete in these markets. Any company can win overseas contracts if it doesn't need to make normal commercial returns on its investment.
- It should not be running "value-added' services, any more than the Main Roads Department should be running trucking businesses. Telecom's job is to provide the "carriage' on an equal opportunity basis for all who wish to use the network, so it must not grant itself special privileges. If it is involved in "value-added services' then these should only be to fill gaps in marginal or non-profitable areas - not to compete with commercial service supplier.
- It should be a carriage provider, not a content provider. It has no business being involved in Pay TV other than providing carriage services equally to anyone who requires them, and at a price which reflects the cost of installing and maintaining that part of the network.
- It should calculate prices which reflect the real-cost of providing all telephony and data services (with some additions to cover USO subsidisation). Telecom constantly complains about Optus �cream skimming� - and this is correct, Optus does. But it was Telecom which allowed cream to be skimmed by not rebalancing its tariffs when optical fibre came in. Telecom was (and still is) skimming off the cream itself on long-distance calls, as it has done for most of a decade.
- It should not discount, but publish an annual list of service-prices and stick to this. If Optus can do something cheaper, then it is in Australia's interests to allow Optus to take over this niche in the market. There is no economies of scale in the use of a public telephone network - in fact, the opposite applies. Large users tend to create peak-load crises - and this sets the level of engineering required, and so the capital costs.
- It should reduce management and administrators to a level of about 5% of engineering and technical maintenance staff.
- It should have no need for departments with 16,000 marketing staff, or television advertising budgets of $350+ million per year. Marketing staff should be no more than customer service and support representatives.
- It should start acting like an infrastructure organisation. It is part of the foundation upon which Australian industry depends.
14.0 Technical Appendix
14.1 ATM - Asynchronous Transfer Mode
Because of the emphasis on global standards when every telephone network must connect with every other network, we know well into the future most of the core factors that will create the future. The most important change that will happen over the next decade is the introduction of ATM (Asynchronous Transfer Mode) into the telephone networks.
This is the side of telecommunications which is truly revolutionary, yet will only be noticed as evolutionary by the average user. The trick is to hide the radical nature of the change from users, and allow them to see it only as new and innovative services.
ATM is a packet-switching technology, while our present networks are circuit-switched. But ATM is a cell-based fast-packet switched technology, which acts so fast that it appears to the user as if it were circuit-switched. So it is a "virtual' circuit technology.
ATM handles all forms of digital data in the same way; it is designed to handle video, audio, and messaging services over the same network. It is the presence of ATM which makes the network of the future infinitely flexible, and adaptable.
It will work over existing telecommunications network structures, over copper or optical fibre, and over the new Hybrid Fibre Coaxial cable networks - so it is the unifying force. It is fairly safe to say that it will define the shape of the network for the next twenty years - and possibly for the next fifty. The period of rapid innovation will probably cease when ATM becomes ubiquitous in the next decade, because it solves most of the problems that we are currently trying to overcome with these rapid changes.
But, from the viewpoint of the telephone companies, it makes the network into a pipeline service. And it alters the charging policy in a number of ways:
This is the Telecom Paradox. ATM forces the telephone companies to confront the fact that they must abandon the present pricing structure - yet they can't find a new acceptable way to handle these problems. They will probably end up like the Water Board, able only to charge an annual connection fee, plus some metering of the water (packets) entering or leaving the premises - and at the low price the carriers must charge for video, this will effectively make voice telephony and data free.
- ATM will not normally be charged on a connection-time basis, but on the volume of bits transferred. If you chose to use a low-rate highly compressed vocoder to conduct your international conversations, then you will be charged accordingly. If you want high quality audio or video, then you will pay for the increased bandwidth over time (volume), not just for connection time alone.
- ATM services, like most packet-switched services these days are independent of distance. It will generally cost no more to send information 1000 miles than it will 10 miles.
- Since video requires nearly 1000 times the bandwidth of telephony, then on a volume basis, an hour of video should be charged at a rate which reflects this. But, if we are willing to pay only $5 to watch a 90 minute video, this means that a 9 minute interstate telephone call should only cost fractions of a cent.
Their only solutions suggested by the carriers to date, is to attempt to tie the use of these new innovations with special value-added services such as Video On Demand (involving themselves at the service level, not just the carriage), and so inflate and control the pricing according to what the market will bear. But most people believe that as ATM becomes more ubiquitous, the carriers will not be able to maintain any artificial distinctions between voice-services and video services, and eventually they will become common pipeline services - priced purely on volume.
14.2 MPEG - Motion Picture Experts Group
In our analog past we've had three types of television around the world: PAL standard in Europe, Asia and Australia; NTSC in the Americas, Japan and the Philippines; and SECAM in France, the old USSR, and all their colonies/dependencies.
In our digital future we will have many more TV standards - some used for small portable TV screens, some for videophones, some for PCs and training aids, some for home TV in the present width and height (4:3) we watch each night, some for widescreen (16:9), and others for home cinema, and commercial cinema projection (HDTV). There will be American (ex 525-line) and European (ex 625-line) variations on all of these, and there will be dozens of standard in sound (Surround sound, multiple language tracks, etc).
However, out of the apparent chaos has emerged some common sense. The world has standardised on the MPEG compression system for both video and audio, which means that the same computer chips can be used for all these variations - making economies of scale possible. These are immensely complex and very powerful compression chips, so this decision has been vital to the success of digital TV in the near term.
14.3 DAVIC - Digital Audio-Visual Industry Council
MPEG compression is only a small part of the digital television standardisation problem. The international DAVIC (Digital Audio/Visual Industry Council) group is now standardising the set-top boxes, the subscription ('access control') mechanisms, and the various transmission formats (for satellite, cable, terrestrial, etc.) so that we don't end up with stacks of home decoding boxes.
By early next year it should be possible for companies to begin building standardised units which can handle all these new services, handle the payment, and protect the rights of the program providers from pirates.
The importance here, is that the set-top box in the future is the gate-keeper to information flowing into and out of your home, and it needs to be of a standard which benefits you, and enables you to choose from the range of competing possibilities on offer - not a proprietary standard owned and controlled by a single Pay TV provider.
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