Australian Financial Review – Page 2

Why Multinationals Are Not Avoiding Australian Tax

with Sinclair Davidson

The title of the interim report of the Senate economics committee inquiry into corporate tax avoidance, released this week, is “You cannot tax what you cannot see”.

This is a rather embarrassing admission that the evidence for widespread corporate tax avoidance – the avoidance which has filled so many newspaper columns, so many hyperbolic speeches in parliament – just doesn’t exist.

Imagine being pulled over by the police and told that even though you’ve been observed driving below the speed limit, stopping at stop signs, giving way at give way signs, indicating correctly, wearing your seatbelt, and maintaining a respectable distance from the car in front, the police have a hunch you’re somehow violating community expectations.

While the Senate committee feels sure there are questionable corporate tax practices going on, it doesn’t actually find any.

Rather, it relies very heavily on the political rhetoric of a now-discredited 2014 report by the Tax Justice Network, which claimed that firms were denying the government vast sums of revenue through opaque and confusing tax arrangements.

In fact, what the committee’s interim report shows is that the tax practices of the big tech firms are quite explicable.

For instance, Microsoft and Google have their regional headquarters in Singapore. As the committee admits, these headquarters are not shells, existing solely to avoid giving Joe Hockey money. They’re real. They have real offices, real assets, and real staff doing real work. In Singapore. Not Australia. Just because those Singapore headquarters digitally export some products and services to Australia does not mean they should pay Australian corporate tax on the profits.

Even more explicable is large firms with large research and development costs deducting those costs from their taxable profits. The R&D corporate tax deduction is bipartisan government policy. It seems a bit much for governments to introduce a tax incentive then get angry with firms for using it.

The lack of evidence of tax avoidance makes the committee’s belief that the Australian government should name and shame corporate tax avoiders vaguely comic.

Certainly, the Australian Tax Office should be vigilant ensuring firms are paying what they owe. Firms that fail to do so should face the full consequences of the law. But that already happens. Australia has some of the strongest anti-avoidance laws on the planet. The government has the tools, right now, to deal with illegal tax evasion.

Underpinning this whole debate is the fact that Australia’s corporate tax rate is very high. At 30 per cent, it is substantially above the OECD average of 25.3 per cent. And Australia is one of the most heavily reliant countries on corporate tax revenue in the OECD. The Senate committee admits that this heavy burden puts Australia at a “comparative disadvantage”.

With such a disadvantage, it is no surprise that multinational companies are not lining up to establish their regional headquarters here.

But a failure to establish regional headquarters in Australia – “avoiding permanent establishment” in the lingo of the committee – does not constitute tax avoidance. Australia’s tax and regulatory environment is not competitive. Singapore’s is competitive. This ought to cause some soul-searching by the Parliament. Handwringing about phantom corporate tax avoidance just postpones consideration of the real problem.

Perhaps we might expect the sort of anti-corporate nonsense espoused at the inquiry from Labor and the Greens. What’s really disappointing is the full-throated support of the corporate tax panic from the Coalition.

Government senators on the committee wrote a dissenting minority report. Yet their complaint was that the committee did not fully acknowledge all the exciting work the Abbott government was doing to clamp down on multinationals.

Earlier this year the government released its own proposed legislation to deal with corporate tax avoidance. In effect that legislation would empower the ATO to second-guess where it feels profits should be booked for tax purposes.

The consequences of such an approach would be dire. It would expose multinational firms to double taxation. It would be a huge incentive for those firms to leave Australia all together, taking jobs and economic activity with them.

All this fretting about tax avoidance makes good demagoguery. But it might seriously harm Australia’s economy.

Moral Panic Overlooks Real Company Tax Problem

with Sinclair Davidson

The corporate tax profit shifting debate is a classic example of moral panic. First, it’s incredibly complicated. How many Australians could explain how company tax is calculated, let alone what business practices a “double Irish Dutch sandwich” refers to?

Second, it’s driven by hyperbolic and simplistic reports of companies paying little to no tax. These stories pivot on even more complicated scandals, such as “Lux Leaks”, and the technicalities of foreign tax systems.

And third, it’s wildly overstated. The best current estimates of how much corporate tax is shifted across borders is in the realm of 2 per cent to 4 per cent of total corporate tax.

It’s true that earlier estimates in the 1990s were much more than that. It was those high estimates that got the Organisation for Economic Co-operation and Development interested in the issue. But the firm- and affiliate-level evidence is better now. It’s pointless to scrutinise a moral panic for the clarity of its claims. But the corporate tax debate is missing the point.

As a society we don’t value firms for the money the government extracts from them. We value firms because they produce goods and offer services that make us richer, our lives easier, more convenient and more enjoyable, and our standards of living higher.

We ought to design our tax system to encourage foreign firms operating and doing business on Australian shores, bringing investment and jobs. Any attempt to tackle profit shifting that raises uncertainty or lowers Australia’s investment climate would be a disaster.

The corporate tax is not a good tax. As a recent Treasury paper pointed out, it is one of the most inefficient taxes levied by Australian governments. The burden of the corporate tax is scattered and obscure.

Greens leader Christine Milne has been running around this week accusing companies of not paying their “fair share”. But that fair share is always and inevitably passed on to someone else. The literature on the incidence of corporate taxation suggests the burden of corporate tax is worn in the short term by investors, and in the long run by a combination of investors and workers. Of course, under our superannuation system every worker is an investor as well.

Few of the standard justifications for the existence of corporate tax – particularly in a small, open economy – are compelling. One fear is that company owners might divert their personal income into the company. But they’d still have to pay capital gains tax on the way out again. Another argument is that corporate tax is an easy way to get money out of multinationals. Absurd, we know.

That’s why there are academic tax papers with titles such as “Why is there corporate taxation in a small open economy?” and “Can capital income taxes survive? And should they?”

For the political class, the corporate tax has one great advantage: it’s unclear who ultimately pays. It’s easy and comfortable to beat up on corporations, just as long as you stay mum about who actually ends up paying corporate tax. The whole system rests on this clever one-two trick. Who could sympathise with big bad business?

But even if the government wishes to keep the corporate tax fiscal illusion going, there’s hope. For all the handwringing about the double Irish Dutch sandwich, one point often missed is that Ireland has been very clever. That country’s low corporate tax rates have brought in multinationals, and with them jobs and investment.

It’s not obvious those low rates have come at a cost to the Irish budget. Corporate tax revenue as a percentage of total revenue in Ireland is almost exactly the OECD average. There’s no reason we couldn’t copy the Irish example – get in on the Irish-Dutch sandwich ourselves. The Irish make their own luck. So should we.

Communications Minister Malcolm Turnbull’s Metadata Move Will Aid Regulators, Not Security

The Abbott government has rightly focused on red tape reduction and deregulation.

But Communications Minister Malcolm Turnbull could well preside over one of the largest increases in the regulatory burden since the telecommunications market was liberalised two decades ago.

At the very moment when Turnbull seems to have cleaned up the mess that was the national broadband network, his mandatory data retention policy puts the entire competitive dynamic of the Australian telecommunications sector at stake.

Terrorism is a very real problem. The existence of the Islamic State in Iraq and Syria has heightened the terror threat. If there are serious gaps in our anti-terror law framework, they should be filled. The government has spent the past six months doing so.

However, the data retention bill the government has put forward – which requires telecommunications providers to store masses of data on their customers for no other purpose than if a law enforcement agency or regulator wants to have a look at it in the future – is not a targeted anti-terror law.

If data retention is just for terrorism, the government could legislate to ensure it was just for terrorism. But from what we know, both the Australian Competition and Consumer Commission and the Australian Securities and Investment Commission are likely to get access to the new data.

Indeed, over the half a decade that data retention has been debated, its most fervent advocates have been economic regulators, not counter-terror agencies.

One draft data set (even as Parliament is set to vote on the bill, we still don’t know what the final data set to be retained will be) included a requirement to store records of “download volumes” for two years. What anti-terror benefit would that add? Download volumes would useful in copyright infringement cases.

The threat data retention poses to privacy has been widely discussed. But data retention is, first and foremost, a new economic regulation. So let’s treat it as sceptically as we would any increase in the regulatory burden on business.

Prime Minister Tony Abbott has said that the cost of data retention would be around $300 to $400 million, or just 1 per cent of the total revenue of the telecommunications industry.

This is a very significant amount of money. Telcos are already some of the most highly regulated firms in the country.

Turnbull has suggested government will contribute substantially to the cost of implementing data retention. But whether we pay for data retention through internet bills or just general taxation, we’ll still pay for it.

This new burden could dramatically reshape the telecommunications sector. All else being equal, large firms, with their well-established regulatory teams, are able to comply with new regulation much easier than small firms, which lack the economies of scale to absorb costs.

The unfortunate result of burdensome regulation is push smaller firms out of the market, reducing competition as they disappear. Less competition will, in the long run, result in higher prices.

In the case of data retention, it isn’t just size however that matters. Some telcos have more complex networks and technologies and legacy systems – think of Telstra – for whom imposing these new requirements might be disproportionately expensive.

Turnbull and Attorney-General George Brandis claim that mandatory data retention will require telcos to store no more data than some firms do already – just store it for a bit longer.

It’s not clear which firms they’re referring to. The entire industry has been up in arms about data retention. The proposed policy is not just a minor extension of existing practice.

Nevertheless, there’s a reason some telcos store data more than others. The smallest internet service providers survive by keeping their data storage and infrastructure costs as low as possible, hoping to pull customers away from the big firms with lower prices or better service.

For the law enforcement and regulatory agencies that have spent the past six years lobbying for data retention, regulatory compliance costs are an abstract second-order issue.

But for internet users and taxpayers, who will be charged higher prices by a declining number of internet service providers, the economic effect of mandatory data retention is a big deal.

Splitting Telstra Is Not The Right Move

Last week, the US Federal Communications Commission abandoned its decade-long experiment with forced access sharing. Under this process the four so-called “baby bell” phone companies were required to open their phone lines to competing broadband retailers, rather like Telstra’s ADSL must be opened to its rivals.

As the former chief executive of US West, the baby bell that served the US Midwest, Sol Trujillo is intimately aware of the harmful effects that forced access policies have on telecommunications services. In the name of competition, access requirements also disingenuously known as unbundling make an entire industry subservient to regulators, rather than the market and consumers.

Telstra’s last attempt to change prices for high-speed internet, involving the introduction of the entry level $30 per month price early last year, was subject to vigorous action by the Australian Competition and Consumer Commission and Telstra’s retail rivals seeking to have the price increased.

This was punishing the customer to preserve the competitors and was just as odious as the policies that US regulators have unanimously decided are harmful to true telecommunications competition.

Telstra’s decision last year to lower the cost of home broadband should have been welcomed around the country. Instead, a pricing arrangement which resulted in a massive surge in ADSL uptake was greeted with threats of a multimillion-dollar fine and a brutal series of condemnations in the press.

Telstra’s basic broadband pricing has not changed in 1 1/2 years, probably as the result of lessons learnt from last year’s ugly fight. Such stagnant pricing in such a dynamic sector is not the sign of healthy competition.

The most harmful effect of forced access regulation is on infrastructure. The telecommunications market does not have the same stability as electricity or water; the steady progression of new communication technologies requires significant infrastructure investments to meet consumer demands.

It is clear that allowing competitors to leech off Telstra’s copper wire network at a nominal rate that ensures their profitability, means that there are poor incentives to invest in newer, more advanced infrastructure.

To argue that the capital required to build such a network is so large that no company would possibly do so is fallacious. One need only look at the sudden explosion in aviation competition with the advent of Virgin Airlines to recognise this fact.

In telecommunications we can be confident that this will emerge in the US now that price shackling has been abandoned. Not only do the existing regulations dissuade young competitors from developing new services, but they give Telstra a significant disincentive to upgrade lines. This point was made clear in a Senate committee earlier this year in a discussion on comparable broadband speed.

Telstra’s reluctance to roll out fibre optic cable to the home a technology which will rocket broadband speeds to among the best in the world is based not upon a lack of desire to do so, but a fear that the ACCC will force the company to open its lines at a rate which could make the roll-out a poor investment.

This is the regulatory environment Trujillo faced in the US, and this is the one he faces in Australia right now. However the recent developments here have not followed the positive developments in the America.

While recent Australian debate has focused on the National’s rent-seeking demands for future-proofing, it is the operational separation of Telstra into a wholesale and retail division which threatens to be the legacy of the coalition’s compromise.

If it goes through as planned, separation will lock in the regressive forced access regulation. Telstra Wholesale will be no more than a province of the ACCC empire controlled not by consumer demand but by an ACCC managed cartel of parasitic competitors trying to suck concessions from the one provider of significant communications capital that the country has.

The timing of the US decision is fortuitous for the federal government and those who will draw up the new arrangements for the final sale of Telstra.

We can look to the US, and their momentous decision to end this regulatory arrangement, for ideas on how to progress.

Hands Off Software, Samuel

Nothing gets you more attention than picking on the cool kid at school.

The Australian Competition and Consumer Commission is arguing that Google is responsible for the content of the advertisements that accompany its search results, and that it is not sufficiently obvious that they are ads.

The ACCC alleges that ads that appear to link to one firm, but in fact link to another firm, are in violation of trade practices law.

But Google already has its own dispute resolution process that adequately resolves these problems. This machinery is not there because it wants to satisfy regulatory authorities; it’s there because it is part of the search engine’s commercial attraction to ensure its links and advertisements are credible and not likely to mislead searchers.

Google’s reputation rides on the integrity of its search results. The company may seem like it owns the internet, but the history of software and computing shows us that such domination is easy to lose. Users will migrate if they stop trusting Google.

The ACCC’s second contention has more important implications. The regulator argues that Google’s ads are inadequately distinguishable from its search results.Again, this argument is easily dispensed with. Not only does Google highlight and separate ads from search results, it also clearly labels them as sponsored links.

Furthermore, it is easy to tell where links are directed – Google publishes the full address to help its users navigate their searches.

This is in addition to the status bar visible at bottom of modern web browsers, which also indicates the destination of any given link.

Internet users are fairly sophisticated at determining the validity of individual sites. They have to be – the deluge of email spam has made computer literacy a requirement.

Even so, if a search engine wanted to pepper its results with ads, it should not be against the law to do so. Publications mix paid advertisements and editorial content shamelessly, but do not find themselves the target of high-profile ACCC lawsuits and media releases.

The biggest challenge modern software companies have is developing business models that can actually turn a profit. Reckless regulatory intervention will limit the ability for firms to experiment with ad-based revenue models.

The action against Google is a symptom of a deeper struggle that government and regulators are having with the implications of digital technology and the internet. Rather than seeing the paradigmshifting opportunities of online services, they are merely being seen as a further opportunity to expand the turf of the regulator.

ACCC chairman Graeme Samuel has repeatedly argued that online sporting content provided exclusively to Telstra BigPond subscribers could constitute a monopolistic bottleneck to competition. Never mind that this is a whole new service developed entrepreneurially by Telstra, and the rights to provide this content to subscribers had been ascertained by fair competition on the open market. Nor that Optus and other service providers are also seeking to provide unique content of their own.

The regulator has announced that this is the first action of its type internationally. But this is not entirely the case. By arguing that Google is responsible for the content of its ads, the ACCC joins individuals and firms who sue the search engine for merely linking to objectionable material.

Such activity is becoming common internationally – rather than suing the site or sponsor of the offending material, litigants target the much higher-profile Google. This ensures publicity and targets an entity that is wealthy enough to pay should the suit be successful.

There is a further worrying implication of this action. The software industry used to be clearly separate from the regulatory morass that rules other industries. The industry moves astonishingly fast, has no entry barriers and is characterised by the sort of innovation and entrepreneurial action that renders regulatory oversight redundant.

But in Europe and the United States, the potential expansion of regulation to online services has forced tech companies to set up lobbying divisions in Brussels and Washington staffed with lawyers and government relations specialists.

The last thing the industry needs is to compel software engineers to sit down with regulators before they can offer new services. To do so would be to invite the same regulatory stagnation that has enveloped telecommunications.

Media-Rule Horse Has Bolted

Communications Minister Helen Coonan’s attempts at policy reform have so far been conspicuous failures. Telstra’s fibre to the node network was scuttled by her requirement that Telstra build it and then give control over it to the regulator. And now what was already a timid “media reform” package has been watered down almost to the level of pointlessness.

The coalition’s proposed changes to media laws were obsolete on the day they were released. They were an attempt to deal policy into the frenzied technological change taking place in the unregulated parts of the media and telecommunications sector.

In March, the day the government released its media discussion paper, Apple released for download and purchase on its iTunes service High School Musical. The movie has been a huge success with the “tween” market (children between the ages of eight and 12). It cannot be seen at the cinemas, it’s available only on DVD and via the internet. Movie distributors had learnt the lesson from music distributors’ failure half a decade ago – consumers are migrating their entertainment onto the internet, and are happy to pay for the privilege.

This week we saw the final watering down of the media package and the sale of YouTube to Google – $US1.65 billion ($2.2 billion) for 67 employees and a website.

None of Apple, YouTube, Google or Microsoft made submissions or appeared at the Senate inquiry into the government’s media legislation. Telstra gave evidence only about the mobile television licence. These companies didn’t need to get involved in debates about old media. No reform package can stop the migration of consumers from traditional media into more exciting and more flexible formats.

Now, with the release of Telstra’s Next G network, the transition from old to new media is firmly under way. Certainly, the wireless network is slower than the scuttled fibre to the node network, but it doesn’t take much to happily stream a YouTube video onto a mobile phone. Next G speeds are already faster than those that many consumers have piped into their home, and are set to increase in speed tenfold.

When Prime Minister John Howard says media reform is only a second-order priority, he is more prescient than he realises. The creative storms of change will blow no matter what is in the Broadcasting Services Act.

The Holy Grail of modern communications has long been obvious: high-speed internet. If this is available on mobile devices, consumers can watch video from any service, read their email from any provider and browse any website with the same freedom they have in front of their computers at home. But Australia has a regulatory environment dramatically at odds with technological and cultural developments here and overseas.

What was the debate about? The “diversity” cry rings hollow – on the internet, an infinite array of content and opinion is available to anybody who cares to look. Online media services, still in their infancy, can deliver more diverse content than can be consumed in a lifetime.

But political debate about media ownership always ends up with politicians pontificating about the relative merits of media content. Genuine deregulation means that this decision would be made entirely by consumers. In a deregulated market, what people want on television or radio, people get.

By forcing local radio stations to broadcast a minimum of local content, the politicians say they know better than consumers what should be broadcast. It is an attempt to force consumers to pay for politicians’ public visibility – elsewhere this would be called corruption. By restricting the ability for stations to respond to consumer demand, the reform package condemns many independent broadcasters to failure.

Local media produces niche products that can be supplied by other vehicles. Whether product is supplied on the same radio transmitter as 50 years ago, or a podcast inaugurated 50 days ago, should be of no concern to legislators.

Outside the realm of government regulation, we have innovative, dynamic companies responsive to market demand. Within its reach, we have an industry being variously protected and attacked by flawed public policy and political manoeuvring. Unsurprisingly, audiences for unregulated new media are growing faster.

Traditional media still have a role. But when the government imposes new regulations and fails to strip away the old ones, that role is looking more and more perilous.

Only The Market Can Properly Reshape The Media

Robert Menzies despised television and stated privately that he hoped it would not be introduced during his government. Does Communications Minister Helen Coonan have a similar attitude towards the next radical media change?

Given the opportunity to robustly liberalise the regulatory environment that the Australian media has been subject to for over a century, the government has declined to act.

There are big entrenched media companies which have made large investment decisions based on the current framework, and the political reality is that genuine deregulation would have to be a slow and careful process. But instead of attempting to unwind our Byzantine media regulations, at whatever pace, the government’s media reforms do nothing more than add more rope.

For instance, the proposed auction of two additional swathes of spectrum should have been greeted with enthusiasm. Entrepreneurial companies which had won these new licences could have used them to deliver whatever services they perceived to be in demand.

Instead, the government has chosen to dictate to potential users the terms and conditions of their licences, terms and conditions which will not apply to existing users of broadcast spectrum. This “command and control” approach to economic management has been discredited in both theory and practise. It’s ill-suited to managing a limited and static array of services, and it’s doubly unsuited to manage the fast paced and high-risk communications and media industry.

It does, however, allow the government to claim credit, as the Communications Minister did this week, for any potential new services delivered within their strict framework. What Coonan fails to mention is the services that the government will not allow us to receive. To this end the government has invented two terms, “narrowcasting” and “datacasting”, defined not by what they can do, but what they cannot.

One of the channels to be auctioned is allowed to broadcast free-to-air, but not replicate traditional TV services. Why not?

The government is not a suitable body to predict the possibilities of and the demand for newer forms of media. Only a market unhindered by restriction is capable of doing so with any success.

Similar objections can be raised to the government’s proposal to replace one elaborate formula for media ownership restriction within a market with another elaborate formula. While touted as a grand liberalisation of ownership regulations, they are in fact, little more than minor adjustments. For advocates of genuine deregulation throughout the economy, this should be a disappointment.

Many critics of the reform proposals hinge their arguments upon the potential lessening of diversity that could be the result of consolidation within the industry.

It is absurd to argue that media diversity will decline without stringent checks on the ownership of broadcast media outlets. In no era in history has this been less true. While the internet has been justifiably praised in bringing alternative viewpoints and independent media outlets to the home, rapid technological improvements in seemingly mature industries like printing have increased in the last few decades the volume of magazines, newspapers and printed material manyfold.

Anybody who doubts that minority or niche voices will not get heard after genuine media reforms should consult the vast ethnic press, made possible by dramatically lower print production costs.

In fact, mergers between media organisations could have tangible benefits. A fully vertically integrated corporation, able to command world-wide news gathering and content production, may be able to produce a far better and diverse range of services.

The massive competitive pressure exerted upon existing media companies from the proliferating new media compels dramatic change, even in such seemingly dominant organisations as News Ltd. Rupert Murdoch’s recent acquisition of the social networking website MySpace is a case in point.

These gains are not guaranteed, however. The US market, after a rush of media consolidation in the 1990s as companies rushed to prepare for the digital era, has been beset by a series of failures and divestitures. AOL Time Warner has been shedding assets now that the financial gains expected from its highly publicised merger have not appeared. Viacom, Disney, Clear Channel, Knight-Ridder and many others have downsized or spun off companies in the last few years.

But these companies need the freedom to experiment, and fail, with new business models.

New media organisations are popular and influential, and will become more so. Governments of all stripes across the world are struggling to predict its significance. That is understandable – nobody has any inkling of how these changes will pan out.

But instead of indulging itself in public consultations and submission processes, commissioning reports and carefully releasing sections of the spectrum with highly prescriptive regulations, the government would be far better to leave the future of the Australian media up to the market.

There is no convincing reason why entrepreneurs, allowed to experiment with new technologies and business models, cannot amply deliver the services that Australian consumers demand now and into the future.

Regulator Should Butt Out On Fibre-Optic Broadband

It is unfortunate for consumers and businesses that Telstra’s potential $3 billion-plus investment in a large-scale fibre-optic network and the coming T3 sale have coincided.

The debate over the two have rarely been separated, but at stake are two very separate issues, with very separate stakeholders. Treasury officials are concerned with maximising the price of Telstra’s sale, but consumers and businesses should be concerned about the circumstances in which we allow infrastructure investment in this country.

As Australian Competition and Consumer Commission chairman Graeme Samuel has correctly noted, Telstra’s fibre-optic plan is “not the only game in town”. A consortium of Telstra’s competitors, including Optus, Macquarie Telecom, Primus and Internode, have proposed an open-access network. Tellingly, all their proposals would require heavy investment from Telstra.

Telstra’s competitors are merely following Telstra chief executive Sol Trujillo’s lead and conducting regulatory negotiations through press statements.

Unfortunately for the regulator, the obstinate Telstra refuses to sign up to its competitors’ plans. Telstra has the money to do so, but, under the current regulatory framework, no desire. And why should it? The ACCC has argued that any investment by the carrier would be subject to a “fair” return. But it is not the ACCC embarking on this risky business venture – Telstra is a company that at least in theory should be aiming to maximise its financial returns. If a company, or individual for that matter, makes an investment in the market, they should be subject to their own judgement of what constitutes a fair return, not what a national regulator considers one to be.

But such thinking is largely alien to the ACCC, which has long believed itself to be the patriarch of large infrastructure investment in Australia.

The classic justification for the imposition by a regulator of shared access does not apply to Telstra’s fibre-to-the-node (FTTN) proposal.

The carrier built its copper-wire network under a government-imposed monopoly. It used taxpayers’ funds to do so. Under these circumstances, it was perhaps reasonable to have a regulator open the network up to ensure at least the vestiges of competition. But there are very real problems with such a regulatory regime.

Access-based competition encourages service providers, initially leeching off the monopoly provider’s network, to step up the “ladder of investment” – slowly investing more and more in the existing infrastructure. This has its advantages in a marketplace with little innovation.

But having now invested a great deal in the existing network, these carriers are faced with the prospect of being abandoned by Telstra as it jumps into a largely separate new network.

The ACCC’s framework has encouraged the growth of small, fly-by-night internet service providers, whose business model is nothing more than a reliance on the ACCC-determined access prices. Country-wide, there are more than 250 of these ISPs, encouraged not by the whim of the free market, but by the decrees of the regulator. Given their perilous profitability, they are ill-equipped to withstand the rapid technological change of the sector.

Access sharing does nothing to encourage true, facilities-based competition. And there are few other industries where facilities-based competition, and the innovation which propels it, are of such paramount importance. Given the ever-increasing range of technology by which high-speed broadband can be delivered to the home – and to the mobile phone – we cannot afford to discourage entrepreneurs from experimenting with new business models and products.

And, not least, access sharing constitutes a massive taking of property rights. This may not have been of much concern to regulators a decade ago, when they were faced with the taxpayer-supported Telecom, but with a nominally private company whose investments are subject to free will, this should be of great concern.

The communications market has been liberalised for the past decade and subject to a radical shift in emphasis. It is important to remember that consumer demand has moved from the basic telephone service to mobile telephones, to video-playing iPods. There are now large numbers of telecommunications providers, many of which are justly proud of their investments in infrastructure across the country.

But Telstra’s competitors and the ACCC want to migrate the access-sharing framework, developed a decade ago for a monopoly network provider, onto a fibre-optic network developed by an entrepreneurial company with private capital. The FTTN network is highly speculative. Given the current state of technological innovation, it is a risky investment. Telstra must bear this risk alone.

The FTTN network will not be the last investment Australian firms make in telecommunications infrastructure. Rapid technological change makes it a certainty that every few years significant upgrades will be made to our national communications networks. But if regulators are given a right of reply to every investment and pricing adjustment, Australian broadband will lag well behind what a wealthy, prosperous nation should have.

Halters On Google For Now

Decisions by Microsoft and Google to obey repressive Chinese censorship in order to expand into the Chinese market do not represent a “surrender” (“Giants melt beneath the Great Firewall of China”, Opinion, February 3).

But it is not clear what Google and Microsoft’s critics in this case are actually advocating. It seems unlikely that they would have been able to negotiate away the censorship. The power of Google is mighty, but the Chinese regime’s stubbornness is by all reports mightier.

Should technology companies choose not to operate in China as a symbolic stand against the regime? If this is the case, should we refuse to trade with countries whose trade is not entirely free? It is hard to imagine any winners in either scenario.

But as innovative companies make inroads into Chinese markets, citizens now have access to the latest communications technologies.

Even without the capacity to search for words like Tiananmen, access to the infinite ocean of the internet will have real and concrete effects. The desire for political and economic freedom is not contingent upon access to freedom.org. Political thought is much less obvious than that.

The situation is not ideal. But more political freedom – and Google and Microsoft’s expansions do represent that – is better than less. We must not let the best become the enemy of the good.

ACCC Paying Lip-Service To Innovation

Australian Competition and Consumer Commission chairman Graeme Samuel now argues that content is the determining factor in whether a media company is being anti-competitive. (“Consumers the key to media revolution”, AFR, November 18).

Samuel says that the bar for monopoly has been substantially lowered. Now all it takes is an assessment that a company is acquiring too much premium content – sporting content, obviously, but movies as well. This judgement will continue to change as tastes do. He mentions tennis, AFL, rugby and cricket, but not soccer, which is now about as premium as you can get.

But it is the capacity for companies to make exclusive content deals that encourages entry into new, developing markets. If the ACCC punishes companies that it deems too enthusiastic in offering value to consumers, it will only make these consumers think twice about adopting the new technologies at all.

Why would the ACCC warn companies off experimenting with new products and services? Samuel may think that he is protecting competition, but by arbitrarily punishing companies he is punishing consumers and stifling innovation.

Such arguments as this betray the fact that the ACCC is merely paying lip-service to the possibilities of new media, rather than understanding its revolutionary consequences.