John Fairfax Holdings Limited
ACN 008 663 161

S U B M I S S I O N

FAIRFAX SUBMISSION TO PRODUCTIVITY COMMISSION INQUIRY INTO CONVERGENCE AND THE BROADCASTING SERVICES ACT

John Fairfax Holdings welcomes the opportunity provided by the Productivity Commission to participate in its review of the impact of competition policy and technological change on the Broadcasting Services Act.

The subject is complex, as the Commission’s issues paper illustrates. Economics is intertwined with social policies. There are significant technological and market uncertainties. Substantial vested interests are involved.

Fairfax has no issue with - in fact, we have consistently supported - the goals of media policy, namely diversity, access, quality, efficiency, low prices and innovation. In our view, these goals are more likely to be achieved in the future by relying on market forces and competition policy. Consequently, we urge that competition policy:

The driving issue that shapes our view is the digitisation of content and its delivery. "Convergence" means that all communications are or can be digital. Hence, the common platform for all communications - broadcast, narrowcast, telephone, cable, internet, satellite and microwave - is digital, and not analogue. The availability of, and access to, digital broadband platforms and digital receivers are the absolute keys to the 21^st century economy for every country seeking to be engaged and integrated in our increasingly globalised world.

At the present time, there are bottlenecks and roadblocks in access to digital networks – television, satellite, cable, telephone. These digital pathways are the pipes that carry content to users. The pipes are limited in number and capacity, in part due to government decisions regarding the allocation of, and access to, spectrum, in part due to significant economies of scale and in part due to potential technical barriers at each end of the pipe. As a result, competition policy requires that existing players and new entrants have access to the pipes and end-to-end devices on terms and conditions that are not anti-competitive.

As the scope of these issues goes beyond the media industry to embrace the telecommunications and software industries, Fairfax supports the implementation of a uniform competition policy that applies to all of them. This is required to deal with fundamental concentration and monopoly issues that could arise from relaxing media ownership restrictions in the absence of other reforms with respect to access to digital broadband capacity.

In our view, there are three types of regulation affecting the media and related industries in Australia: of ownership, of access to scarce resources, and of content. A proper deregulation that fits within agreed principles of competition policy would involve deregulation on all three dimensions, with particular emphasis on the first two: ownership and access to scarce resources. Accordingly, Fairfax supports removal of the cross media and foreign ownership limits combined with the application of competition policy principles to digital access. This means that these converging industries would operate within a regulatory regime that would promote maximum access by providers of services, and choice for consumers, by minimising emerging bottlenecks in digital terrestrial television, telephone, cable, microwave and satellite.

We believe that media diversity, in an age of technological convergence, can be maintained and enhanced by competition policy and open markets and by the full and proper application of competition policy to these industries - rather than by regulation of media ownership.

We need to add an important cautionary note to our position. Specifically, the "devil is in the detail" as to how these changes are implemented - the timing and the sequencing of reforms, the processes by which changes are made and the resources available for ongoing regulation are critical to a positive outcome. We urge the Commission to give particular and careful attention to these matters. This will require that the ACCC, and the Australian Broadcasting Authority’s technical and planning areas, be appropriately staffed and resourced to carry out their responsibilities.

The key to effective reform is to address current and emerging anti-competitive regulation and practices with respect to the delivery in digital form of various types of content to users.

• The convergence issue is primarily one of convergence with respect to the digital delivery of content. Information-based industries can be generally characterised as having a three part value chain: the creation of content, publishing and delivery to customers.

• Convergence occurs in the delivery of content via digitalisation as all content becomes digital.

• This may cause some convergence in earlier stages of production and publication, but the economics in favour of convergence in these areas are not significantly changed from what they are today.

There are significant anti-competitive regulations and practices - current and emerging - in the critical area of delivery of digital content in particular.

• Will there be competitive channels of digital delivery, with multiple ownership, resulting in a competitive market for digital distribution? Because switching costs to consumers are high and rollout of delivery networks is sequential, consumers in practice do not have significant access to multiple channels.

• Will new participants be able to enter this market?

• If there is little or no competitive market, what is the ability of new providers of services to use distribution channels owned by existing incumbents, specifically the conditions regarding the access to, and prices of, digital delivery networks?

In this context, merely reforming the media ownership rules will have little impact on digital delivery issues, and could instead perpetuate an oligopolistic industry structure in the new environment.

This issue is not simply of interest in Australia. In the United States, Internet operators are seeking access to the digital networks operated by the cable industry. This is the pivotal concern in the present battle for takeover of MediaOne that has been waged by AT&T and Comcast (and one that will survive the outcome of the acquisition). A recent account has outlined the matter as follows:

The Commission’s inquiry is especially timely as it is anticipating these issues at a relatively early stage of the industry’s development in Australia.

The interests of Fairfax shareholders require that these anti-competitive rules and practices be dealt with. The removal of bottlenecks in access to digital delivery networks, platforms and receivers will allow Fairfax and other current and emerging content companies to compete aggressively and on equal terms with content providers who are integrated in terms of digital delivery platforms, pipes and receivers.

It is a fundamental objective of Fairfax management to maximise shareholder value. To achieve this objective, the Company seeks to secure greater access to digital broadband capacity, platforms and receivers. Fairfax is not permitted, under the current legislative and regulatory regime, to grow in any significant way in a number of defined sectors where it has considerable skills and content. We want our hands untied, so that we can compete to the best of our ability in a free market. Where our hands have not been tied, and there have been no artificial barriers to competition, as in the internet, Fairfax has become a national leader.

While partial deregulation will work to provide opportunities to expand the Company and realise an increase in shareholder value - through the startup of new ventures, acquisition or merger - the achievement of these goals will be enhanced by the opening of markets in all the industries affected by convergence.

With regard to the larger community interest, the provision of ownership and access opportunities for all potential competitors will optimise delivery of the economic benefits of competition (diversity, access, quality, efficiency, low prices, and innovation) in terms of the producers of media content. More open markets will also work to optimise attainment of the goal of diversity in print, electronic and digital media, by virtue of a dramatic increase in competition - as opposed to concentration - in these converging industries.

Reforming the ownership and content rules before addressing the key digital delivery issues is less attractive for our shareholders and the community. While our shareholders would obtain a benefit from the immediate repeal of the foreign and cross media rules, in terms of removing barriers to potential acquisitions by Fairfax of other media interests (or the potential acquisition of Fairfax by a television network, or foreign interests), we believe greater shareholder value can be created over time by open markets in digital delivery, permitting Fairfax to leverage its leadership in media content.

Finally, we emphasise that any changes to the media laws must be cognisant of the maxim, "The devil is in the detail."

The benefits that can be conferred by applying competition policy to the media, telecommunications and software industries are dependent upon the timing of such changes. The ideal is for all potential competitors to be in an equivalently competitive position when a more open regime comes into effect. There are several critical aspects to this issue:

• the sequencing of reforms: which rules are liberalised, in what order, and when;

• the processes that will govern access, access pricing, and spectrum allocation: how these are established, when new rules become effective and how potential abuses are identified and corrected; and

• the resources available to administrative and regulatory bodies in writing the new competition policy framework and overseeing it.

With regard to competition policy, we submit that the further liberalisation and opening of markets for media needs to be preceded by further opening of access to digital broadband capacity. It will defeat the principles of competition policy if, for example, the restrictions on foreign ownership of the media, or the cross media rules, were removed - and we support their removal - before any liberalisation of access to, and pricing of, digital broadband platforms and capacity in other areas.

We therefore believe that the Commission needs to assess, and address, as part of this inquiry and in its final recommendations, this basic issue of digital broadband platform access and pricing. This would include the following areas:

• an examination of the determination on the number of available free-to-air television licences;

• the date by which new free-to-air television licences can be granted.

• technical standards;

• common connection devices and receivers; and

• software platforms.

We believe that the Trade Practices Act is the appropriate statutory framework for all these.

We recommend a thorough assessment of the professional staff and financial resources available to the ACCC and the ABA (as noted earlier) to fulfil their statutory responsibilities in the expanded jurisdiction.

Fairfax supports a more fully competitive regime in media ownership and greater access to scarce distribution and transmission resources. This involves opening up all the industries affected by technological convergence - television, telephone, cable, satellite and microwave - to more market forces. Partial deregulation is not consistent with a robust competition policy and will provide only partial success in securing the benefits of reform.

Fairfax believes that key public policy goals, such as diversity, which have previously been protected by narrow technology specific regulation, can be secured in the public interest through market forces and competition policy.

Our proposal is driven by a coherent and consistent view of competition policy. Indeed, the consistency of our proposal - Fairfax is not arguing to be protected from competitive forces operating freely in an open and deregulated market - permits a clearer understanding of the consequences of other proposals.

In support of our submission, we are pleased to provide the Commission with two additional papers, one on digital technology access issues and another on the economic issues of competition policy in the affected industries.

The digital technology paper, prepared by Fairfax staff, reviews the ways digital content can be delivered into homes and businesses, the regulatory, technical and economic hurdles entrants face, and the access issues that should be addressed.

The economic issues paper, prepared by Joshua Gans, Associate Professor in Economics, the University of Melbourne, is an economic analysis of the current regulations on the broadcasting industry in Australia, and discusses convergence issues and the utility of applying competition policy across the converging industries, with particular attention to the monopoly bottlenecks in digital platforms.

We look forward to further debate on all the issues involved.

Related papers:

• Access and Technology Aspects Paper
• Economic Issues Associated with the Regulation of Broadcasting in Australia, by Joshua Gans. (Downloadable Word.doc)

9 May, 1999

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