State of the Australian Telecommunications Industry

Executive Summary

The telecommunications industry is the backbone of the digital economy. It enables constant digital activity across supply chains and into businesses and homes. It is the platform for future growth of digital applications that drive productivity improvements across the Australian economy.

The state of the telecommunications industry, and the emerging gap between industry revenue and the capital investment required to meet rapid data usage growth, is therefore a key determinant of the overall health of the digital economy.

The telecommunications industry’s delivery of these benefits is reflected in data usage growth and in the proliferation of new digital applications in the enterprise and consumer markets. And despite this dramatic uplift of capacity, the CPI index for ‘Telecommunications Hardware and Services’ fell 24.6% since June 2012, while the overall CPI index rose 32.6% over the same period.

At the same time, the industry is more productive. Wider coverage and faster data networks have been achieved despite declines in industry revenue. These productivity benefits are being passed on to end users, driving overall economic performance and social access to communications.

These benefits have largely spilled over to society. Telecommunications industry revenues have been flat as these gains have not been monetised through higher pricing. But ongoing telecommunications investment is needed to support this growing usage. The current capex slowdown risks the emergence of a digital investment gap. This is not solely an Australian problem; Vodafone has argued that a similar gap is opening in Europe.

There are some promising signs of revenue recovery from the pandemic in certain product lines, though others remain under pressure. But this occurs against a backdrop of long-term decline in returns on invested capital (ROIC) in the Australian telecommunications industry since the Global Financial Crisis (GFC).

The rising cost of capital exacerbates this ROIC challenge. The cost of capital had been at historic lows in the wake of the GFC and fell further during the pandemic. But the post-pandemic boom coupled with global supply constraints has catapulted economies into high inflation with rising interest rates.

We are now in a fundamentally new economic environment. While interest rates are expected to ease in 2024, they are not forecast to fall back to the levels of 2020. The cost of capital has risen, and this will impose new discipline on investment in all industries. This has happened in all advanced markets and is not confined to Australia. But as an island continent with a dispersed population, Australia has high demand for telecommunications infrastructure.

This new environment has important implications for investment in telecommunications infrastructure. The 1997 telecommunications reforms represented a national commitment to facilitating private investment in telecommunications, through the emergence of new, privately funded competitors and the privatization of incumbent Telstra.

In many ways, the last decade has been a reversal of this program. A new wholly government-owned incumbent now dominates fixed telecommunications. Grant support for regional mobile is also significant. The private sector share of industry profit is falling, along with industry capex. This is worrying because significant investment demands in the Australian market still exist: fibre upgrade, expanded mobile coverage, and the spread of new technologies like 5G. The history of telecommunications over the last decade shows that private companies make an indispensable contribution to the efficiency of such investments. This requires a healthy industry that can achieve commercial returns on capital invested.

This is a policy challenge as well as an industry challenge, and regulation is an important determinant of investment attractiveness. The telecommunications industry is subject to:

• A regulatory regime of exceptional complexity, covering consumer protection, privacy, wholesale prices and access, service standards and complaints procedures, advertising standards, spectrum access, local council planning, universal service obligation, and national security.
• High costs from spectrum allocation policies that inflate spectrum unit prices, even as demand for spectrum to support wireless communications is surging.
• A fixed wholesale pricing structure based on traffic capacity that has increased uncertainty for retail service providers while benefitting the publicly owned wholesale operator.
• Inability of mobile operators to easily monetise data growth and therefore keep pace with investment demands.

These issues must be addressed to create the investment environment that will attract the capital Australia needs. In a global economy where capital is mobile, private capital investment cannot be sustained unless returns meet industry benchmarks.

Nations that create attractive investment environments for telecommunications investors will reap the benefits of better digital infrastructure and a stronger digital economy. Nations that do not will be laggards, forced to rely on public injections of capital that will inevitably be constrained as governments work to reduce the fiscal damage caused by the pandemic.

About Venture Insights

Venture Insights is an independent company providing research services to companies across the media, telco and tech sectors in Australia, New Zealand, and Europe.

For more information go to www.ventureinsights.com.au or contact us at contact@ventureinsights.com.au