Broadband is overpriced and under-used according to critics, but it is poised to boom, says Angus Kidman

Published in AustralianIT, August 26 2003

AFTER a languid start, competition is slowly heating up for broadband in Australia. Joining Telstra and Optus cable services are an increasing range of ADSL options, largely (though not exclusively) provided via Telstra and sold through a bewildering array of more than 160 providers.

"We've moved out of the early adopter phase and into the market penetration phase," says Scott Larson, marketing director for consumer and multimedia at Optus.

Yet that enthusiasm is yet to translate into massive adoption. Although they're quick to talk up the potential of broadband, projections from telcos and analysts don't suggest a massive switchover in the near future.

By 2005, Telstra itself hopes to have 500,000 direct broadband customers, and another 500,000 wholesale clients. Throw in another 100,000 or so for Optus cable offerings and that represents 1.1 million customers.

While that number is a big improvement on today's official figure of 423,600 broadband users, it is still not a high percentage of the population. IDC's regional analysis shows similar (though slightly higher) numbers, and suggests that apart from overtaking the Philippines, Australia's regional ranking will remain unchanged.

Australia's slow broadband adoption relative to other countries has been a source of continuing complaint. While the telcos themselves blame Australia's geography, analysts suggest price is a more relevant factor.

"Broadband is increasingly becoming the standard means of internet access in countries such as Korea, Taiwan and Hong Kong," IDC analyst Renee Gamble says. "However, while it is becoming more pervasive in Australia and Singapore, high pricing is slowing adoption in these two countries."

Providers agree pricing is important. Optus, which downgrades user speeds rather than charging for downloads above a capped limit, maintains that sticking to this pricing model is an important differentiator.

"We think flat rate pricing is a central factor in our success," Larson says.

"One of the reasons people don't take up broadband is because of concerns over high penalty rates."

Telstra, which has admitted a healthy portion of its broadband revenue comes from people paying those rates, isn't having a bar of it.

"You don't get unlimited petrol or beer," public affairs manager for Telstra BigPond Kerrina Lawrence says.

But Telstra also wants to drive down prices, particularly on initial installations. "Reducing upfront costs drives uptake," Lawrence says.

"That's the barrier to entry. Fifty or $60 a month is the price that people will bear."

Some think that won't be enough. "How many people will pay $70 or $80 a month just for entertainment?" managing director for Pacific Internet Australia Dennis Muscat says.

Telstra has adjusted its wholesale pricing strategy significantly since being issued with a competition notice in December 2001, and many small broadband providers have since emerged.

Its wholesale customers would still like to see further reductions, but concede it's unlikely.

"Telstra will not lower its wholesale prices easily," Muscat says. "It's a big ask."

One unusual quirk of the Australian market has been that until earlier this year, cable, not ADSL, was the dominant access model. Telstra claims its cable passes 2.5 million homes, while 7.5 million premises have access to ADSL. Optus cites a figure of 1.5 million for its cable customers.

Telstra currently has 978 exchanges enabled for ADSL, with 410 in metropolitan areas and 568 in rural regions (although that figure also includes questionably "rural" locations such as Canberra).

The total number of enabled exchanges is not expected to top 1000, despite recent demands by the Australian Communications Authority that 54 remote exchanges have their overall services upgraded.

Optus is understood to be planning a consumer DSL service for next year, but, on the record, the company remains coy. "We are certainly exploring our DSL options," Larson says. "It's just not viable to do any further cable roll-out. In terms of extending the footprint, DSL is preferable."

A limited service, purchased wholesale from Telstra, is currently offered as part of a small business package.

Ever since high-speed internet first became possible, local providers have loudly proclaimed that content is the way of the future. Despite some expensive and failed investments, they still appear to believe that. What they don't want to do is invest any more money in it.

Lawrence says early in-house experiments with "free" online channels for Telstra subscribers that didn't count towards download caps had limited success.

Its more recent model of partnering with organisations such as sporting groups and musical venues has been more successful, with some sites attracting hundreds of thousand of visitors.

"Content will play an increasingly important role over time," Larson says. But he's quick to add: "We will not make content decisions for our customers that will effectively pass on costs."

As happened earlier in the dial-up market, most players expect there'll be consolidation around specific market segments, content-based or not.

"There's more than 160 broadband providers, and they're trying to capture everything," says Muscat. "That will have to change."