ACMA RadComms2014

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• ACMA RadComms2014
• Productivity Consequences of flexible regulation
• Ian Martin
• Regional Head of Telco ResearchCIMB Securities

• 10 September 2014

2

• Market sector MFP index and growth rates within
  productivity cycles

2003-04
2007-08
1998-99
90
1993-94
1988-89
1984-85
1981-82
1973-74
0.5
-(0.7)
0.7
0.6
0.9
2.5
0.2
0.0

• Source PC, Productivity Update May 2013

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• ABS IMT productivity index

• Source ABS cat 5260.0.55.002, 2014

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• Mobile sub-sector productivity

• Source CIE, RadComm2013

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• CIMB indicative fixed line productivity

• Source BIE, 1996, ACCC 2004, CIMB estimates

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(No Transcript)
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• First telecommunications legislation in Australia

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• Highlights of micro-economic reform

• Essentially taking government out of direct
  involvement in allocation of resources in favour
  of market allocation productivity enhancing
• Reform of GBEs to focus effort on efficiency
  rather than other objectives
• Market driven allocation of spectrum spectrum
  licensing spectrum trading
• Quantifying and direct funding of cross-subsidy
• Routine cost-benefit analysis
• Introduction of competition
• Separation of regulation from production and
  investment (Austel, ACCC)
• Pro-competitive safeguards access regime,
  industry specific regulation
• Privatisation of GBEs capital allocation within
  an efficient capital market rather than by
  government

Each step contributed to a better matching of
resources with likely demand
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• Undermining microeconomic reform...

• Having got out of direct decision-making on
  resource allocation, governments get back in
  through the back door, ie by regulation and
  direction
• Over-eager declaration of services(Calls for
  separation of declaration from management
  regulation of access)
• Regulatory direction over industry
  structure(Cost Benefit Analysis of any directed
  change in industry structure)
• NBN renationalisation, regulated technology
  preference, rollout preference
• Management of the access regime to achieve a
  preferred industry structure and/or distributive
  outcome will it undermine mobile productivity?
• Undermining of competitive neutrality risk to
  the Internet of Things (IoT)
• Extensive Ministerial direction over spectrum
  allocation

undermining the ability of the market to match
resources with demand is what undermines
productivity regulatory changes post-investment
sovereign risk
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• Regulated access regime shifted risk and return

• Risks have increased in telecommunications
  infrastructure investment
• Invest on one basis only to see it over-turned
  post investment commitment
• ACCC has introduced new concepts post investment
  commitment, unrelated to economic efficiency
• Returns have increased across telco access
  seekers through redistribution rather than
  investment
• Several steps-down in access prices aggregation
  among access entrepreneurs
• Access prices below cost across a broad average
  of users, disincentive to invest at scale
• Structural separation pursued as an claimed
  reform without evaluation
• Has left risk with owner of infrastructure and
  distributed returns to access seekers

Pure access seeker share price mid-2009 to
mid-2014
Wholesale only network provider share price since
separation
Source IRESS

• Undermined market evaluation of network benefits
  and costs

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• Market valuation access seeker v. network
  provider

Access seeker Wholesale only network provider
Revenue A1.0bn NZ1.1bn Similar revenue
EBITDA A158m NZ649m 4 times more EBITDA
EBITDA margin 15 61
Network assets A60m NZ3.1bn 50 times more assets
Intangible assets A612m NZ166m
Customers 800k 1,781k Physical network connections
Dividend 26cps 0cps No dividend in FY14
Return on Invested Capital 14 7.4 Half the ROUC
Market cap, Monday 8 Sept A1.4bn NZ0.7m
Enterprise value A1.7bn NZ2.5bn
EV/EBITDA FY15 9.3x 4.5x Half the market valuation multiple
Sources CIMB, Company reports

• Would the ACCC do the same thing in mobile as it
  has done in fixed line?

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• The Internet of Things likely largely wireless
  connected

• What spectrum and allocation approach for IoT?
• What impact will reservation of fixed backhaul to
  NBN Co have on IoT industry structure and
  development of services?

Reserved backhaul is 35 of NBN Cos LT
revenue We believe that the proliferation of
mobile devices and the need to service those
devices will be one of the key areas driving
demand for the NBN. NBN Co, Deloitte Access
Economics Report, Mobile Nation, Feb 2013
Source Altera
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• Spectrum management and spectrum auctions

• ACMA has a positive reputation among investors
  for spectrum management
• Probably hard not to have a positive reputation
  given growth in MBB
• Good spectrum management is below-the-radar for
  secondary market investors
• Spectrum auctions
• Closely followed in the equity market given
  impact on capex and market
• How many Ministerial directions are needed to
  sell a block of spectrum?
• Red underpants requirements unsettle investors
• 700MHz spectrum price was effectively set by the
  Minister for Communications
• In effect excluded VHA how can it be efficient
  to have left so much spectrum unsold
• Cant rectify post-auction without triggering
  sovereign risk
• 5G spectrum
• Will be more closely followed by the market
  because Demand gt Supply
• Where will it come from? Who will have to
  surrender spectrum? What process to manage
  this?

• Process and arrangements should facilitate
  private sector to evaluate and meet emerging
  demand

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• What might have been? AWA and mobile telephony,
  1949

Mobile wireless
Source AWA Annual Report 1949
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Whats that you say, Chris? Productivity and
innovation in the mobile sector? That requires
flexible regulation to facilitate market-driven
investment and competition, not over-ride it with
regulatory preference.
Roger that, over.
Source AWA Annual Report 1949