What TPG buying iiNet means for competition in Australia: Control Shift

Last Friday, TPG announced it is purchasing iiNet for $1.4 billion.

The deal certainly proved to be a topic of hot conversation on telecommunications industry message board Whirlpool, where the discussion thread on the topic has blown out to 77 pages and counting, as of the time of writing.

Many of the comments are from customers who chose iiNet or one of its brands (in particular Internode) because it’s a premium provider. They’re concerned the quality of their services will decline once the deal is completed.

To understand why TPG is keen to buy iiNet, and its big implications for competition, we need to go back to a decision made by the ACCC in 2010.

A few basic points

Most of the debate about the rollout of the National Broadband Network has been around whether the final mile should be fibre optic cable or a mix of slower but cheaper technologies. However, there was another equally crucial – and often overlooked –decision made by the previous government that had huge implications for competition in the Australian telecommunications industry.

In order to understand why this decision was so important, you need to be familiar with the three key parts to a phone network: the final mile (or “local loop”), the exchange (also known as a “Point of Interconnect” or PoI), and the backhaul network.

The final mile is made up of the cables that connect your house or business premises to your local exchange for phone and internet access. The backhaul is the fibre-optic cables that link an exchange back to your telco’s main offices, the rest of the network, and the undersea cables that connect Australia to the outside world. The exchange, or PoI, houses the equipment that links the local loop and the backhaul network together.

The old copper telephone network was limited in how far premises could be from their nearest PoI. For example, in order to get ADSL internet, a property needs to be within around 4 kilometres of a PoI. This meant there had to be a large number of PoIs right across the country. But this limitation of distance doesn’t exist with the more modern technologies used in the final mile of the NBN.

A crucial policy decision: Many PoIs or few?

The original plan for the NBN, supported both by most small to medium telcos and the NBN Co itself, was to have the whole of Australia served through 14 PoIs, with just two in each state. Under this proposal, by installing equipment in just 14 buildings, a small business could enter the telco market and serve the whole of Australia through the NBN.

However, the four big companies that owned most of Australia’s backhaul at the time (Telstra, Optus, AAPT/Telecom New Zealand and NextGen/Leighton Holdings) complained that this would make most of their backhaul networks obsolete. They began lobbying to either get the NBN built with far more PoIs, or get paid millions in compensation.

Of course, more PoIs also mean telcos need to install and maintain equipment in many more buildings in more places, and also install a lot of backhaul. For many, the only choices would be to either build up their scale, or become resellers for a larger player.

As SmartCompany reported at the time, industry experts such as Simon Hackett warned the decision would lead to higher prices for consumers, and be “untenable in practice” for smaller telcos.

Suffice to say, to the surprise of absolutely no one involved with small business in Australia, the ACCC ended up siding with the big corporates over the little guys. It decided the NBN would have 121 PoIs, rather than the 14 it needed. It was a triumph of politics over engineering.

Sure enough, a wave of consolidation hit the telecommunications industry. iiNet purchased Netspace, the retail arm of AAPT, TransACT, Internode and Adam. M2 (which trades under the Southern Cross Communications and Commander brands) purchased Primus, Dodo and Engin. Meanwhile, TPG became one of the big four by purchasing the backhaul arm of AAPT.

With TPG’s takeover of iiNet, we’ve now reached an inflection point where, just like the big four banks or the Coles and Woolies duopoly, Australians are now left to choose between a “big five” of telecommunications: Telstra, Optus, TPG/iiNet, Vodafone and NextGen (and its resellers).

Any new entrant at this stage would either need to raise billions of dollars to roll out thousands of kilometres of backhaul cable and equipment in over a hundred PoIs, or simply become a reseller of one of the big five.

The myth of the apathetic Aussie consumer

There’s also a broader issue at play here, and it cuts right to the heart of Australian small business and competition policy.

It has often been said that Australia ends up with oligopolies such as the big four banks or the big five telcos because consumers are apathetic. Yet 77 pages and counting on Whirlpool suggests Australian consumers are really far from apathetic.

Instead, a concentrated market has been created as a result of government policy.  It was the case with the ‘four pillars’ policy in banking. It was the case with the ACCC (and its predecessor, the Trade Practices Commission) allowing Wesfarmers and Coles to swallow a string of different chains (remember SSW, Tuckerbag, Festival, Safeway and BiLo as standalone chains? How about Jewel or Franklins?). And it is the case again in telecommunications.

The big question out of all of this is whether we, as consumers, are better served by competition policy that carves markets up between two or four big players? Or are we better off when many players, including innovative small businesses and startups, are free to serve niche markets and disrupt the status quo?