Internet interconnection submission by AAPT/Connect:

EXTRACT ONLY from Annex A: Overview of the Internet industry

20 JUNE 2003

This annexure reviews the Internet industry to address some of the issues directly raised and described in the Australian Competition and Consumer Commission (ACCC) discussion paper.

Variants of peering and transit are used almost universally around the world for Internet interconnect.

Fundamentally peering is an arrangement between ISPs to exchange traffic between paying customers typically (but not necessarily) on a Sender Keep All (SKA) basis.

Transit is one of a customer/supplier relationship where one ISP sells an Internet transit to the global Internet to the other ISP.

ISPs cannot be a peer and a transit customer over the same interconnect link because of the inability to differentiate traffic and so bill accordingly. It should be noted however that there are some options which might look like combination of transit and peering – these are effectively discounted transit based on estimating traffic exchanges between customers or an agreed discount on the standard price.

In mid-1997 a range of complaints were received by the Commission regarding the conduct of Telstra in refusing to enter into reciprocal Internet interconnect with other Australian ISPs. During May and June 98 the Commission issued two competition notices in relation to this conduct by Telstra. Subsequently 1. Telstra entered into what is presumed to be SKA peering agreements with 2. Optus, 3. Connect belonging to AAPT (since purchased by Telecom New Zealand) and 4. Ozemail (taken over by MCI - subsequently sold to iiNet) - the large backbone ISP's referred to as the "Gang of Four".

Peering and transit arrangements are normally highly confidential and not in the public domain. Whilst it is highly unlikely that Telstra, Optus, AAPT and Ozemail buy domestic transit services from other ISPs, they certainly procure international transit services.

A macro analysis based on discussions with industry and on Paul Budde Communications estimates, indicates there has been substantial price reductions for international Internetconnectivity from a high of approximately 25 cents/Mbyte in 1998 to just over 1 cents/Mbyte in 2003.

The results are very similar to those of Europe, albeit delayed slightly. The major market change triggering major reductions was the commissioning of the Southern Cross Cable System - owned by Telecom New Zealand (50%), SingTel (40%) and Verizon Business (10%) - and then subsequent launch of the Australia Japan Cable System - mostly run by Telstra. The launch of these two cable systems provided end-to-end connectivity at much lower costs which have clearly flowed through to wholesale pricing as would be expected in a competitive market.

The projected 2004 number of $0.007/Mbyte is based on expected competitive pricing on international bandwidth continuing with further narrowing of margins for cable owners.

** End of Extract

Recent News
Broker Watch
Which telco stocks are hot, and which are not
Jill Fraser - February 11, 2008

With the new Federal Government’s National Broadband Network high on the agenda and pundits predicting that the insatiable use of telecommunication services is set to continue, the telecommunications sector looks likely to weather any slowing in the Australian economy more comfortably than other sectors.

Goldman Sachs JBWere states that the telco sector is more defensive than many other industries in Australia and that increased demand for wireless broadband internet access would sustain its growth over the long term.

The industry has come through a period of significantly increased competition, especially in mobile and broadband - and it’s anticipated that competitive pressure on margins will continue over the medium term.

Impending are some significant policy changes, in particular in relation to broadband.

Dominated by Telstra, the distinctly bipolar sector is teetering on the edge of emerging from ‘the dark ages’ as the Government’s $8 billion high-speed broadband fibre network gets closer to becoming a reality.

The government’s tender has yet to be awarded. The two main contenders will be Telstra, which is not enamoured with the government’s plan to invest $4.7 billion and create a joint venture and a consortium of telecommunications companies. This includes SingTel Optus, the G9 group, which has not expressed any objection to the proposed joint venture.

In an overview of the proposed regulation, telco consulting company, Ovum refers to an ACCC report, the Telecommunications market indicator report 2005–06, published in August 2007. It notes that during the 2005/2006 financial year, Telstra enjoyed a 78% share of the end-user PSTN (Public Switched Telephone Network - the worldwide voice telephone network) access line market.

The only other full-service operators with PSTN access networks are SingTel-owned Optus (with a market share of 14%), AAPT (owned by Telecom Corporation of New Zealand – TCNZ) and Primus Telecom. AAPT and Primus have a combined market share of 8%.

There are four mobile network operators in Australia:

(NB: the above connection market share figures are valid as of 2Q07.)

Analysts agree that revenue from fixed line telephone networks will fall but that growth in mobile services and broadband will more than offset this.

Special Note

Pipe Networks is primarily a backbone network that wholesales capacity to other operators in the industry. It operates 670,000 metres of fibre optic-based network, which is sold to larger customers – banks, government departments and services in central Sydney, Melbourne and Brisbane. This provides secure, long-term revenue.

What’s got the market excited is that Pipe has just got the go ahead to build a $200 million undersea cable between Sydney and Guam, which will mean faster, cheaper internet access for the local market.

Due for completion in mid-2009, the Pipe Pacific Cable breaks Telstra and Singapore Telecom's stranglehold on Australia's cable links to the rest of the world.

Ovum’s research director, David Kennedy states that there is a debate in the industry about whether this is going to create a bubble in trans-Pacific capacity.

** End of Recent News