Is Telstra a backhaul monopolist?

The nation's third largest Internet Service Provider joined the growing chorus of debate on Telstra's obligation to maintain rural telephone services. Optus chief executive Paul O'Sullivan recently said the Universal Service Obligation (USO), which requires carriers to subsidise Telstra's maintenance of regional and rural phone services, should be reformed.

O'Sullivan's comments came after Telstra regulatory managing director Kate McKenzie told an industry conference the USO was "not sustainable" in the longer term. Telstra claims a lack of funding for the USO is "holding back" profitability, and is a regulatory burden.

However, Steve Dalby, iiNet regulatory affairs general manager, told ZDNet Australia the real issue was how to increase competition in bush communications.

According to Dalby, while iiNet has been able to justify the investment in metropolitan areas to rollout broadband services in competition with Telstra, the cost of using Telstra's Internet 'backhaul' links to rural areas was prohibitive -- and there are no alternatives.

But in urban areas, he said iiNet was able to beat Telstra over the head with threats to seek alternative network access from competitors like Optus, Powertel, AAPT or Primus.

The solution lies in reducing the cost of the bush links, and Dalby hopes the federal government can "force" Telstra into action.

"If competitors of Telstra can get access to the backhaul network at prices which are much more reasonable than Telstra is quoting at the moment, then there will be more competition," he said, adding this would net consumers better services.

The telco's dominance over bush services isn't the only reason why ISPs are unwilling to invest in rural Australia, said Scott Hicks, managing director of South Australian ISP Adam Internet.

While he admitted his company had very little infrastructure in the bush due to the "very expensive" backhaul services, he said the other difficulty was getting the "right number of customers" to justify any investment.

But times are changing and competition in the these areas are increasing, Hicks said. "There is quite a lot of work going on around South Australia with particular projects like [government-run] Broadband SA," he said. "I've seen a few other carriers putting their own backhaul out to certain areas like [regional centres] Port Lincoln, Renmark either via fibre or a wireless solution."

Playing monopoly
One strong voice for the monopolist argument comes from Robin Simpson, a research director at analyst group Gartner.

"There is no competition, there is just Telstra [most of the time]" Simpson said of the backhaul space. "It's a historical accident of the fact that you have a government incumbent."

Like Optus' O'Sullivan, Simpson would also like to see reform in the USO pact. Instead of paying the money to Telstra, it and any other government funding allocated to bush telecoms should be portioned out to any telco willing to invest in infrastructure for a particular region.

The analyst believes this will enable competition to develop and ultimately lead to ISPs like iiNet being able to do good business in those areas.

"If we encourage somebody else to go in, Telstra actually has some incentive to compete," Simpson told ZDNet Australia.

A revamped USO could even open the market to non-traditional ISPs. "Soul Pattinson Telecommunications have got quite a bit of backhaul in regional centres," he said, adding some states' rail infrastructure corporations also had their own optical fibre already running along some rail lines, and would only need a little financial incentive to add more.

"These people not only look after railway lines and signalling and stuff, they also have fibre in many cases, or very high quality copper," he added. "It runs along all the railway lines -- and of course, where do the railway lines go? They go to big towns."

It would be a small step for these organisations to set up a high-speed WiMAX-based wireless broadband hub at the centre of small towns, Simpson said, using fibre running alongside the railway line to provide cheap backhaul.

"All of a sudden you can deliver high-speed broadband services economically to the entire town. So I think there's a little bit of lateral thinking to be done here," he added.

Long-term, Telstra may inadvertently face increased competition due to another factor -- a price drop in hardware.

"The equipment to do backhaul is getting cheaper," warned Simpson. "The economics are changing because the cost of wireless is starting to come down.... It's starting to compete with the cost of getting a team of people and a big CAT [earthmover] and digging a trench for 20km to stick some fibre in."