Slide 1: Telstra Regulatory Briefing cover letter to ASX
1 December 2005 The Manager Company Announcements Office Australian Stock Exchange 4" Floor, 20 Bridge Street SYDNEY NSW 2000 ELECTRONIC LODGEMENT Dear Sir or Madam Telstra Regulatory Briefing Office of the Company Secretary Level 41 242 Exhibition Street MELBOURNE VIC 3000 AUSTRALIA Telephone 03 86
Slide 2: Telstra seeks investment certainty for IP network
Media Release | December 2005 337 / 2005 Telstra seeks investment certainty for IP network Telstra will begin building its new IP broadband network as soon as next year if its shareholders’ investment is protected from regulations that would otherwise allow competitors to piggyback on the multi- bil
Slide 3: Media Release (continued)
Media Release “If this does not happen, Australia risks seeing a devastating drain of capital overseas and away from telecommunications. We also risk seeing a massive transfer in wealth from Telstra’s Australian shareholders to the largely foreign shareholders of our major competitors. “Australians
Slide 4: Regulatory Briefing December 2005 Disclaimer
Regulatory Briefing 1 December 2005 Disclaimer statements are A unknown risks, 1 ainties and oe many of which are bel control of Telstra, which may cause actual results to differ motenally tm those expressed in the statements cont in these presemiations, Fo example, the factors that are likely t6 af
Slide 5: Three Purposes
Phil Burgess Three Purposes First | © How fegulations have telecom future 10 Cleon execute the
Slide 6: Management
= Management = Work force
Slide 7: The Burden of Over-Regulation
The Burden of Over-Regt Over-regulation: © creates competitive imbalan Introductic ns
Slide 8: Telstra Operational Obligations
Telstra Opera Priority Assist 000 CSGs IPND. Disability Low income measures Directory Assist White Pages y, Sensible regulation, that | needs tairer funding base
Slide 9: Recipe For Stalled Investment
Recipe For Stall Investment
Slide 10: Unconditioned Local Loop pricing history
Uncondition ONIN ie prices. March 2002 - ACCE pacing principles 17 pelieve that costs (large bond 2 pice of S35 ee renches) have declined by Januarg 2003 - Telstra lodges underta ee : arvaveraged basis(#20%m Band 1, $40 in Bands, Banda) y October 2003. ACCC teledces model gonditions ; proposes base
Slide 11: Unconditioned Local Loop pricing structure
Unconditio c Structure 7 S160: $140 28 $300: end- Users, Ut oe Uftine requigtoy yw stig wears. foxs the geogronni i Bographically average ULL pric pep Celstra
Slide 12: Regulating Next Generation Networks
Regulating Next Generati Ppinating Service » Integrated Service Digital Network paling Service / Local Carriage Service deal PSN Originating Service Local PS1N Terminating Service _ ~ Dornestic Trang
Slide 13: Equivalence
Equivalence: metrics MMIII Audit 10
Slide 14: Conclusion
Conclusion © Telstra proposes groun Australia into the digital = Telstra sha upgrade wil andatory Unbundling in the US: Lessons Learned the Hard Way Jeffrey A. Eisenach, Ph.D. Chairman, CapAnalysis LLC 11
Slide 15: Background
Background + Deregulation began with the Telecom Act of 1996 + Mandated ULL for telecom services + Narrowband and DSL were covered; cable modem services were exempt + Federal Communications Commission issued overall regulations in August 1996 + State PUCs issued pricing rules in 1997-1998 + Ligitati
Slide 16: ULL Rates Were Set Below Cost
ULL Rates Were Set Below Cost 100% 90% 80% 70% 66% B ULL Rate as % of Operating Cost MULL Rate as % of Revenue 59% 60% 50% 7 40% 5 30% 4 20% + 10% 4 0% +1 i 52% “49% 1 1 | BellSouth Qwest Verizon ...And then lowered further US$18.95 & Basic Une-P @ Loop Rate US$I7 45 US$16.12 US$14.18 Jan-02 July-02
Slide 17: Results
Results + Entry by ~300 CLECs, which raised ~US$450B in capital, largely in high-yield debt + Business plans focused on “cream skimming” in business markets and cities where rates were above cost + Most of the capital was “invested” in aggressive marketing, not telecom infrastructure + Virtually all
Slide 18: Increasing Reliance on ULL
Increasing Reliance on ULL B CLEC-Owned Lines || m CLEC ULL Lines Dec Jun Dec Jun Dec Jun Dec Jun Dee 1999 2000 2000 2001 2001 2002 2002 2003 2003 2001 : Investment “Bubble” Ends $140,000 $130,000 $120,000 $110,000 $100,000 $90,000 $60,000 $50,000 $40,000 $80,006 + $70,000 4 Real Investment in Commu
Slide 19: Equipment Stocks Collapsed
Equipment Stocks Collapsed Market Valuation of US Telecom Equipment ‘eo Manufacturers 2000-2002 US$ Billions CLECs Went Bankrupt | CLEC Bankruptcies by Month, 2000-2002 in) q 16
Slide 20: Cable Dominated Broadband
Cable Dominated Broadband 35,000,000 7 30,060,060. 25,060,000 > Total Lines aa -B ADSL a 20,000,000 =t- Cable Modem a 15,000,000 me 10,000,000 as 5,000,000 oe o T T r : r r 1 * * < " $ CAP ANALYSIS, Verdict: ULL Experiment Failed Virtually every CLEC went bankrupt, costing investors hundreds of bill
Slide 21: New Policy Direction
New Policy Direction ULL scaled back (e.g. no longer covers switching) and PUCs are raising prices for remaining elements {i.e., loops) Cable modem exemption from resale confirmed by FCC in 2002 FTTC/FTTH exempted from resale in August 2003 DSL exempted from resale in September 2005 All broadband fa
Slide 22: FCC: ULL Reduces Investment
\FCC: ULL Reduces Investment “The record shows that the additional costs of an access mandate diminish a carrier’s incentive and ability to invest in and deploy broadband infrastructure investment.” Federal Communications Commission September 23, 2005 CAP ANALYSIS, FCC: Safe Harbour for DSL Will Enc
Slide 23: FCC: Mandated Sharing Impedes Innovation
FCC: Mandated Sharing Impedes Innovation “Requirements that would guarantee ISPs access to [wireline broadband transmission] would impede the development and deployment of innovative wireline broadband Internet access technologies and services.” Federal Communications Commission September 23, 2005 C
Slide 24: FCC: It's Not Just Cable
FCC: It’s Not Just Cable “The threat of competition from other forms of broadband Internet access, whether satellite, fixed or mobile wireless, or a yet-to-be-realized alternative, will further stimulate deployment of broadband infrastructure.... These emerging broadband platforms exert competitive
Slide 25: The Simple Economics of ULL and NGN Buildout
‘The Simple Economics of ULL and NGN Buildout $ 4. ULL Reduces CostlHomes Passed Projected ARPU/Home Passed ARPU, 2. Lower Projected ARPULL ARPU Means Less Extensive Buildout Homes Passed HP uu HP. (Buildout with ULL) (Buildout without ULL) CAP-ANALYSIS Deputy Chief Fina icia 0}
Slide 26: ULL Economics of European Entrants
ULL Economics of E uroped Entrants Conmonents ee ay Pesci j ecountinG Treatment * Annual Fee per ling: » Opex: b> £27 per line, Expensed ee One-Off Connection Charge» Capex £83 per ling, Depreciated overs years: Depends on churn Site Survey + Capex "> £2788 per Site, Depreciated over 5 years. i) &>
Slide 27: OFCOM (UK) observations on ULL costs
e z E 8 E &> OFCOM (UK): “There are pect ss G04 _ the cost tends to increase when the density bservations conducted in the early the calculation ip aria omy Interact”. caste iplgssoroneclcn) PS 9 24
Slide 28: Impact on NGN of EU Broadband Regulation
Impact on NGN of EU | Broa The European Reality > In Denmark: [he introduction of Bit-Stream Access bined with Cost-based pricing of the local loop has lead to a standst ( ; strategu, the Regulators: up of LLU: players are now roving) ; protect the Investment mi ; down the tadder yy (i In France, mo
Slide 29: Measuring Effective Competition in Developing Broadband
Measuring E op in Developing Br Key Criteria © Sustainable competiti mpetition 26
Slide 30: Broadband Penetration Across Economies
Broadband Penetrati Economies Broadband connections per 100 poputatian et) 10 ; Le. : 2000 2001 2002 2003 2004 Source: Ofcom / ONS ‘Soins: OFCOM The Camenlcenions Wi ti Broadband Pen tration Economies BSL lines in operation (including resate} 4.4 miltion. 3.2million 0.16 mitiion, 14,000, 349;000, 40
Slide 31: Broadband Prices per Month
Price (UKE) per month 35 30 20 spo 88a0 $ ei. 16" & se s 2 Ra & 3 Services with speeds >=512kB/s Source: Ofcom & Aplitte OFCOM <The Conmminiesitians ar Services with speeds >=1MB/s. mies UGA - California ny France 72 Sweden 6a 60 2000 Source: Ofcom Jisiiie: OFCOM The Comnunteattons Uap 2003 2004 28
Slide 32: Broadband Platform Competition
otit cciiiiliiiniiianiii Broadband Pl itform Co fe of total connections 160% 0%, BO% MOther 60% Cable 40°% miu 20% gi 0% w@ Other DSL @ Incumbent OSL Note: Other DSL figures for Japan, Korea and Japar include LLU Source: Ofcom, NRAs Apion: OFCOM “The Comonunietions Mh aie References Ene es (05) 72 J
Slide 33: Chief Financial Officer: Key regulatory issues
Chief Financial Officer industry value, Key regulatory issues & impacts o here include: & Qverdl despite my long list of ACCC p ) werestinent & Regulatory Peau jonovation 30
Slide 34: Facts and Myths
Facts and lv Optus claims that Celstra has prev quantified the imp opposed to Sacony yo MpPTOx $800 1 2009/10 b ) AAC versus $20 (Telstra) B pice, The 05/05 figure is small ¢ 4 frow approaching ACLE claim thot the main point of difference ; i gore $491 17 Airaid, ali Band 2 customers J much dost cus
Slide 35: Telstra estimate of revenue loss
Telstra estimate of reveny have already been mace, or NOW 9 i tale dedine avarage aficlony 7/7) price Tow POs 1 cost : 2 BY, throught 22 Z Bande Kay sasumplions ate stated in Band 2 Revenue Loss & Subsidy _ eee Band 2 Revenue Loss & There are approximately 751, services within Band 2 i & IPULL acces
Slide 36: ULL Pricing Creates Arbitrage Markets
ULL Pricing Creates a Markets © Wholesale revenue drops => New arbitrage __ ULL pricing competitors; take revenue Peel, with minimalinvestment © Rate-arbitrage competition drives down retail prices: PSTN/BB prices decline Economic Impacts. sini Example Revenve (cash) impacts: The table below quantit
Slide 37: $30 ULL Price Impact
$30 isin the ae Band 2 For $22 ULL: For $13 UlL - This impact would be spread acrosswho eons metrics 2 ould mean ; NPAT CAGR over 5 years Gearing % : ATA% ROMS i) 4.0% YB Fee e OUTITTTITAIITE Telstra NM ULL offers potential for gross margin improvement A$ par month - approx ig per neath -apprsx, Mon
Slide 38: Free Rider Effect For Telstra's Competitors
Free Rider Mh For T¢ istra’s C ctosiag 2 Picking 7 a alt ubsid Co Effect on Telstra Economics fe De-Averaging assumes Telstra P50 ie of tS losses increasing network access charge ipnet) rural areas > But the 0 d yequire substantial ‘aces in network wholesale price implications tot rurc! lo Cakes oF
Slide 39: A history of changing course on pricing methods
A history of “changing course” when a pricing method doesn't deliver the right results Thetable below shows: ae = Muttiple pricing methodotagie: © Inconsistent methodologies bein 2 this creates “rate arbitrage” opi © Wholesale pricing decisions that grsistent with the government’ 4: pressed In Price
Slide 40: Telstra, Singtel Optus investment
Telst Ny Singiel Optus Investment d S Cupex pa (sb) ba 6 Optus - capex for fise gear Bource Si pgtel Quarterly Management ois i Optus’ Preference for Res« 7 ConnectSi0s == Optus continues to add resale ice December 2903, Singlet scaling down its HEC direct connect has incieased its res
Slide 41: The claim about the copper network
The claim ... ty Jelstra’s copper network is a lega ofits monopoly history. Ws nationalisation non-shareholders have no right, nor Csgim, 20 Na comerssip of or praceeds from the networ! > The copper d etwork Generates fe Telsty large cash- flows, which enable dee The competitive carers seeking acces
Slide 42: Basis of Regulatory Financial Impact Estimates
Basis of Reg latory Financial In ci Estimates) = del eee Retail Price Contris, Pricing of ULL Estimated 05/06 Impact The ACCC Pricing Methods Time, Even For The Same The ACCC regularly change show, ULL pricing Estimated 7 ACCC’ preferred | ACG ecumate — tnplied ULL implied cost demand by Band 2 ULL
Slide 43: Questions & Answers
Phil Burgess Group Managing Dire Public Policy & Communic Question& A 40
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