Competition & the 5G spectrum

Speakers: 
Mr Rod Sims, Chair
Conference: 
ACMA RadComms 2018
30 October 2018

ACCC Chair Rod Sims addresses the ACMA RadComms 2018 conference regarding competition issues and the 5G spectrum.

Transcript: 

Check against delivery

Introduction

Thank you for inviting me to speak with you today.

Today, I would like to address three issues:

  • First, the importance of competition to investment; as Fred Hilmer nicely put it some years ago, just because you can invest doesn’t mean that you will without competition to spur you on,
  • Second, our thinking about some of the possibilities of 5G and implications for the NBN, and
  • Finally, I will make some very broad observations on the upcoming 3.6 Gigahertz auction and the proposed merger between TPG and Vodafone Hutchison.

I am of course aware that there is a multitude of uses of spectrum. The ACCC is primarily concerned with mobiles and wireless communications uses and that’s what I’m going to focus on today.

As we move closer to a 5G world the challenges and opportunities are becoming clear to both industry and regulators. As you all well know, 5G promises to bring a ‘step-change’ in mobile technology, with fibre-like speeds and high data capacity that is able to match that of fixed line networks for the first time.

The ultra-low latency and high reliability of 5G creates new opportunities for industry, and we expect to see thousands of interconnected devices, and new applications coming online in the next few years.

As an example, some talk of autonomous vehicles; it will be fascinating to see if and when there is widespread take up.

Networks themselves will change, and become increasingly heterogeneous, with a mix of existing macro cell towers and new small cell technologies to help overcome some of the propagation challenges of using very high frequency spectrum.

5G will need a diverse range of spectrum to support its different use cases: low, high, and very high band frequencies to provide coverage, high speeds, low latency and to carry large amounts of data along the network.

We will see the first 5G spectrum auction take place in November with the 3.6 Gigahertz spectrum band, and over the next couple of years, the very high, millimetre wave frequency bands will also likely be auctioned.

Along with this greater demand for spectrum comes significant implications for competition. One of the challenges will be making sure that those who need spectrum get enough of it to be effective competitors in retail markets. 

Wide-spread commercial availability of 5G networks and compatible devices is not expected until around 2020, and the international standards are yet to be fully finalised. However, there is a lot of preparation happening at the moment across the industry and government to make sure networks are ready to support the transition and 5G compatible devices, when they are released.

This includes work for the ACCC to make sure our regulatory settings are fit for purpose and flexible enough to support the transition to 5G.

1. The importance of competition to 5G investment

Just because you can do something that is in your interests doesn’t mean you will. This is true for people, and even more true for businesses. Competition provides the incentive that spurs companies, or even entire industries, into action.

For the truth of this one must look no further than the contemporary travails of recently disrupted industries, such as the taxi industry for example, who are facing their first competition in a very long time, or in some cases ever, to see the fresh injection of innovation and motivation that competition has wrought into a formerly stagnant area of business.

So why is this relevant for mobiles? We know that 5G is going to lower the cost of delivering data, but those changes will be accompanied by large capital and operating costs; operators will need to acquire new spectrum, densify their networks by building more mobile towers, and make sure their transmission can support delivery of new services.

So what is going to drive this investment?

Competition of course.

Competition is the single most critical driver of investment.  It can be the catalyst for innovation and can see operators build wider, better networks, to provide higher quality services than their competitors.

We see this in Australia. Despite the challenges of our geography and our comparably low population, much of whom are situated along the coast, Australia has some of the best mobile networks in the world. Why? Because competition created the environment that led to these services being developed and delivered to the Australian consumer.

In other places around the world regulators often feel compelled to put caveats on spectrum to drive investment with technology coverage requirements so that consumers receive the best outcomes.  

We have never had to do that here.

The only historical condition that we are aware of was a carrier licence condition for Telstra during its rollout of NextG 3G technology that it match its CDMA coverage before it was allowed to shut down that service.

Of course, Telstra matched its CDMA coverage and then some.

While competition in the Australian mobiles market has traditionally been strong, there are key issues that a competition regulator will always worry about.

For example, there are very high barriers to enter the mobile network market, especially in a large, sparsely populated country like Australia, the upfront investment costs of building a new network are huge.

As the competition regulator, we want to make sure markets are working for consumers, now and in the future. Part of this is about preserving the competitive environment so that it is attractive for investment. One way we do this is by seeking to minimise regulatory risks and barriers for entry for existing and new operators.

We looked very closely at the relationship between competition and investment in our regional mobile roaming declaration inquiry.

We found that the declaration of access to a mobile roaming service would be likely to distort the incentives for Telstra, Optus and Vodafone to make continuing efficient investments to strengthen and expand network coverage.

As consumers download more and more data on their mobile devices, sustained investment will become even more important for operators, as we all know how damaging a few network outages can be to a company’s reputation and more importantly, to the users of the network.

However, investment costs can be significant, and if we want to see more competitors in mobiles we need to think carefully about how to best achieve sustainable competition and minimise barriers to entry.

We expect calls to share network infrastructure are likely to increase in a 5G world because of the capability offered by 5G to allow greater independence to operators who may share a radio access network, and the costs and difficulties involved in rolling out a dense mobile network, particularly in the cities.

Competitive implications of network sharing

How is this different to roaming?

As you know, network sharing can either be passive or active.

We have a degree of passive network sharing in Australia, where operators share mobile towers, or other assets, and we regulate this to an extent under our Facilities Access Code.

As we move into a 5G world, the need to densify networks, particularly in highly populated areas, may encourage more tower sharing. 

Active network sharing is less common as it is far more complex, and involves sharing of the radio access network, or RAN itself, including the spectrum. This can have pros and cons for competition: it can reduce maintenance and investment costs which can lower the barriers to entry, but it can also be difficult to differentiate the services being offered.

With 4G LTE technology, RAN sharing has become more sophisticated – and operators are more able to distinguish between and maintain control over their respective services and offerings. Bilateral RAN sharing arrangements have the potential to save operators between 20 to 40 per cent on network costs.

There is a lot of debate around internationally, about the benefits of network sharing, particularly moving into a 5G world. Some countries have been looking at fundamentally altering the structure of their mobiles market, moving from multiple competing mobile networks, to a shared wholesale network where operators simply buy capacity from one or two network providers.

This may see competition in mobiles evolve, so rather than network against network, we may see competition within the network, between different providers sharing the same RAN.

I do not think that we will see this in Australia to any great extent but there may be benefits to 5G active network sharing, particularly where it encourages smaller players to invest and roll-out new services while also enabling them to keep control over and differentiate their services, and so be active independent competitors.

There are many potential benefits of network sharing including more efficient asset utilisation and lower costs for operators, faster and wider deployment of new technologies, and greater spectral efficiency.

However, there are also adverse consequences for competition and consumer outcomes if, for example, we end up with a sluggish, ill-managed monopoly network provider that stifles service competition. Where smaller players are sharing networks there is also a greater risk of tacit collusion depending on the extent of sharing and a stifling of investment.

We need to ensure our regulatory framework is flexible enough to facilitate the potential evolution of competition, and new innovative services/technology that might develop, while mitigating against any potential anti-competitive behaviour. This includes ensuring operators have access to network infrastructure (either through some active or passive sharing) and competitive backhaul is available.  

Ultimately, we want to see consumers benefit and we want to see network owners incentivised to invest. Which is why we will take a close examination of any proposals for active network sharing.

2. 5G opens exciting possibilities

While Verizon is off launching the world’s first 5G-esque services in America with its fixed wireless home internet service, we have an interesting dynamic developing in Australia between the mobile networks and the NBN.

With 5G we will see the first generation of mobile technology capable of delivering broadband services that are comparable to fixed services in terms of speed and capacity.  This is unprecedented in the Australian market, and indeed globally.

This is great news for consumers as it will create more choice of services and suppliers and see telco products better align with their needs, particularly those who value mobility, such as renters. 

We are already seeing an increasing number of Australians going mobile-only for voice services, at over 6.5 million, as well as significant growth in mobile data. Although by volume, mobile data traffic is still substantially smaller than fixed, it is growing at a much faster rate.

As 5G networks will be able to transport significantly more data traffic than previous mobile networks, it is anticipated that mobile broadband services may become more of a viable substitute for fixed broadband. 

This leads us to an interesting competition issue: what does 5G mean for the NBN?

The NBN is a monopoly wholesale network so we should strongly welcome it facing competition.

We are currently seeing some operators offering consumers hybrid modems with their NBN connection, where data traffic can be directed over the mobile network rather than the NBN. 

This is just a small step towards operators favouring their own mobile networks over the NBN, but will we see it go further?

The impetus for this so-called ‘NBN bypass’ first came about following delays with the NBN build, and consumers not receiving speeds they were sold.

Over the last few months, both the ACMA and the ACCC have put some measures in place to try and resolve these problems. However, as many of you are aware, a question remains about the cost of wholesale NBN access services.

We have long heard providers complain about low margins on the NBN, which is largely due to the variable costs of provisioning capacity to support high speeds and growing data traffic.

So for those RSPs with an alternative mobile or wireless network, it may be more cost effective to offload some fixed NBN data traffic onto their own  network (where consumers have a hybrid modem) or seek to supply some services entirely over their own mobile network, completely bypassing the NBN.

Of course, a family with three teenagers is highly unlikely to ever switch away from a high-speed fixed line connection. But there is an opportunity for wireless operators to attract those consumers who don’t necessarily want the high speeds and unlimited data offered by fixed service providers. For consumers at lower price points, with small data needs, a wireless service might suit better than the NBN.

We are always happy to see offers in the market match consumer demand and anything that delivers the services that consumers want at the prices they are happy to pay is welcome news to us.

But what does this mean for NBN Co? And what does it mean for the smaller operators who don’t have their own mobile network?

These are all complex questions; and we will need to wait and see what happens when 5G becomes widely available and how markets react.

What we must never do, however, is seek to restrain others in order to protect the NBN business model. This would be a disaster for consumers.

3. The spectrum auction and merger

There is a lot of chatter around about the spectrum auction scheduled to commence later this month. I do not propose to talk explicitly about the particular circumstances of the auction itself.

The ACCC has long had a keen interest in spectrum but we do not have a formal role in spectrum management or allocation processes, as this is entirely the role of our colleagues at the ACMA.

We do, however, provide advice on competition limits when asked to do so by the Minister, and otherwise discuss a range of issues with the ACMA.

Our key role is complementary to the ACMA, and focuses on regulating and promoting competition in the downstream markets that rely on spectrum (the wireless markets). We want to make sure that operators have equal opportunity to acquire this essential input so they can compete effectively in the retail markets, which in turn encourages investment and product differentiation.   

Access to spectrum has always been a significant barrier to entry into wireless markets. To operate a mobile network you need spectrum, and spectrum is an increasingly scarce and valuable asset.

As the competition regulator, we need to think very carefully about what we can do to promote competition now and in the future for the long-term benefit of consumers.

We need to make sure that spectrum allocation processes, including allocation limits, promote competition in downstream markets, rather than, and this is an important point, just competition in the allocation itself.

Each spectrum allocation is a new opportunity for a potential entrant, a different service, or improved coverage. It is one of the few tools available to the regulator to promote competition in wireless markets.

What happens now in terms of allocating spectrum, in the upcoming 3.6 GHz auction in November, and future auctions of millimetre wave spectrum, will have a long-term impact on competition in downstream wireless markets.

We need to make sure we achieve the most efficient and pro-competitive use of spectrum.

Claims by existing operators that they need more and more spectrum at the expense of smaller players are always extremely worrying. Perhaps some of the engineers in this room will correct me, but I have never heard an MNO say that it has enough spectrum.

High revenues might be attractive for government, but they can be detrimental to competition in downstream markets if operators overpay at auction. High spectrum costs may impact the financial sustainability of operators, leading to lower network investment, and in the worst case scenario, forcing an operator to exit the market.  There may also be adverse consequences for consumers, if spectrum costs are passed on through higher retail prices, or less network investment leads to poor service quality.

We need to take a broader view when it comes to spectrum and look past the spectrum allocation process itself. We need to ensure that downstream wireless markets continue to operate effectively, and that the benefits of competition are reaching all consumers.

The TPG-VHA merger

I will now very briefly discuss the proposed TPG-VHA merger and the joint venture.

When we review a proposed merger, we consider whether or not it is likely to substantially lessen competition. We think about what competition would look like with and without the merger.

As we are in the midst of looking at this merger, I will not say anything that could pre-empt the decision. However, clearly some of the issues we are focussing on include:

  • The potential competitive influence of TPG’s mobile network
  • VHA’s entry into broadband, and what that has meant for competition

Ultimately, the focus is on whether consumers are likely to pay more or receive lower service levels because of the merger.While there are many changes taking place in the industry, our focus will be on the impacts of the merger itself.

TPG and VHA have also signed a joint venture agreement. This is primarily to bid in the upcoming 3.6 GHz spectrum auction, and we have secured an undertaking to ensure that the core existing operations of TPG and VHA are managed and maintained independently of each other while the ACCC conducts its review.  The joint venture could also see them share parts of their network more closely in the future if the merger doesn’t proceed.

An agreement between competitors to share networks rather than compete to build them independently does have potential competition implications. As already discussed however, we are also aware of the potential spectrum efficiency benefits being put forward.

Conclusion

What do I want you to take away from this session?

First, competition, competition, competition. If Australians are to keep the high standards of mobile services that they currently enjoy, competition is the only way to achieve that. We cannot become complacent.

Second, yes, 5G will potentially be disruptive. While this may be problematic for some interests, if consumers and businesses get access to a range of services that meet their demands and preferences in an increasingly connected world, this is all we should be solving for.

Finally, our thoughts on the merger and spectrum auction. We will always focus on competition and the resulting benefits that it can bring to consumers over the longer term.

Thank you.