Expert Report Comparative Analysis of Communications ... Appendix C...Expert Report Comparative Analysis of Communications Markets as it Relates to the Economic Viability of Optus’

Expert Report

Comparative Analysis of Communications Markets as it Relates to the

Economic Viability of Optus’ HFC Network and Telstra’s Proposed HFC Exemption

Prepared for Gilbert + Tobin

Jeffrey A. Eisenach, Ph.D.

June, 23 2008

PUBLIC VERSION

C R I T E R I O N E C O N O M I C S , L . L . C .

CONTENTS

I. PRELIMINARY MATTERS........................................................................................... 1

II. INTRODUCTION AND SUMMARY............................................................................. 4

III. THE ROLE OF HFC IN INFRASTRUCTURE COMPETITION IN OTHER COUNTRIES..................................................................................................................... 6

IV. ANALYSIS OF FACTORS AFFECTING THE COMPETITIVENESS OF OPTUS’ HFC INFRASTRUCTURE............................................................................................ 17

V. LAST-MILE INFRASTRUCTURE COMPETITION BENEFITS CONSUMERS 46

VI. SUMMARY OF CONCLUSIONS ................................................................................ 56

APPENDIX A: CV OF JEFFREY A. EISENACH

APPENDIX B: FEDERAL COURT GUIDELINES

APPENDIX C: MATERIALS PROVIDED BY GILBERT + TOBIN

APPENDIX D: COMMERCIAL-IN-CONFIDENCE


I. PRELIMINARY MATTERS

A. Instructions

1. I have been asked by counsel for Telstra to analyze the market for communications

services in the United States and other nations as it relates to the economic viability of the

Optus Hybrid-Fiber Coax (HFC) infrastructure in Australia, and to explain the implications of

my analysis for Telstra’s application.1 I have been asked to express my professional opinion on

the following issues:

• the role played by HFC infrastructures in markets outside of Australia, including

specifically the United States;

• Optus’ contention that certain characteristics of the Australian market place puts it at

a disadvantage relative to companies deploying HFC infrastructures in other nations,

including the United States;

• the viability and economic consequences of infrastructure-based competition in

telecommunications markets generally and with respect to the service territories

covered by Optus’ HFC infrastructure in particular.


1 My report is thus directly responsive to Optus’ concern that the report previously submitted by Mr. Harris in this proceeding does not adequately address the economic aspects of HFC viability. See Optus Submission to Australian Competition and Consumer Commission on Telstra’s December 2007 Exemption Application for Fixed Line Services in the Optus HFC Area (March 2008) [hereafter Optus March 2008 Submission], at 2.19 (“Optus notes that the Harris report does not address the riskiness of investment or the conditions necessary for profitable investment in the network. Optus contends that it is inadequate from an economic point of view to discuss only the engineering feasibility of adding to the capacity of the network. By way of analogy, it may be technically possible to build a bridge between Melbourne and Tasmania to encourage tourism; however it would not automatically follow that it is economically profitable to do so.”) In responding to Optus’ concerns I have reviewed the ACCC’s discussion paper on Telstra’s proposed HFC exemption (Telstra’s Exemption Application Relating to SingTel Optus’ HFC Network – Discussion Paper, January 2008)

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B. Author of this Report

2. My name is Jeffrey A. Eisenach. I am Chairman of Criterion Economics, an economic

consulting firm based in Washington, D.C., and an Adjunct Professor at George Mason

University Law School. I have more than 25 years experience performing economic analyses of

competition, regulatory and public policy issues, and have served in senior policy positions at

the U.S. Federal Trade Commission (FTC) and the White House Office of Management and

Budget (OMB). I have also served on the faculties of Harvard University’s Kennedy School of

Government and Virginia Polytechnic Institute and State University. Prior to joining Criterion, I

served as Chairman of CapAnalysis, the economic consulting arm of Howrey LLC and,

previously, as President of The Progress & Freedom Foundation.

3. I have authored or co-authored numerous expert reports in litigation matters as well as in

regulatory proceedings before the Federal Communications Commission, the Federal Trade

Commission, state public utility commissions, and other regulatory agencies; and, I have

testified before Congress on multiple occasions. I am the author or co-author of eight books,

including The Digital Economy Fact Book, The Telecom Revolution: An American Opportunity,

and America’s Fiscal Future: Controlling the Federal Deficit in the 1990s. In addition, I have

edited or co-edited five books, including Communications Deregulation and FCC Reform:

What Comes Next? and Competition, Innovation and the Microsoft Monopoly: Antitrust in the

Digital Marketplace. My articles have appeared in scholarly journals as well as in such popular

outlets as Forbes, Investors Business Daily, The Wall Street Journal, The Washington Post, and

The Washington Times.

4. Among my previous affiliations, I have served as a scholar at the American Enterprise

Institute, the Heritage Foundation and the Hudson Institute. I remain a member of the board of


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directors of The Progress & Freedom Foundation, and I also serve on the Advisory Board of the

Pew Project on the Internet and American Life.

5. During the past 12 months, my consulting engagements have included providing testimony

in state regulatory proceedings involving the state of communications competition in the U.S.,

including specifically proceedings before the Virginia State Corporation Commission, the

Maryland Public Service Commission and the District of Columbia Public Service Commission.

In each of these proceedings, I provided expert testimony on behalf of Verizon

Communications. I have also recently submitted an expert report to the Federal

Communications Commission in a matter involving a dispute between Verizon

Communications and major U.S. cable companies regarding marketing practices. In each of

these matters, the state of competition between cable, telephone and other wireline

infrastructure companies played a central role in my analysis.

6. I hold a Ph.D. in economics from the University of Virginia and a B.A. in economics from

Claremont McKenna College. My complete CV is provided as Appendix A to this report.

C. Federal Court Rules

7. Set out at Appendix B is a copy of Version 6 of the “Guidelines for Expert Witnesses in

Proceedings in the Federal Court of Australia” (Guidelines). A copy of Version 5 was provided

to me before I commenced drafting this report. A copy of Version 6 was provided to me after it

was published in May 2008, and I have reviewed both versions before submitting this report.

8. I have drafted this report to comply with those Guidelines.

9. I have been engaged by Telstra in various consulting capacities over the course of the past

three years, beginning in July 2005. My role in these engagements has been to provide

economic analyses related to competition in the telecommunications sector and, more recently,


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to advise Telstra on issues related to online safety and internet content filtering. My current

engagement with Telstra is limited to the latter set of issues.

D. Documents and Materials Provided by Gilbert + Tobin

10. Documents provided to me by Gilbert + Tobin and which I was asked to examine in

preparing this report are listed in Appendix C.

E. Additional Materials and Factual Materials Relied Upon for this Report

11. Additional materials I relied upon in preparing this report are referenced in the text. The

factual premises I have relied upon in preparing this report are the facts:

• contained in the documents and materials provided to me;

• referred to in the body of this report; and

• contained in additional materials as referenced in the body of this report.

II. INTRODUCTION AND SUMMARY

12. In this Declaration, I report the results of my analysis and explain the implications of those

results for this proceeding.

13. My primary conclusions are as follows.

• First, firms using HFC infrastructures (“cable companies”) compete successfully

against traditional telephone companies, satellite providers and other

communications providers in the United States and around the world. Indeed, in the

U.S. and elsewhere, cable companies are the leading providers of video and

broadband services, and are rapidly increasing their shares of the market for voice

telephony.


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• Second, the international differences which Optus cites as explanations for its unique

inability to compete successfully using its HFC infrastructure are non-existent,

overstated, or balanced by other factors.

• Specifically, international evidence demonstrates that competition between

multiple competing wireline infrastructures is economically efficient and that

the copper access network (CAN) is not, as a general matter, a natural

monopoly. International evidence also demonstrates that HFC infrastructures

compete successfully with telephone company infrastructures, including

copper infrastructures.

• The international differences which Optus cites as explanations for its unique

inability to compete successfully using its HFC infrastructure are non-

existent, overstated, or balanced by other factors. For example, (1) Optus

service territories are larger than most cable service territories in the U.S.; (2)

Optus is not unique in facing wireline competition for voice, data and video

services, nor in serving areas that include many small multi dwelling units

(MDU); and, (3) while pay TV penetration in Australia is indeed lower than

in the U.S. and many other countries, other characteristics of the Australian

market, including Optus’ high revenues per service and high voice

penetration, compensate for this difference. In short, there is nothing special

about Australia that makes HFC competition uneconomic.

• Third, for these reasons, and others I discuss in the body of this report, Optus’

contention that investment in its HFC infrastructure would be uneconomic, even in


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the absence of the availability of unbundled local loops (ULL), is both unsupported

and incorrect.

• Fourth, contrary to Optus’ assertions, the benefits of last-mile infrastructure

competition are significant, including accelerated broadband take-up, more rapid

deployment of Next Generation Networks (“NGNs”), and lower prices for

consumers.

14. The remainder of this Declaration is organized as follows. In Section III, I describe the

markets for pay TV, broadband, and voice telephony services in the U.S. (and, briefly, in other

countries) and analyze the role played by companies that provide these services over HFC

infrastructures. The evidence I present contradicts the broad claims made by Optus that last-

mile infrastructure is a natural monopoly and that HFC is an “old” technology. In Section IV, I

analyze the specific characteristics of the Australian market that Optus claims distinguish

Australia from the rest of the world and make it impossible for Optus’ HFC infrastructure to

compete successfully. The evidence shows that the competitive conditions facing Optus are for

the most part not unique and, in any case, do not support its contention that its HFC

infrastructure cannot compete successfully. In Section V, I discuss the benefits of infrastructure

based competition. In Section VI, I briefly summarize my conclusions.

III. THE ROLE OF HFC IN INFRASTRUCTURE COMPETITION IN OTHER COUNTRIES

15. Optus’ arguments with respect to the viability of its HFC infrastructure fall into two

categories, those that relate to the competitiveness of HFC infrastructures in general, and those

that relate to unique characteristics of the Australian market. This section addresses the former

arguments, specifically that (a) the copper access network (CAN) possesses natural monopoly


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characteristics that make duplication economically inefficient2 and, (b) that HFC infrastructures

are “old technology” that cannot compete successfully with copper and other modalities.3 In

this section, I describe the role of HFC in infrastructure competition in other nations, including

specifically the United States. My analysis demonstrates that the CAN is not, as a general

matter, a natural monopoly, and HFC is in general highly competitive with – indeed, in many

respects, superior to – copper and other infrastructures.

A. Infrastructure Competition and HFC in the U.S.

16. The experience in the U.S. market demonstrates that multiple competing wireline

infrastructures can and do compete successfully. Indeed, the U.S. market is characterized by

two ubiquitous (or nearly so) “last mile” wireline infrastructures – HFC and copper4 – and by

multiple additional overlapping infrastructures. These include two independent satellite

providers of pay television, each of which provides nationwide coverage; competing HFC

infrastructures deployed by cable overbuilders; the FTTP “FiOS” infrastructure being deployed

by Verizon; the FTTN “U-Verse” infrastructure being deployed by AT&T; and, four national

mobile voice and data networks (and other regional ones). Moreover, additional entry is

occurring, including the recent decision by Sprint and Clearwire to deploy a national broadband

network using mobile wireless technology.

2 Optus March 2008 Submission at 4.5 (“Accordingly, the CAN possesses natural monopoly characteristics and the current access regime leads to an efficient use of the network. The existence of alternative infrastructure (e.g., the HFC networks operated by Telstra and Optus) does not necessarily mean that access networks are not a natural monopoly, since these networks may represent inefficient duplication. The existence of these networks is insufficient in and of itself to warrant the removal of regulation; just as the absence of alternative infrastructure is not necessarily sufficient to satisfy a case for the continued declaration of a service.”)

3 Optus March 2008 Submission at 4.12 (“Further, to grant the exemption in order to encourage Optus to invest in HFC is to attempt to force Optus into investing in an old technology. HFC may have been a leading edge technology in the mid 90s but it may no longer be so – and the ACCC as a regulator cannot be in the best position to determine this. Indeed, Telstra appears to have no plans to further extend its own HFC.”)

4 The copper access network in the U.S. passes virtually 100 percent of homes. About 87 percent of homes are passed by cable systems offering at least 36 channels of pay TV programming. See Federal Communications Commission, 12th Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, MB Docket No. 05-525, (March 3, 2006) [hereafter FCC Twelfth MDVP Report], at ¶32.


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17. Cable companies in the U.S. are licensed (“franchised”) by local governments, and their

operating territories are thus highly fragmented. There are more than 6,600 individual cable

systems in the United States,5 ranging in size from more than 800,000 subscribers to a few

hundred.6

18. Prior to 1992, some local governments franchised cable systems on an exclusive basis,

meaning that only a single cable company was permitted to operate in a given territory.

However, this practice was banned by the Cable Television Consumer Protection and

Competition Act of 1992. While the 1992 Act left in place prohibitions on telephone company

cross-ownership of cable companies (which were originally enacted in 1984),7 these were

eliminated by the 1996 Telecommunications Act.8

19. Just as Optus operates cable systems in three different Australian cities, U.S. cable

operators often operate multiple cable systems in different areas. The largest Multiple System

Operators (MSOs) are Comcast, Cox, Cablevision and Charter Communications. Table 1

shows the number of subscribers served by the largest MSOs. It is worthy of note that Optus’

total HFC subscribership of CiC begins CiC ends would make it the CiC begins CiC ends

largest cable operator in the U.S. Furthermore, Optus is CiC begins CiC ends.

5 See NCTA, Industry Statistics, available at: http://www.ncta.com/Statistic/Statistic/CableSystems.aspx. 6 See NCTA, Top 25 Cable Systems, available at:

http://www.ncta.com/Statistic/Statistic/Top25CableSystems.aspx 7 See Cable Television Consumer Protection and Competition Act of 1992, Pub. L. No. 102-385, 106 Stat.

1460 (1992); Cable Communications Policy Act of 1984, Pub. L. No. 98-549, § 613(b) (47 U.S.C. § 533(b).). Telephone companies were permitted by law to operate “open video systems,” which provided video on a common carriage basis, but no large scale systems were deployed.

8 Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56 (1996).


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Table 1: 25 Largest U.S. MSOs (December 2007)

Rank Company Subscribers1 Comcast Cable Communications 24,063,0002 Time Warner Cable 13,251,0003 Cox Communications 5,422,1004 Charter Communications 5,219,9005 Cablevision Systems 3,123,0006 Bright House Networks LLC 2,330,1007 Suddenlink Communications 1,405,9008 Insight Communications 1,369,1009 Mediacom LLC 1,324,000

10 CableOne 702,70011 WideOpenWest 361,90012 RCN Corp. 358,00013 Bresnan Communications 300,30014 Service Electric 289,10015 Atlantic Broadband 286,60016 Armstrong Group of Co. 234,40017 Knology Holdings 227,70018 Midcontinent Communications 196,90019 Pencor Services 179,20020 Broadstripe 157,50021 Buckeye CableSystem 147,00022 MetroCast Cablevision 143,90023 General Communication 143,30024 Wave Broadband 141,10025 MidOcean Partners & Crestview Partners 139,100

Source: http://www.ncta.com/Statistic/Statistic/Top25MSOs.aspx

20. With the prohibition of exclusive franchises, cable systems began to face competition from

“cable overbuilders.” Companies such as RCN, WideOpenWest (WOW), Knology and Wave

Broadband (Astound) now serve more than a million subscribers in both urban and rural

markets throughout the U.S., including some of the nation’s largest markets.9 All of the major

U.S. overbuilders utilize modern HFC infrastructures and offer “triple-play” bundles that

include voice, data and video services. The FCC estimated that in 2005 approximately 3.3

9 See FCC Twelfth MDVP Report at ¶89 (“RCN Corporation is the nation’s largest overbuilder, supplying voice, video, and high-speed Internet access services to residential subscribers over its own network in the Boston, New York, Chicago, San Francisco, Los Angeles, Washington, D.C, Philadelphia, and Lehigh Valley, Pennsylvania, metropolitan markets.”)


http://www.ncta.com/Statistic/Statistic/Top25MSOs.aspx

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million pay TV subscribers lived in areas where overbuilders provided effective competition.10

In Section III below, I specifically examine four U.S. markets where overbuilders operate, and

demonstrate in detail that Optus is far from unique in facing competition from another HFC

infrastructure.

21. Like Optus, some U.S. cable overbuilders were forced to write down their valuations

during the “telecom bust” of the early 2000s, generally through use of the Chapter 11 process.

Unlike Optus, however, these firms have continued to invest in their infrastructures to keep pace

with current cable technology. All of the major overbuilders have now deployed digital

infrastructures capable of providing voice, data and video services.

22. Today, the major U.S. cable overbuilders have large positive valuations, as shown in Table

2, with an average valuation per subscriber of nearly $2,100.

Table 2: Valuations of Largest U.S. Cable Overbuilders

Company Valuation Subscribers Valuation/SubscriberKnology $499 million11 227,700 $2,191 RCN $429 million12 416,000 $1,031 Wave Division Holdings $187 million13 70,000 $2,671 Wide Open West $842 million14 345,000 $2,500

10 See Federal Communications Commission, Statistical Report on Average Rates for Basic Service, Cable Programming Service, and Equipment, MM Docket No. 92-266 (December 27, 2006) at 16. Estimate of 3.3 million subscribers in competitive areas is based on 94.2 million pay TV subscribers as of June 2005. (See FCC Twelfth MDVP Report at ¶8.) As discussed below, this figure has increased in recent years as the result of entry by AT&T (“U-Verse”) and Verizon (“FiOS”) into the market for pay television.

11 Market capitalization as of June 16, 2008, from Yahoo! Finance, available at: http://finance.yahoo.com/q?s=KNOL

12 Market capitalization as of June 16, 2008, from Yahoo! Finance, available at: http://finance.yahoo.com/q?s=RCNI

13 Valuation as of February 2006. See Mike Farrell, “Debt-Light, RCN Explores Sellout Options,” Multichannel News (September 18, 2006) [hereafter RCN Options], available at: http://www.multichannel.com/article/CA6372809.html

14 Valuation as of December 2005. Id.


http://finance.yahoo.com/q?s=KNOL

http://finance.yahoo.com/q?s=RCNI

http://www.multichannel.com/article/CA6372809.html

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23. In the mid-1990s, cable also began to face competition from Direct Broadcast Satellite

(DBS) providers, including DirecTV and Echostar. These companies, which have nationwide

footprints, compete with cable and other video providers both by offering pay TV on a “stand-

alone” basis and by bundling their services with the voice and data offerings of major telephone

companies. The Federal Communications Commission reports that as of 2005, DBS operators

served more than 27 percent of all U.S. subscribers in both urban and rural markets;15

subsequent private estimates show that the satellite providers’ market share has continued to

grow, and currently exceeds 31 percent.16 Thus, whereas Optus does not face competition from

an additional general audience satellite provider within its HFC footprint (in addition to its cable

competitor), U.S. cable companies face direct competition from two substantial satellite pay TV

operators, which together serve nearly one third of the market.

24. Over the course of the past 10 years, the development of cable modem and IP telephony17

(Voice Over Broadband, or “VOB”) technologies has dramatically altered the economics of

U.S. cable companies. Beginning in the mid-1990s, U.S. cable companies began converting

their networks to digital technologies and deploying large amounts of fiber optic cable. These

investments permitted them, initially, to begin deploying cable modem broadband services and

15 See FCC Twelfth MDVP Report at ¶72 (“As of June 2005, approximately 26.12 million U.S. households subscribed to DBS service. This represents an increase of 12.8 percent over the 23.16 million DBS subscribers we reported last year. DBS accounts for approximately 27.7 percent of all U.S. MVPD subscribers”). Analysts attribute DBS’ continued growth to the increase in local-into-local broadcast stations; service enhancements, including multiple room viewing solutions and HDTV; and the ability to co-market DSL service. In terms of subscriber penetration, DBS penetration initially occurred primarily in rural and small markets, but as a recent GAO study found, since 2001, DBS penetration has grown rapidly and increased in suburban and urban areas.”)

16 Jeff Wlodarczak, “Equity Research: U.S. Q1'08 Video/Data/Phone Trends,” Wachovia Capital Markets LLC (May 15, 2008) [hereafter Wachovia Research Report] at 8.

17 There are several varieties of internet protocol-based voice technologies, including those that operate from computer to computer, or from computer to the Public Switched Telephone Network (PSTN), such as Skype. The IP telephony technologies deployed by operators of HFC infrastructures permit prioritization of voice traffic within the carriers’ networks and are considered “carrier grade.” Unless otherwise indicated, I will refer to the IP telephony technologies used by HFC companies as “VOB.”


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circuit-switched telephony. More recently, as VOB technology has advanced, the deployment

of voice services has expanded.

25. The results of the cable companies’ entry into voice and data markets show, contrary to

Optus’ “old technology” claims, that modern HFC infrastructures are highly competitive with

traditional copper infrastructures. Indeed, HFC technology is in many respects superior to

copper-based technologies. This is especially the case with respect to broadband, where cable

modem technology generally provides greater bandwidth than the phone companies’ DSL

services.

26. Because each customer can now purchase multiple services, modern HFC infrastructures

have allowed providers to increase their Average Revenue Per User (“ARPU”), with ARPUs for

many U.S. cable companies now at or above $100 per month.18 At the same time, because

these services are all provided over the same physical infrastructure, capital requirements have

fallen. Regulators in the U.S. and elsewhere have recognized the significance of digital

convergence in “significantly reduce[ing] the amount of capital that is required to build and

maintain facilities.”19

18 See, e.g., Craig Moffett, “U.S. Cable: Welcome to the ‘100 Club,’” Bernstein Research (July 19, 2007) [hereafter Cable 100 Club].

19 See, e.g., Telecommunications Policy Review Panel (Canada), Final Report (2006) at 1-25. (“Profound changes are taking place in network economics in relation to both capital and operating expenses. IP makes it possible to merge all services on the same infrastructure and the same logical network (the latter is often referred to as a “platform” for the different services it supports). This has the potential to significantly reduce the amount of capital that is required to build and maintain facilities. It also allows for better management of operating costs. The cable industry’s rollout of IP-based voice services provides an example of the economic advantages of IP-based networks.”) Compare Federal Communications Commission, In the Matters of Appropriate Framework for Broadband Access to the Internet over Wireline Facilities, Report and Order and Notice of Proposed Rulemaking (September 23, 2005) at ¶40 (“[T]he technology used to build networks, and the purposes for which they are built, are fundamentally changing, and will likely continue to do so for the foreseeable future. A wide variety of IP-based services can be provided regardless of the nature of the broadband platform used to connect the consumer and the ISP. Network platforms therefore will be multi-purpose in nature and more application-based, rather than existing for a single, unitary, technologically specific purpose. More generally, the erosion of barriers between various networks and the limitations inherent in those barriers will lead to greater capacity for innovation to offer new services and products.”).


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27. Another factor affecting the viability of HFC infrastructures has been the rapid reduction

of deployment costs for advanced services, especially VOB services. The cost of deploying

circuit-switched cable telephony services has fallen from approximately $600 per incremental

subscriber in 2000 to approximately $345 in 2007, largely as a result of the declining price of

network interface units. The cost of deploying VoIP-based telephone service is lower still.

Premise-powered VoIP can be deployed for approximately $250 per incremental customer;

network-powered VoIP services can be deployed for approximately $280.20

28. The impact of these price reductions on the economics of HFC has been profound. For

example, In-Stat reports that:

[T]he price of cable telephony equipment has dropped substantially in recent years. For example, in early 2007 the price of a certified DOCSIS 1.1 MTA was approximately $70, down approximately 50% in just three years. While this may not seem like a huge price decrease, if a cable operator purchases 1 million MTAs this year in comparison to buying them in 2004, they would be saving $70 million. The same trend holds true for more expensive VoIP equipment, like a CMTS or a call management server. 21

29. In this context, it is worthy of note that Optus’ most recent evaluation of the economics of

upgrading its HFC infrastructure appears to have been conducted in 2003, and that even that

analysis was limited to the economics of expanding to service MDUs.22

30. As a result of the developments described above, U.S. cable companies have not only held

their own against telephone companies, but have outpaced them on multiple fronts. Cable

companies serve 66 percent of the residential market for pay TV services, 54 percent of the

residential market for broadband data services, and – despite the fact that their voice

20 See InStat, “The Worldwide Market for Cable Telephony Services” (April 2007) [hereafter InStat Report], at 18-19.

21 Id. at 34. 22 See Optus March 2008 Submission at 3.24.


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deployments are still in process – already serve 18 percent of the market for residential wireline

voice services.23

31. Moreover, contrary to Optus’ claims about the unsuitability of HFC infrastructures for

business services,24 U.S. cable companies are competing successfully in the market for small

and medium businesses. Comcast, for example, reports that it expects to serve 20 percent of the

small and medium enterprise (SME) market by 2011.25 Analysts agree that HFC providers can

compete successfully in the SME market. Morgan Stanley, for example, recently concluded

that “we believe it is reasonable to expect cable can achieve 20% market share of business

telephony customers” and that “[t]he SME rollout is an opportunity to drive asset turns higher,

as the product extensions to this new customer set is not very capital intensive relative to the

revenue opportunity.”26

32. Optus is also incorrect in its contention that HFC infrastructures are “not suitable for …

wholesale services.” While wholesale access to last mile services are not a substantial portion

of U.S. cable companies’ business model, at least one company, Time Warner, does provide

wholesale access to competing ISPs.27 The company reports that it has been able to provide

wholesale services without incurring significant costs.28

23 See Wachovia Research Report at 8-9. 24 Optus March 2008 Submission at 2.11 (“The HFC network is suitable infrastructure for the provision of

retail consumer services, but is not suitable for business and wholesale services. Tellingly, Telstra itself does not provide significant business or wholesale services through its own HFC network.”)

25 See Comcast Presentation, Merrill Lynch U.S. Media Conference (June 5, 2008), available at: http://library.corporate-ir.net/library/11/118/118591/items/296815/060508.pdf

26 See Simon Flannery, “Cable & Telecom VoIP Success Driving Telco On-Net and Off-Net Video,” Morgan Stanley (July 23, 2007), at 5-6.

27 See FCC Twelfth MDVP Report at ¶63 (“Some cable operators, however, offer their high-speed Internet service subscribers the ability to use unaffiliated ISPs. For example, Time Warner Cable offers its subscribers multiple ISPs, including its own Road Runner Internet access service with AOL for $49.95, Earthlink for $44.95, and Stic.Net for $44.95.”)

28 See Richard Cole, “New technology coming to ease open access: systems designed to reduce bandwidth strain”, (December 10, 2001), available at: http://findarticles.com/p/articles/mi_m0DIZ/is_50_13/ai_81105016 (Quoting Time Warner representative Mike Luftman: “‘We're not having any problems [implementing open


http://library.corporate-ir.net/library/11/118/118591/items/296815/060508.pdf

http://findarticles.com/p/articles/mi_m0DIZ/is_50_13/ai_81105016

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33. The success of U.S. cable companies in competing against copper, satellite, overbuilt HFC

infrastructures – and, more recently, fiber and advanced FTTN – is uncontroversial. Indeed,

most analysts believe HFC infrastructures in the U.S. have strong competitive advantages, in

particular with respect to competition against telephone companies.

34. For example, Wachovia recently noted that in early 2008, “[c]able took the majority of

new broadband customers, reflecting speed advantage and lower price tiers” and that “68% of

[Comcast’s] gross [broadband] additions were [taken] from DSL.”29 Similarly, Morgan Stanley

noted that “Cablevision declared that after just four years [providing VOB telephony services] it

is the largest residential phone company on Long Island, surpassing Verizon,” and concluded

that “We believe that cable is increasingly winning the broadband speed wars forcing the

telecom operators to spend on upgrading their networks to provide higher speed broadband

services and video offerings.”30

35. Experience in the U.S. also demonstrates that HFC infrastructures can compete

successfully against FTTH and FTTN infrastructures. In AT&T’s home market of San Antonio,

Texas, for example, Time Warner has responded to AT&T’s U-Verse (FTTN) deployment by

aggressively marketing its triple-play services. According to a recent report, “Thus far, in

neighborhoods where Time Warner and U-verse go head-to-head, the [cable] system's triple-

play penetration has increased 12%, from 17% in June 2006 to 29% as of June 2007…. System-

wide bundle penetration reached 27% four months ago, up 90% from early 2006.”31

access],’ Luftman says. ‘And we haven't had to buy a whole lot of equipment to make this work. We're pleased with it.’”)

29 See Wachovia Research Report at 5. 30 See Simon Flannery, “Telecom Services Cable Makes Further Inroads: CVC Tops VZ; WiFi and

WiMAX to Come,” Morgan Stanley (May 11, 2008), at 1. 31 See Simon Applebaum, “Meet The System: San Antonio: Time Warner Cable Fights AT&T In Its

Hometown,” CableFAX's CableWorld (August 13, 2007).


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36. As I explain further in section V below, U.S. cable companies are now beginning to deploy

the latest digital cable standard, DOCSIS 3.0, which will permit (among other advances)

broadband download speeds of up to 160 Mbs. As Wachovia concludes, “the beginning of the

rollout of DOCSIS 3.0 … should accelerate data share gains from DSL.”32

B. Infrastructure Competition and HFC in Other Nations

37. The success of the U.S. cable industry is not unique. Nearly all OECD countries, and

many non-OECD countries as well, have substantial HFC infrastructures offering pay TV,

broadband and digital telephony services. In-Stat notes “In Europe, VoIP-enabled cable

telephony subscriber numbers are also on the rise, although not as rapidly as in North America.”

It reports, for example, that Liberty Global’s UPC Broadband division had 650,000 VoIP-

enabled cable telephony subscribers in eight different European countries as of March 2007,

while Com Hem had over 115,000 subscribers in Sweden.33

38. The Canadian cable industry has been a world leader in the deployment and digitization of

cable networks. Approximately 94 percent of the homes passed by cable in Canada have high-

speed cable Internet access available to them.34 As a result of this combination of advanced

infrastructure and widespread availability, Canada is ranked first among OECD countries in

terms of cable internet penetration.35

39. As I discuss further below, competitors in other nations are, just as in the U.S., being

driven by infrastructure competition to make large investments to further upgrade their

infrastructures. As one example of the worldwide growth in digital cable, worldwide cable

32 See Wachovia Research Report at 6. 33 See InStat Report at 34. Other major European cable telephony providers include: ONO, serving 1.5

million customers in Spain; RCS/RDS, with 500,000 subscribers in Romania; Telenet, with 455,000 subscribers in Belgium; and, CaboVision, with 229,000 subscribers in Portugal. See id. at 44.

34 See Telecommunications Policy Review Panel (Canada), Final Report (2006). 35 OECD, “Broadband subscribers per 100 inhabitants, by technology,” (December 2007), available at

http://www.oecd.org/document/54/0,3343,en_2649_33703_38690102_1_1_1_1,00.html


http://www.oecd.org/document/54/0,3343,en_2649_33703_38690102_1_1_1_1,00.html

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modem shipments grew by 16 percent between 2006 and 2007; shipments of E/MTAs, which

combine cable modems with VOB phone adaptors, were up by nearly 30 percent.36 These

figures are simply not consistent with Optus’ claim that HFC is an “old technology.”

IV. ANALYSIS OF FACTORS AFFECTING THE COMPETITIVENESS OF OPTUS’ HFC INFRASTRUCTURE

40. Optus submits that “the relative success of cable companies in other jurisdictions” is

explained by a variety of factors which exist in other jurisdictions but not in Australia.

Specifically, it cites the “unfavourable market profile of Australian MDUs,” the fact that some

other countries prohibit telephone companies from owning cable networks, and the relative

popularity of pay TV in other jurisdictions. These factors, Optus submits, “have allowed cable

companies in other jurisdictions to secure higher penetration rates than Optus and thus to

achieve substantially more attractive scale economies…”37 In this section, I present my

analysis of these issues. I begin by making several general observations on Optus’ claims.

Next, I present (primarily in Confidential Appendix D) a comparison of Optus’ overall

operating metrics with those of major U.S. cable companies, showing that Optus compares

favorably with U.S. cable companies on key indicators of competitiveness. Third, I compare

competitive conditions in Optus’ three HFC operating territories (Brisbane, Melbourne and

Sydney) with conditions in four U.S. markets, demonstrating that the competitive conditions

36 See Alan Breznick, “Docsis Device Shipments Top 30M in 2007” Light Reading’s Cable Digital News, available at: http://www.lightreading.com/document.asp?doc_id=147229&site=cdn

37 See Optus March 2008 Submission at 3.31-2 (“Optus submits that the relative success of cable companies in other jurisdictions may be explained in large part by the unfavourable market profile of Australian MDUs and by the fact that some or all of the following circumstances apply in overseas jurisdictions (but none apply in Australia): • the incumbent fixed line operator is prohibited from owning a cable network; • cable operators had geographical monopolies which allowed them to fully exploit the available economies of scale; and/or • Pay TV has been very popular in those countries and is not controlled by the incumbent telephony operator. These factors have allowed cable companies in other jurisdictions to secure higher penetration rates than Optus and thus to achieve substantially more attractive scale economies than Optus – a crucial factor in considering the commercial attractiveness of expanding a network.”) See also Optus March 2008 Submission at 3.11(c) (“[C]omparison with cable companies in other jurisdictions is misleading, since the circumstances facing those cable companies are very different from the circumstances facing Optus in Australia.”)


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faced by Optus in its markets are in many respects superior to those faced by cable companies

in major U.S. markets.

A. General Observations on Optus’ Claims

41. Before presenting my empirical comparisons of Optus’ HFC operations with the

operations of U.S. cable companies, it is important to address certain preliminary matters that

form the basis for my analysis.

1. Profitability Depends on Overall Penetration and Total Revenues Per Customer

42. First, Optus submits its infrastructure is economically unviable because of its inability to

achieve economies of scale, which it equates to high penetration rates, and particularly with

high penetration rates for pay TV.38 Further, it claims that its low HFC penetration rates

distinguish it from cable companies in the U.S.39 Its analysis in this regard is, at best,

incomplete.

43. Specifically, Optus focuses on penetration of pay TV services (which are the most widely

deployed service in the U.S. market), and ignores or discounts penetration of voice and data,

where Optus compares more favorably. Equally important, Optus fails to take into account the

revenues it receives – i.e., its monthly ARPU – for all services combined. Again, on this

metric, Optus compares favorably with U.S. cable companies. In Confidential Appendix D, I

demonstrate that, when penetration rates and revenues for all customers and all services are

38 See n. 33 above (Optus March 2008 Submission at 3.31-2). See also Optus March 2008 Submission at 3.16 (“A high level cost analysis of HFC and copper build networks is illustrated in Figure 3.1. It illustrates that access networks with significant external plant build requirements such as HFC or copper conform to a build curve with high cost at low penetration. The curves illustrate that such networks are most cost effective at subscriber penetration levels of greater than 30%.”)

39 See Optus March 2008 Submission at 3.17 (“Most international HFC cable operators (e.g., in the U.S. and Singapore) typically have subscriber penetrations greater than 50%, resulting in a low cost per subscriber. For various reasons noted below under the heading “Cable operators in other jurisdictions”, Optus’ expected penetration levels are much lower.”)


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taken into account, Optus’ operating results are comparable to those of U.S. cable companies

and, indeed, superior to those of the major U.S. cable overbuilders.

2. The Competitive Effect of Telstra’s HFC Infrastructure Must Be Properly Understood

44. Optus submits that its ability to compete with Telstra via the Optus HFC network is

compromised because the Optus HFC network overlaps with both Telstra’s copper network and

Telstra’s HFC network. Indeed, Optus indicates that its competitive position would be

significantly enhanced if “Telstra did not also own an HFC network.”40

45. Optus’ claims regarding the significance of Telstra’s HFC network are inconsistent with

both the facts and with economic theory. Simply put, Telstra’s significance as a competitor to

Optus is not a function of how many networks it operates, but rather of the services it offers, the

costs of providing those services, and the prices it charges for those services.

46. The facts as I understand them are as follows. Optus offers voice, data and pay TV

services to certain households in Brisbane, Melbourne and Sydney using its HFC infrastructure.

In addition, it has deployed DSLAMs in some Telstra central offices which allow it to offer

voice and data services, but not pay TV, to many of the same households. Finally, Optus also

resells Telstra voice and data services within its HFC service territory, though it is rapidly

moving customers from its resale offering to ULL.

40 See Optus March 2008 Submission at 5.22 (“Optus submits that the size of the various Australian markets for telecommunications services are too small to warrant a copper network in addition to two HFC networks. Optus considers that its HFC network would be better placed to compete with Telstra’s copper network if Telstra did not also own an HFC network (which prevents Optus from obtaining scale economies). This realisation is why Telstra rolled out its HFC in the first place, to destroy the economic viability of the Optus HFC.”) See also Optus March 2008 Submission at 3.47 (“The above factors related to pay TV and the overlap of the Telstra HFC reduce Optus’ achievable scale economies. Economies of scale are important to many aspects of operating the HFC. Expanding the network involves substantial fixed costs that are common to the provision of services to more than one home or unit.”); and Optus March 2008 Submission at 2.36 (“Another reason why Optus might choose not to make the investment required to activate a new area of network is because it is unable to attract sufficient customer demand to achieve the required economies of scale, because Telstra’s HFC would capture some of the market share that would have otherwise gone to Optus’ HFC.”)


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47. Telstra also offers voice, data, and (via its joint venture FOXTEL) pay TV services to

customers in the area served by Optus HFC infrastructure. It does so using a traditional

wireline telephone infrastructure, which delivers voice and data services; and, Telstra’s joint

venture, FOXTEL, uses an HFC infrastructure, which overlaps approximately 80 percent of

Optus HFC footprint41 and delivers data and pay TV (but not voice) services.42

48. To summarize the facts above, Telstra delivers the same services to its customers as does

Optus, but whereas Optus maintains only one last-mile network, Telstra maintains two last-mile

wireline networks and has the option of utilizing a third (satellite) network to deliver pay TV.

Thus, Optus’ concern that Telstra’s ownership of a competing HFC infrastructure places it at a

competitive disadvantage can only be correct if it is somehow more efficient for Telstra to

provide the same services over multiple networks that Optus provides over one.

49. As a preliminary matter, it should be noted that Telstra’s dual ownership of copper and

HFC networks does not and cannot confer upon it an advantage based simply on economies of

scale – i.e., the virtue of having a “larger plant.” The reason is straightforward: both Telstra

and Optus have invested the capital necessary to be able to fully serve the entire market. That

is, both have achieved the maximum scale, in terms of fixed physical plant, that is possible in

this market.

50. Another possibility is that Telstra’s ownership of multiple networks allows it to capture

economies of scope not available to Optus.

51. An example of economies of scope providing a competitive advantage to one provider

which is not available to others arguably occurs in the case of nations which grant a statutory

41 See ACCC, “Emerging Market Structures in the Communications Sector” (June 2003), at 32. 42 Telstra’s joint venture FOXTEL also provides pay TV via Optus’ satellite infrastructure, including in

those parts of Optus’ HFC footprint that Telstra’s HFC infrastructure does not cover.


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monopoly over some types of mail delivery to one firm. For example, the statutory monopoly

over the delivery of first class mail enjoyed by United States Postal Service truncates the range

of services that an entrant can offer in competition with the Postal Service. As a consequence,

an otherwise efficient entrant may be unable to achieve economies of scope that would lower its

incremental cost.43 Thus, the unique economies of scope that the Postal Service enjoys are

derived explicitly from its statutory authority to offer both ordinary letter delivery service

(which private competitors do not offer) and express delivery services (which private

competitors do offer) within the same network.

52. The competitive landscape facing Optus and Telstra is fundamentally distinct from the

Postal Service example: unlike firms such as Federal Express, the range of services that Optus is

permitted to deliver is in no way truncated. Moreover, the suite of services that Telstra can

deploy via its copper and HFC networks (voice telephony, broadband internet, pay TV) is not

qualitatively distinct from the services that Optus can deploy using its own facilities.

53. The only remaining thesis that might validate Optus’ concern is that it is somehow more

efficient to offer bundles of telecommunications products over distinct networks rather than

over a single network. For example, there might be diseconomies of scale in operating a single

network, making it more efficient to deliver services by utilizing two parallel networks – i.e., it

might be that a bundle comprised of some combination of pay TV, broadband and telephony

provided via HFC and copper is somehow inherently more efficient to provide than the same

bundle provided exclusively via HFC. The economics of communications networks, however,

run directly contrary to this thesis: rather than experiencing lower costs, the operator of multiple

43 The European Commission has recognized this problem, noting in the Deutsche Post decision that “joint deliveries [of mail-order parcels and letters] create economies of scope that exist between the reserved product and the competitive product. Due to the reserved area these economies of scope are not available to competitors.” See Case COMP/35.141, Deutsche Post AG, 2001 O.J. (L 125) 27 at ¶ 11 n.17.


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networks (in this case, Telstra) must incur the largely fixed costs of maintaining and operating

multiple networks, while the operator of a single network does not. Indeed, it is the ability of

communications infrastructure providers to provide multiple services over the same network

which has resulted in reduced costs and lower entry barriers, as explained above.

54. Given that Telstra’s ownership of two overlapping networks does not confer an economic

advantage in terms of reduced costs, the only remaining argument available to Optus is that it is

the existence of an HFC network, not Telstra’s ownership of it, which places it at a competitive

disadvantage. In short, Optus’ submission on this point boils down to the argument that its

profits would be higher if it were a monopolist, which is uncontroversial.

55. Consumers, however, would not be better off under an Optus monopoly. As I demonstrate

in this report, the experience of other nations shows that infrastructure-based competition is

both economically viable and economically desirable. Indeed, Optus actually has a significant

competitive advantage when compared, for example, with U.S. cable companies: It faces only a

single fixed-line infrastructure-based competitor, Telstra, which – no matter how many

infrastructures it owns or operates (copper, HFC, satellite) – offers only one set of competitive

alternatives to Optus’ services. By comparison, U.S. cable companies face at least two satellite

providers of pay TV services; an incumbent telephone company offering voice, data and (in

many cases) video; and, in many cases, a third wireline infrastructure provided by a cable

overbuilder.

56. Optus also claims its incentives to invest are reduced by the possibility that Telstra will

invest in an FTTN network, which Optus claims would be less risky than an investment in HFC


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since “Telstra would be likely to secure close to 100 percent penetration.”44 This prediction is

only valid, however, to the extent Optus continues to disinvest in its HFC network and rely

instead on ULL. As I have explained above, competition in international markets demonstrates

the HFC infrastructures are successfully winning market share away from telephone companies,

regardless of the telephone companies’ infrastructures; in the U.S., cable companies already

serve 18 percent of U.S. landline telephone subscribers, and still larger shares of broadband and

pay TV. Thus, telephone companies that compete against cable companies with modern HFC

competitors do not have, and do not ever again expect to have, “close to 100 percent

penetration.”

3. The Effects of Changes in Technologies and Markets Must Be Taken Into Account

57. Optus’ analyses of the return on HFC investment were conducted prior to important

changes that have taken place in technology and the marketplace.45 Specifically, the costs of

providing advanced services over HFC infrastructures have fallen, and the uptake of advanced

services has increased. These changes invalidate the results of Optus prior analyses of the

return on investments in its HFC infrastructure, the most recent of which was completed in mid-

2003.

58. First, as noted above, the costs of key inputs into HFC infrastructures have fallen by 50

percent or more in just the past three years, and are expected to continue falling in the future.

Optus’ analysis does not appear to take these price declines into account.

44 Optus March 2008 Submission at 3.27 (“Optus notes that the investments it is apparently expected to make as a result of the proposed exemption application involves far greater risk than a fibre-to-the-node network, in which Telstra (if it were the successful tenderer) would be likely to secure close to 100% penetration (through retail and wholesale).”)

45 See, e.g., Optus March 2008 Submission at 3.24 (“The most recent analysis of the economic feasibility of accessing MDUs via the Optus HFC network was carried out in July 2003 (prior to the emergence of ULLS as a commercially viable alternative option for supply to residential customers). The results of this analysis are set out in Appendix A.”)


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59. While the figures provided by Optus for its cost estimates do not provide sufficient detail,

particularly with respect to underlying assumptions, to formally re-estimate its Return on

Investment calculations with any precision, Figure 1 illustrates the effects of cost declines on

deployment costs. (To be clear, the figures in the chart are for illustration purposes, and do not

rely on Optus confidential information.)

60. The top line in Figure 1 illustrates the incremental costs of a five-year expansion of an

HFC infrastructure, assuming one customer is added each year for five years, and the

incremental cost of each added customer is constant at $400. Under this assumption, the total

cost of deployment is $2,000, and the discounted present value of the investment, assuming a 12

percent cost of capital, is $1,442. The middle line shows the effect of a 20 percent annual

decline in deployment costs (a conservative assumption) – that is, it illustrates what the path of

actual costs would have been had Optus begun deploying in 2003. The total cost in this case is

$1,345, and the discounted present value is $1,018. In other words, based on these hypothetical

figures, a “constant cost” assumption results in overstating the cost (on a present value basis) of

a five-year deployment begun five years ago by about $400 ($1,442 - $1,018), or roughly 30

percent.

61. Optus, however, does not present its 2003 analysis as evidence of what would have

happened had it begun deploying five years ago, but rather as evidence of the expected return

on an investment begun today. To properly evaluate the going forward return, it is necessary to

take into account both the decline in input costs since the original Optus analysis was performed

and the expectation of continued declines going forward. These assumptions are illustrated in

the bottom line in Figure 1, again without using confidential Optus data. The total deployment

cost in this case is $551, and the present discounted value is $417. Thus, the effect of failing to


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account for the actual decline in costs in the past as well as the expected continued decline in

prices in the future is to overstate the present value of the required investment by more than

$1,000 ($1,442 - $417), or more than 70 percent. Any return on investment analysis based on

such erroneous cost figures is simply invalid.

Figure 1: Effect of Price Assumptions on the Discounted Present Value of a Five-Year Investment

Constant Cost Assumption

Actual Costs(Costs Decline 20%/annum)

Actual Costs (2008 Start)

0

50

100

150

200

250

300

350

400

450

Year 1 Year 2 Year 3 Year 4 Year 5

DPV = $1,442

DPV = $417

DPV = $1,018

62. It is similarly important to take into account the impact of rising penetration rates for data

and pay TV. Optus’ public figures show that the number of data subscribers on its HFC

infrastructure rose from 143,000 in 2003 to 412,000 in 2008, indicating that its broadband

penetration of serviceable homes nearly tripled, from approximately 10 percent to


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approximately 29 percent.46 Further, while Optus appears to have little interest in the pay TV

market (despite reporting a 25.7 percent increase in pay TV revenue in the quarter ended March

2008 compared with March 2007),47 apparently due at least in part to its concerns about low

overall pay TV penetration in Australia, the fact is that pay TV penetration in Australia is

growing. ACMA, for example, reports that overall pay TV penetration rose from 26 percent in

2006 to 29 percent in 2007.48 Again, relying on projections and analysis using outdated data

significantly misrepresents the true position.

4. The Competitive Challenges of Servicing MDUs Are Not Unique to Australia, and Have Been Overcome Elsewhere

63. Optus also submits that it is incapable of economically serving MDUs within its service

territory, and that the presence of such units also distinguishes its service territory from those

served by cable companies in other nations.49

64. Optus’ argument is invalid for two reasons. First, markets in the U.S. where overbuilders

compete successfully have as many (or more) MDUs, including small MDUs, as Optus’

markets. Second, the challenges of penetrating MDU markets are not unique to Australia, but

HFC operators elsewhere have been successful in overcoming these challenges.

46 See Singapore Telecommunications Limited And Subsidiary Companies, Management Discussion And Analysis Of Financial Condition, Results Of Operations And Cash Flows For The Fourth Quarter and Financial Year Ended 31 March 2004 at 40; and, Management Discussion And Analysis Of Financial Condition, Results Of Operations And Cash Flows For The Fourth Quarter and Financial Year Ended 31 March 2008 [hereafter Optus Operating Results 2008] at 49.

47 Optus Operating Results 2008 at 49 48 ACMA, Media and Communications in Australian Families 2007 (December 2007), at 5. 49 See Optus March 2008 Submission at 2.26 (“Of the 2.2 million homes passed by the Optus HFC

network, around 0.8 million homes are classified as “unserviceable”, including approximately 0.5 million homes in MDUs.”); and, id. at 3.31 (“Optus submits that the relative success of cable companies in other jurisdictions may be explained in large part by the unfavourable market profile of Australian MDUs….”)


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65. With respect to the prevalence of MDUs in Optus’ markets versus markets in the U.S., I

demonstrate below that MDUs are just as prevalent, if not more so, in U.S. markets as in Optus’

HFC markets.

66. With respect to the challenges of gaining access to MDUs, a recent U.S. Government

Accountability Office report found:

[U.S. overbuilders] expressed concern about being prevented from providing service to large segments of the population that live in apartments or condominiums, which are generally referred to as “multiple dwelling units.” We were told that owners of multiple dwelling units often enter into exclusive contracts with one cable provider, thereby limiting a competitor’s access to that building. Also, even when [broadband service providers] BSPs have gained access into a building, we were told that the building owners may not allow them to lay additional wires because of the associated costs and disruptions. In fact, 1 BSP we spoke with estimated that it could not provide service to 20 percent of subscribers in 1 of our case-study markets because of problems gaining access to multiple dwelling units.50

67. Indeed, until recently, U.S. overbuilders have been hindered by the common practice of

incumbents to enter into exclusive arrangements with MDU owners, a practice I understand

does not occur in Australia. The Federal Communications Commission banned such exclusive

contracts for video services in a 2007 order, and extended that ban to all telecommunications

services in 2008.51 Until the FCC issued these orders, U.S. cable overbuilders faced entry

barriers in the MDU market that have not been faced by Optus.

68. Importantly, the FCC based its decision in the MDU exclusivity orders on the

determination that multiple wireline providers could economically serve individual MDUs.

50 United States General Accounting Office, Wire-Based Competition Benefited Consumers in Selected Markets, GAO-04-241 (February 2004)at 24-5.

51 See Federal Communications Commission, In the Matter of Exclusive Service Contracts for Provision of Video Services in Multiple Dwelling Units and Other Real Estate Developments, Report and Order and Further Notice of Proposed Rulemaking, MB Docket No. 07-51 (November 13, 2007) [hereafter FCC MDU Order]; see also Federal Communications Commission, In the Matter of Promotion of Competitive Networks in Local Telecommunications Markets, Report ant Order, WT Docket No. 99-217 (March 21, 2008) [hereafter FCC Local Telecom Order].


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Specifically, it found that the argument that multiple infrastructures could not efficiently

compete within a single MDU was no longer valid due to operators’ ability to offer multiple

services over the same infrastructure, and concluded that “the dramatic growth of service

combinations and the ‘triple play’ reduces the concern that a sole telecommunications service

revenue stream is insufficient to generate additional competitive entry, even in the residential

context.”52

69. Thus, the presence of MDUs in Optus’ HFC footprint does not support Optus’ claim that

its HFC infrastructure is not economically viable, nor does international data support its claim

that it is differentially disadvantaged by virtue of the presence of MDUs in its service territory.

B. Optus’ Service Territory Compares Favorably With the Areas Served by U.S. Cable Companies

70. To assess the validity of Optus’ submissions with respect to its inability to profitably

invest in the face of a competing HFC infrastructure, I identified four markets in the U.S. which

are comparable to Optus’ HFC service territory in size (i.e., population), population density, and

(with reference to Optus’ claims about the significance of MDUs), the proportion of dwellings

comprised of MDUs of various sizes.

71. In each of the four Metropolitan Statistical Areas (MSAs) analyzed below, there are two

providers of voice, data and video over HFC infrastructures. In addition, each MSA is served

by an incumbent telephone company which offers voice and DSL-based internet service,

bundled pay TV service through a satellite provider, and data and pay TV service utilizing an

FTTN (U-Verse) or FTTP (FiOS) infrastructure. Finally, all four areas are also served by two

52 See FCC Local Telecom Order at ¶9. See also FCC MDU Order at ¶28 (finding that “the fact that a new entrant wants to serve the MDU undercuts any claim that only one wire-based provider can serve the building profitably – if new entry would be unprofitable, it is unlikely that the new entrant would want to enter,” and citing comments from competitive triple-play provider SureWest that “the triple play, which offers a provider revenue from three services, reduces any need for exclusivity that it may have had in the past, when MVPD revenue was the only way it could recover its investment.”).


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satellite TV providers, each of which offers pay TV service independently of their resale

agreements with the incumbent telephone companies.53 Thus, the U.S. markets I analyzed have

far more infrastructure-based competition than Optus’ HFC markets.

72. In analyzing each of these markets, I focused on the portion of each market which is

served by both an incumbent cable company and a cable overbuilder – i.e., the portion most

comparable to Optus’ service territories in the sense that they are served by multiple HFC

infrastructures.

73. To summarize the findings below, the economic and demographic conditions faced by

overbuilders in these four U.S. markets are generally quite comparable to (and in some cases

less favorable than) those faced by Optus. Moreover, the percentage of the housing stock

comprised of MDUs, including small MDUs, is almost uniformly higher in the U.S. markets

than in the markets passed by the Optus HFC infrastructure.

74. The overbuilders present in these markets – Astound, Knology, RCN and WOW – are the

four largest U.S. cable overbuilders, though none is as large as Optus. Each company has

invested in modern HFC infrastructures, and all provide “triple play” service including voice,

data, and pay TV. I provided data above on the current market valuations of these companies

in Section III above. Below, I provide additional data relating to transactions involving the

individual cable systems in the four markets described, which show these systems are currently

valued at approximately $2,500 per subscriber, up (in one case) from approximately $1,000 per

subscriber in 2001.

75. Below, I begin by briefly summarizing some key statistics for the territory covered by the

Optus and Telstra HFC networks in Sydney, Melbourne, and Brisbane. I then provide a detailed

53 Each area also has competition from facilities-based CLECs utilizing unbundled network elements from the incumbent telephone companies.


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discussion of the four comparable U.S. markets. The statistics presented in the text below are

summarized in Table 3, which appears at the end of this section.

1. Optus’ HFC Markets

• Brisbane

76. The territory covered by the Optus HFC network in Brisbane has a population of

approximately 700,000 and an area of 250 square miles, with a population density of 2,800

inhabitants per square mile. Approximately 17 percent of the dwellings in Optus’ Brisbane HFC

territory are classified as being part of an MDU. Out of this total, approximately 84 percent are

located in relatively small MDUs, i.e., structures of no more than three stories. Thus, an

estimated 14 percent of the housing stock passed by the Optus HFC network in Brisbane

consists of relatively small MDUs.

• Melbourne

77. Optus’ HFC network territory in Melbourne spans a population of approximately 1.5

million and an area of 375 square miles, with a population density of approximately 4,000

inhabitants per square mile. Approximately 15 percent of the dwellings in Optus’ Melbourne

HFC territory are classified as being part of an MDU. Of these, approximately 89 percent are

located MDUs of three or fewer stories. Thus, of the total housing stock passed by the Optus

HFC network in Melbourne, an estimated 13 percent can be classified as small MDUs.

• Sydney

78. The territory covered by the Optus HFC network in Sydney has a population of

approximately 2.1 million and an area of approximately 490 square miles, with a population

density of 4,300 inhabitants per square mile. Approximately 28 percent of the dwellings in

Optus’ Sydney HFC territory are classified as being part of an MDU. Of these, approximately


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66 percent are located in structures of three or fewer stories.54 Thus, an estimated 18 percent of

the housing stock passed by the Optus HFC network in Sydney consists of relatively small

MDUs, comparable to or larger than those that Optus claims are problematic to serve.55

2. U.S. Markets

• Detroit

79. The Detroit MSA, centered around an industrial city located in the northern portion of the

Midwestern U.S., has a population of approximately 4.5 million. The Detroit area contains

approximately 1.7 million households, 1.9 million housing units, spans an area of approximately

4,000 square miles, and has a population density of 1,100 inhabitants per square mile. About 15

percent of the housing units in the Detroit MSA are located in small MDUs, containing between

2 and 19 units.56

80. WOW is a privately owned provider of high-speed Internet, cable television and cable

telephony which provides service to portions of the Detroit MSA. WOW’s corporate strategy is

based on so-called “overbuilding”: the company has systematically deployed HFC infrastructure

that overlaps significantly (generally completely) with its competitors’ footprints. WOW began

offering cable television in 1996, but purchased the majority of its systems, including its Detroit

system, from Ameritech in 2001 in a transaction valued at roughly $1,000 per subscriber.57 In

2006, the company was sold to Avista Capital Partners for an estimated $800 million, equal to

54 See Table 3. 55 Optus singles out MDUs that are “…usually between two to three stories high, have no lift, and

generally have less than 12 dwellings per block.” Optus Submission, Appendix A,at 39. 56 Source: U.S. Census Bureau. 57 See Karen Brown, “WideOpenWest Wrangles Place as Cable Competitor” Multichannel News

(November 5, 2001), available at: http://www.wideopenwest.com/news/5-1-2001_multichannel.html; See also Karen Brown, “WOW Now: Cable challenger jumps ahead with Americast acquisition” Broadband Week (June 4, 2001), available at: http://www.broadbandweek.com/news/010604/010604_news_wow.htm


http://www.wideopenwest.com/news/5-1-2001_multichannel.html

http://www.broadbandweek.com/news/010604/010604_news_wow.htm

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approximately nine times cash flow, or approximately $2,500 per subscriber.58 After it

acquired the system from Ameritech, the company upgraded its network to enable high-speed

internet and voice offerings.59 In addition to offering “triple-play” services to residential

customers, WOW also offers data and pay TV services to businesses.60

81. In the Detroit MSA, WOW operates within a service territory of approximately 290 square

miles in three noncontiguous zones, all of which overlap completely with the service area of

Detroit’s large incumbent cable carrier (Comcast). WOW’s service area in Detroit has a

population density of 5,300 inhabitants per square mile. Approximately 22 percent of the

housing units in WOW’s Detroit service territory are classified as being part of an MDU. Of

these, approximately 72 percent are located in relatively small MDUs, containing between 2 and

19 units. Thus, approximately 16 percent of the housing stock in WOW’s Detroit-area service

territories can be classified as small MDUs.

82. Comcast, the primary incumbent cable carrier in the Detroit MSA, is the largest MSO in

the U.S. The company’s cable network passes over 49 million homes and serves over 24

million basic cable subscribers. Comcast also has approximately five million voice customers,

as well as 14 million broadband customers nationwide.61 Comcast offers video, data, and voice

products, and has aggressively marketed its the “triple play” bundle, which combines all three

58 See RCN Options. 59 See Wide Open West, “About Us”, available at:

http://www1.wowway.com/wow/wow.aspx?ConIdent=1004&RCView=Main 60 See Wide Open West, “Internet for Business”, available at

http://www1.wowway.com/internet/internet.aspx?ConIdent=1005&RCView=Nothing 61 See Wachovia Research Report at 21.


http://www1.wowway.com/wow/wow.aspx?ConIdent=1004&RCView=Main

http://www1.wowway.com/internet/internet.aspx?ConIdent=1005&RCView=Nothing

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for an introductory price of $99 per month.62 Nationwide, the company offers service in 39

U.S. states and the District of Columbia.63

83. AT&T, the incumbent wireline carrier in the Detroit MSA, offers traditional wireline

telephony throughout the Detroit area at regulated rates. AT&T also offers high-speed internet

access via DSL, which is available for various prices at several upload/download speeds.

AT&T’s high-speed internet offerings may be bundled with wireline telephony and/or wireless

telephony service, or purchased on a stand-alone basis.64

84. In addition, AT&T offers video services over its U-verse network in Detroit, including in

portions of the WOW service territories. U-verse is the only network in the U.S. that provides

100 percent Internet Protocol (IP) based video service. On U-verse, broadcast channels are

distributed via an IP multicast, which allows a single channel to be transmitted to multiple

users. U-verse offers high-definition programming, as well as other features, such as digital

video recording and advanced program searching. AT&T bundles its U-verse services with high

speed internet offerings.65 As of the end of the first quarter of 2008, AT&T had 379,000 U-

verse video subscribers nationwide. The U-verse network currently passes more than nine

million dwellings, AT&T expects to pass approximately 30 million dwellings by the end of

2010, and expects to have more than 1 million U-verse customers by the end of 2008.66 The

62 See Comcast Corporation, “The Comcast Triple Play”, available at: http://www.comcast.com/tripleplay/ 63 See Comcast Corporation, “Corporate Overview”, available at

http://www.comcast.com/corporate/about/pressroom/corporateoverview/corporateoverview.html 64 See AT&T Corp, General Information, [hereafter AT&T General Information], available at:

http://www.att.com/gen/ 65 See AT&T Corp, U-verse, available at: https://uverse1.att.com/un/launchAMSS.do 66 See AT&T Corp, U-verse Media Kits, available at: http://www.att.com/gen/press-room?pid=5838


http://www.comcast.com/tripleplay/

http://www.comcast.com/corporate/about/pressroom/corporateoverview/corporateoverview.html

http://www.att.com/gen/

https://uverse1.att.com/un/launchAMSS.do

http://www.att.com/gen/press-room?pid=5838

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rollout of U-Verse in Detroit has made the area one of the most competitive in the U.S. for

triple-play services.67

85. Figure 2 shows the areas served by the various HFC infrastructures in the Detroit MSA,

including the areas where Comcast and WOW’s service territories overlap.

Figure 2: HFC Infrastructures in the Detroit MSA

67 See Nathan Hurst, “Comcast, AT&T rivalry heats up: Companies blitz Metro Detroit consumers with ads touting deals on digital TV, high-speed Internet” The Detroit News (December 18, 2007) available at: http://www.detnews.com/apps/pbcs.dll/article?AID=/20071218/BIZ/712180404/1001


http://www.detnews.com/apps/pbcs.dll/article?AID=/20071218/BIZ/712180404/1001

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• San Francisco

86. The San Francisco MSA, located on the Pacific Coast of northern California, in the

western U.S., has a population of 4.1 million. The San Francisco area contains 1.5 million

households, 1.6 million housing units, spans an area of 2,600 square miles, and has a population

density of 1,600 inhabitants per square mile. About 25 percent of the housing units in the San

Francisco MSA are located in small MDUs, containing between 2 and 19 units.68

87. Astound Broadband, a privately owned subsidiary of WaveDivision Holdings, LLC,69

provides high-speed internet, cable television, and cable telephony in the San Francisco MSA.

Astound entered the San Francisco market through an acquisition of assets from RCN for a cash

purchase of $45 million in March 2007, under which it acquired approximately 18,000

subscribers (i.e., approximately $2,500 per subscriber).70 As an overbuilder, Astound acquires

and deploys overlapping HFC infrastructure, in direct competition with cable and wireline

incumbents. Astound provides a variety of bundled offerings to both households and

businesses.71

88. The company covers a service territory in the San Francisco MSA of approximately 190

square miles, with an average of 6,400 inhabitants per square mile.72 In addition to the city of

San Francisco, Astound also serves two noncontiguous outlying areas in San Mateo County and

in the city of Concord. All of Astound’s service territories in the San Francisco MSA overlap

completely with the service area of Comcast, the incumbent cable carrier.

68 Source: U.S. Census Bureau. 69 See Astound, “About Us”, available at:

http://www.astound.net/index.php?option=content&task=view&id=66&Itemid=85 70 RCN Corp, Form 10-K (Fiscal Year 2007), at F14; see also RCN Corp press release, “RCN Corporation

and Astound Broadband Close Sale of RCN's San Francisco Assets” (March 14, 2007), available at: (http://investor.rcn.com/ReleaseDetail.cfm?ReleaseID=233910

71 See http://www.astound.net/ 72 See Table 3.


http://www.astound.net/index.php?option=content&task=view&id=66&Itemid=85

http://investor.rcn.com/ReleaseDetail.cfm?ReleaseID=233910

http://www.astound.net/

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89. Approximately 57 percent of the housing units in Astound’s San Francisco service

territory are classified as being part of an MDU. Of these, approximately 63 percent are located

in relatively small MDUs, containing between 2 and 19 units. Thus, about 36 percent of the

housing stock in Astound’s San Francisco-area service territories is located in relatively small

MDUs. 73

90. AT&T, the incumbent wireline carrier in the San Francisco MSA, offers traditional

wireline telephony throughout the San Francisco area at regulated rates. AT&T also offers high-

speed Internet access via DSL, which is available for various prices at several upload/download

speeds. AT&T’s high-speed Internet offerings may be bundled with wireline telephony and/or

wireless telephony service, or purchased on a stand-alone basis.74 AT&T also offers video

services over its U-verse network in San Francisco, including in portions of Astound’s service

area.

91. Figure 3 shows the areas served by the various HFC infrastructures in the San Francisco

MSA, including the areas where Comcast and Astound’s service territories overlap.

73 See Table 3. 74 See AT&T General Information


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Figure 3: HFC Infrastructures in the San Francisco MSA

• Tampa

92. The Tampa MSA, located on the western coast of Florida, in the eastern U.S., has a

population of 2.6 million. The Tampa area contains approximately 1.1 million households, 1.2

million housing units, spans an area of 2,700 square miles, and has a population density of

approximately 980 inhabitants per square mile. Approximately 17 percent of the housing units

in the Tampa MSA are located in small MDUs, containing between 2 and 19 units.

93. Knology, Inc. provides high-speed Internet, cable television, and cable telephony in the

Tampa MSA. Knology passes 273,600 marketable homes in Pinellas County, in the western


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portion of the Tampa MSA, and serves approximately 54,000 subscribers.75 Knology acquired

its Tampa systems from Verizon Media in 2003.76 The company has offered video and voice

services in Pinellas County since that year, and upgraded its network to provide voice service in

2004.77

94. Due to its redundant fiber-optic cables and network powering systems, Knology is able to

offer circuit-based voice services with reliability standards consistent with those of traditional

fixed-line voice service. Knology’s network is designed for an analog and digital two-way

interactive transmission, allowing the company to deliver video over its network in the same

way that traditional cable companies traditionally provide television service.78 The company

also utilizes high-speed cable modems to provide broadband Internet access, and pursues a

bundling strategy designed to maximize the revenues from total connections served on its

network.79

95. Over 80 percent of Knology’s service territory in the Tampa MSA overlaps with the

service area of Tampa’s incumbent cable carrier, Bright House Networks. In this overlapping

region, Knology operates within a service territory of approximately 380 square miles, with a

population of approximately 760,000 and a population density of 2,000 inhabitants per square

mile. Approximately 36 percent of the housing units in these service territories are situated in

MDUs. Of these, 56 percent are small MDUs, containing between 2 and 19 units. Thus,

approximately 20 percent of the housing stock in Knology’s overlapping Tampa service


75 See Knology Inc., Form 10-K (Fiscal Year 2007), [hereafter Knology 2007 10-K] at 11; see also Vince Vittore, “Knology buys up Verizon video assets” Telephony Online (July 18, 2003), available at: http://telephonyonline.com/access/web/telecom_knology_buys_verizon/

76 See Knology Inc., Form 10-K (Fiscal Year 2005), at 49. 77 Knology 2007 10-K, at 11. 78 Id., at 7. 79 Id. at 8.


http://telephonyonline.com/access/web/telecom_knology_buys_verizon/

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96. Bright House, the primary incumbent cable carrier in the Tampa MSA, is the sixth largest

MSO in the U.S. Bright House is a privately held company with over 2.4 million customers in

California, Alabama., Michigan, Indiana, and Florida. Bright House offers digital video, digital

voice, and high-speed broadband services to residential and business customers. The company

was also among the first in the country to offer high definition television over its systems.

Customers may opt for a variety of ancillary services, such as video on demand, subscription

video on demand, and digital video recorder rentals.80

97. Verizon, the incumbent wireline carrier in the Tampa MSA, offers traditional wireline

telephony throughout the Tampa area at regulated rates. Verizon also offers high-speed Internet

access via DSL, which may be bundled with wireline telephony or purchased on a stand-alone

basis. Verizon has also deployed its FiOS infrastructure in the Tampa MSA, though not yet in

areas served by Knology. As of the end of March 2008, Verizon FiOS had passed about 10.4

million homes and businesses in parts of 17 states. Verzion’s FiOS video offerings deliver

hundreds of digital video and music channels, high-definition programming, and the nation’s

largest collection of video-on-demand content. Verizon’s high-speed FiOS Internet service

offers downstream speeds of up to 50 Mbps and upstream speeds of up to 20 Mbps.81 Verizon

markets bundled offerings with various combinations of FiOS internet, FiOS video, voice

telephony, and wireless telephony.82

98. Figure 4 shows the areas served by the Bright House and Knology HFC infrastructures in

the Tampa MSA.

80 See http://www.mybrighthouse.com/ 81 See Verizon Communications, “All About Verizon FiOS - Fact Sheet”, available at:

http://newscenter.verizon.com/kit/fios-symmetrical-internet-service/all-about-fios.html 82 See Verizon Communications, Residential Packages,

http://www22.verizon.com/Residential/VZPackages/


http://www.mybrighthouse.com/

http://newscenter.verizon.com/kit/fios-symmetrical-internet-service/all-about-fios.html

http://www22.verizon.com/Residential/VZPackages/

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Figure 4: HFC Infrastructures in the Tampa MSA

• Washington DC

99. The Washington DC MSA, located in the mid-Atlantic portion of the Eastern Seaboard of

the U.S., has a population of approximately 5.2 million. The Washington DC area contains

approximately 2.0 million households, 2.1 million housing units, spans an area of 5,800 square

miles, and has a population density of 920 inhabitants per square mile. About 18 percent of the

housing units in the Washington DC MSA are located in small MDUs, containing between 2

and 19 units.


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100. RCN Corporation is the twelfth largest HFC network operator in the U.S., with service

territories principally in the eastern United States, including the Washington, DC area. RCN

provides cable television, high-speed internet, and cable telephony services to residential, small

business and commercial customers.83

101. As one of the leading cable overbuilders in the U.S., RCN has systematically deployed

HFC infrastructure in head-to-head competition with cable and wireline incumbents.84 RCN’s

service territory in the Washington DC MSA overlaps completely with Comcast’s, and covers

most of the District of Columbia, a significant portion of the Maryland suburbs, and a

noncontiguous area in Gaithersburg, Maryland.85 Overall, RCN covers a service territory in the

Washington DC MSA of approximately 90 square miles, with an average of 6,000 inhabitants

per square mile. Approximately 52 percent of the housing units in these service territories are

situated in MDUs. Of these, 55 percent are small MDUs, containing between 2 and 19 units.

Thus, approximately 28 percent of the housing stock in RCN’s Washington, DC service


102. Verizon, the incumbent wireline carrier in the Washington, DC MSA, offers traditional

wireline telephony throughout the Washington, DC MSA at regulated rates. As noted above,

Verizon also offers high-speed Internet access via DSL, which may be bundled with wireline

telephony or purchased on a stand-alone basis. Verizon also offers FiOS services in portions of

the Washington, DC MSA, including portions of RCN’s service area.

83 See RCN Corp, Investor Relations, http://investor.rcn.com/. 84 See InStat Report at 42 (“RCN is a leading cable overbuilder that currently offers voice, video, and data

services in selected geographical areas of Massachusetts, New York, New Jersey, Pennsylvania, Maryland, Virginia, California, and Illinois. As an overbuilder, the company operates in geographic areas where there are other cable TV systems in operation.”).

85 As seen below, RCN also serves a small area in northern Virginia with overlaps with a separate cable incumbent (Cox Communications).


http://investor.rcn.com/

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103. Figure 5 shows the areas served by the Comcast and RCN HFC infrastructures in the

Washington, DC MSA.

Figure 5: HFC Infrastructures in the Washington, DC MSA

3. Comparison of Optus and U.S. Overbuilders’ Service Territories

104. Table 3 summarizes key characteristics of the service territories served by Optus and the

U.S. overbuilders, as discussed above.


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Table 3: Characteristics of Optus and U.S. HFC Service Territories

MarketArea (Square

Miles) Population Density

Total MDUs/Total

Dwellings

"Small" MDUs/Total

MDUs

"Small" MDUs/Total

DwellingsOptus: Sydney 486 2,104,500 4,326 28% 66% 18%

Optus: Brisbane 254 704,021 2,768 17% 84% 14%Optus: Melbourne 374 1,526,881 4,081 15% 89% 13%

U.S. OverbuildersWOW: Detroit 291 1,529,680 5,259 22% 72% 16%

Astound: San Francisco 188 1,212,763 6,448 57% 63% 36%Knology: Tampa 376 758,243 2,014 36% 56% 20%

RCN: Washington DC 90 540,366 5,993 52% 55% 28% Source: U.S. Census Bureau & Warren’s Television & Cable Factbook for U.S. markets; Australian Bureau of Statistics & Optus HFC coverage estimates (provided by Telstra)86 for Australian markets. In Australian markets, an MDU is classified as “small” if it is housed in a structure of no more than three stories. In U.S. markets, an MDU is classified as “small” if it is housed in a structure containing between 2 and 19 units 105. The data in Table 3 contradicts Optus’ claims that its HFC service territories place it at a

disadvantage relative to U.S. cable operators. Specifically:

106. First, in terms of economies of scale and population density, Optus service territories are

relatively large and comparably dense: (1) the coverage area spanned by U.S. overbuilders

ranges from 90 square miles to 380 square miles, while the coverage area of the three Optus

HFC networks ranges from 250 to 490 square miles; (2) the U.S. overbuilders cover populations

between 540,000 and 1.5 million, while the Optus HFC service areas span between 700,000 and

2.1 million inhabitants; and, (3) the U.S. overbuilders face population densities ranging from

2,000 to 6,400 inhabitants per square mile, while the density in the Optus HFC network ranges

from 2,700 to 4,300 inhabitants per square mile.

86 Telstra provided me with its internal estimates of the ESAs where Optus has deployed HFC infrastructure and, for each ESA, an estimate of the proportion of homes passed. My understanding is that this estimate was prepared at some time in the past, and is acknowledged to be an estimate only. I also examined Optus Confidential Appendix B to the Optus March 2008 submission. However, the Optus data (a) was not comparable to the data I utilized for U.S. companies, as it did not provide the number of homes passed and (b) Appendix B is of questionable accuracy, as it does not comport with its only publicly stated estimate. Should more accurate data on Optus’ service territory become available, the figures in this section may be revised accordingly.


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107. Second, with respect to MDUs, Optus appears to enjoy a significant advantage relative to

the U.S. overbuilders. As shown in Figure 6 below, between 13 percent and 18 percent of

Optus-passed dwellings are small MDUs, whereas the comparable statistic for the U.S.

overbuilders ranges from 16 percent to 36 percent.

Figure 6: Prevalence of Small MDUs in Optus and U.S. Service Territories

18%

14% 13%16%

36%

20%

28%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Optus: Sydney Optus: Brisbane Optus:Melbourne

WOW: Detroit Astound: SanFrancisco

Knology: Tampa RCN:Washington DC

Firm and Market

Smal

l MD

Us

/ T

otal

Dw

ellin

gs

108. To summarize, the three Optus service territories are not, on balance, any less

commercially attractive than the four U.S. overbuilder service territories I examined. To the

contrary, on the single characteristic upon which Optus places the greatest weight (the

prevalence of small MDUs), Optus service territories are on balance more commercially

attractive than in the U.S. Moreover, the U.S. overbuilders I examined face substantially more

competition – from two satellite pay TV providers plus, in three of the four cases, from Next

Generation FTTN or FTTP infrastructures being deployed by the incumbent telephone

companies – than does Optus.


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C. Optus’ Overall Penetration and Service Revenues are Comparable to Those of U.S. Cable Companies

109. As discussed above, Optus’ focus on pay TV penetration is misplaced. The relevant

question from an economic perspective is not how many people subscribe to pay TV (or any

other single service), but rather the proportion of serviceable homes in the network purchasing

services of any kind, and the amount of revenue received per serviceable home.

110. In Confidential Appendix D, I compare Optus and several major U.S. cable companies

with regard to several performance metrics, the most important of which are the overall

penetration rate of serviceable homes, and the revenue earned per serviceable home on all

services combined. I conclude that Optus compares favorably with cable systems in the U.S. on

these metrics, and, indeed, outperforms U.S. overbuilders.

D. The Most Likely Explanation of Optus’ Unwillingness to Invest is the ULL Regime

111. Optus bases its claim that investment in its HFC infrastructure is uneconomic on studies

conducted prior to the 2005 reduction in ULL prices which it says made ULL an attractive

alternative. It submits that, because it found HFC investment to be unattractive prior to 2005, it

would reach the same conclusion if ULL were to be withdrawn, as Telstra’s petition

recommends. I have demonstrated above that market and technological changes since 2003

invalidate the results of Optus’ analyses, which are five or more years old. The relevant

question is whether, going forward, Optus would increase investment in its HFC infrastructure

if Telstra’s petition were approved or, conversely, whether the availability of ULLs is

responsible for Optus reluctance to invest today.


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112. There is a substantial literature on the relationship between ULL availability (and pricing),

on the one hand, and investment incentives, on the other.87 Economists generally agree that

ULL can and (especially when inappropriately implemented) does reduce firms’ incentives to

invest. One recent study, by Professor Leonard Waverman and others, confirms this result

based on an empirical examination of 12 major European markets. Specifically, the Waverman

study finds that the availability of ULL causes a drop in the subscribership of competing

infrastructures, which in turn reduces investment. As the study explains:

This fall in subscriber levels has the impact of reducing investment in alternative access platforms in both the short-term and the long-term. In the short-term, investment associated with connecting customers and upgrading networks is foregone, while in the longer term, the very substantial investment associated with expanding network footprints is also jeopardised.88

113. In my opinion, the availability of ULL in Optus’ HFC footprint in Australia is having

precisely the effect Dr. Waverman found in his study of European markets: it is reducing

Optus’ incentives to invest in connecting more customers and in upgrading its infrastructure to

provide more advanced services.

V. LAST-MILE INFRASTRUCTURE COMPETITION BENEFITS CONSUMERS

114. Optus submits that promoting last-mile infrastructure competition is not necessarily in the

long-term interests of end users.89 I have already demonstrated that multiple wireline

infrastructures compete efficiently in other jurisdictions, i.e., that Optus argument that the CAN

87 For a partial review, see, e.g., Jeffrey A. Eisenach and Hal J. Singer, "Irrational Expectations: Can a Regulator Credibly Commit to Removing an Unbundling Obligation?" AEI-Brookings Joint Center Working Paper No. 07-28 (December 2007), available at: http://ssrn.com/abstract=106516

88 See Leonard Waverman, Meloria Meschi, Benoit Reillier and Kalyan Dasgupta, Access Regulation and Infrastructure Investment in the Telecommunications Sector: An Empirical Investigation, LECG (September 2007) at 4.

89 See Optus March 2008 Submission at 5.11 (“The full facilities-based competition that the proposed exemption is purportedly designed to encourage would not necessarily represent an improvement in the conditions for competition.”) See also Optus March 2008 Submission at 5.19 (“Further, Optus submits that the hypothetical efficiencies resulting from infrastructure-based competition are not in and of themselves a benefit to consumers. Only if these efficiencies are translated in to lower prices or better services are consumers better off.”)


http://ssrn.com/abstract=106516

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is a natural monopoly that cannot efficiently be duplicated is incorrect. As I discuss below, the

evidence further demonstrates that infrastructure competition results in greater innovation and

competition, yields lower prices and increased choice for consumers, increases broadband

penetration, and ultimately allows regulators to move to less intrusive forms of regulation.

A. Infrastructure Competition Results in Greater Investment and Innovation

115. There is little dispute that infrastructure competition results in increased investment and

drives more rapid innovation. A recent OECD report, for example, finds as follows:

In the United States, where cable modem use is more prevalent than DSL lines,

competition is leading to network upgrades. Nationwide fixed-line telecommunication operators such as AT&T and Verizon are actively deploying optical fibre networks to compete with cable TV operators’ multiple play services. AT&T is deploying a Fibre-to-the-Node (FTTN)/VDSL2 network to offer multi-channel IPTV HDTV services and other advanced functions. AT&T’s ‘U-verse’ service, a triple play package (digital voice, video and broadband access), is combined with AT&T.s analogue and wireless telephone services to provide quadruple-play potential. Verizon’s Fiber-to-the-Home (FTTH) ‘FiOS’ service, a triple play package (video + broadband access + digital voice) is also combined with Verizon’s wireless telephone network (and where digital voice is not available, its analogue telephone network) to provide quadruple play possibilities…. These services compete with cable companies’ triple play offerings.90

116. In direct response to the competitive threat from telephone companies, cable companies

are moving rapidly to deploy still more capable HFC networks. As a recent analyst report

concluded:

The chief reason why some cable operators are embracing DOCSIS 3.0 so tightly and others are not is the state of telco competition. Comcast is facing strong challenges from Verizon Communications Inc.'s growing fiber-to-the-home (FTTH) network, FiOS. Verizon, which tangles with Comcast up and down the East Coast, has now signed up more than 1 million FiOS TV customers and more than 1.5 million FiOS Internet users. Similarly, in Japan, J:Com is fighting an

90 Organisation for Economic Co-operation and Development Directorate For Science, Technology And Industry Committee For Information, Computer and Communications Policy Working Party on Communication Infrastructures and Services Policy IPTV: Market Developments And Regulatory Treatment (December 19, 2007) at 11 [hereafter OECD IPTV], (available at http://www.oecd.org/dataoecd/11/23/39869088.pdf) (emphasis added).


http://www.oecd.org/dataoecd/11/23/39869088.pdf

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uphill battle against the entrenched FTTH networks of the incumbent phone companies. So the MSO, like Comcast and others, is turning to Docsis 3.0 as a way to match the soaring transmission speeds of its rivals.91

117. The development of these new technologies has led both cable and telephone companies to

invest substantial sums in upgrading their networks. Between 1996 and 2006, for example, U.S.

cable operators invested more than $115 billion to upgrade their networks.

Figure 7: Cumulative Infrastructure Expenditures by Cable Operators 1996-2006 ($billions)

$5.7

$12.6

$28.8

$84.6

$74.0

$59.5

$43.4

$18.2

$105.3

$117.7

$94.7

$0

$20

$40

$60

$80

$100

$120

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Source: NCTA, Cable Industry Infrastructure Expenditures, available at http://www.ncta.com/ContentView.aspx?contentId=56.

118. To put these amounts in perspective, U.S. cable companies invested $13.38 per subscriber

per month in new infrastructure in 2003, increasing to $14.14 per subscriber per month in 2006

and $17.61 in 2007.92 By way of comparison, Optus’ consumer and media division invested a

total of AU$129 million (approximately US$120 million) in 2007, which it reports “primarily

91 Allan Breznick, “Docsis 3.0: The Competitive Hedge,” LightReading (March 11, 2008), available at www.lightreading.com/document.asp?doc_id=148100) (emphasis added).

92 See NCTA, Industry Statistics, available at: http://www.ncta.com/Statistic/Statistic/Statistics.aspx


http://www.ncta.com/ContentView.aspx?contentId=56

http://www.lightreading.com/document.asp?doc_id=148100

http://www.ncta.com/Statistic/Statistic/Statistics.aspx

-49-

represented costs of ULL network investment and customer premises equipment.”93 Based on

its publicly-reported on-net customer base of 851,000,94 Optus invested approximately

US$11.75 per subscriber per month during 2007 – about a third lower than the average U.S.

cable company.

119. U.S. infrastructure investment has not been limited to cable companies. Since the Federal

Communications Commission lifted ULL requirements on NGN infrastructures, beginning with

its September 2003 decision to exempt fiber networks from unbundling requirements, overall

investment in communications equipment in the U.S. has risen by more than 40 percent, as

shown in Figure 8 below. The Wall Street Journal reported that overall investment by U.S.

telecommunications companies in 2007 was expected to be approximately $70 billion.95

Figure 8: Real Investment in Communications Equipment, 1997-2007 ($billions)

Source: United States Bureau of Economic Analysis

93 See Optus Operating Results 2008 at 56. 94 See Optus Operating Results 2008 at 49. 95 Bobby White, “Spending Wave Buoys Makers Of Network Gear; New Web Services Spur Phone Firms

to Invest In Increasing Capacity,” The Wall Street Journal (February 14, 2007) (“After years in the doldrums, the global networking industry is riding a new wave of spending as an explosion in online video and other bandwidth-hungry Internet services forces telecommunications carriers to beef up their capacity.”)


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120. The impact of infrastructure competition on investment is not limited to the United States.

For example, the OECD reports that:

France, which is among the leaders in the OECD providing IPTV service, also provides one good example where competition is leading to the upgrading of networks. …Free, in September 2006, announced plans to spend EUR 1 billion over six years on a nationwide FTTH rollout in order to differentiate its services further from other competing multiple-play operators. In addition, it has also indicated its willingness to unbundle its fibre network for other operators. At the time of writing, the other two major IPTV operators in France, France Telecom and Neuf Cegetel, announced their plans to deploy FTTH networks. 96

121. Free’s buildout provides an important benchmark for the relationship between

infrastructure viability and penetration, as it is building its FTTP infrastructure in throughout

Paris as well as in any other exchanges in which it has subscribership of 15% or greater.97

122. In sum, infrastructure-based competition promotes investment in the telecommunications

infrastructure. And, as I have demonstrated above, such investment is presumptively efficient,

as there is no question that multiple wireline infrastructures are competing successfully in

markets around the world which are similar to the markets served by Optus’ HFC infrastructure.

123. The impact of approving Telstra’s petition on infrastructure investment in Australia could

be significant. For example, if Optus increased its rate of capital expenditure per subscriber to

the same level as that of U.S. cable companies, an additional AU$38 million would be invested

in Australia’s communications infrastructure annually.

B. Infrastructure Competition Results in Lower Prices

124. In addition to promoting investment, infrastructure competition directly benefits

consumers by lowering prices. For example, a recent report by the U.S. Government

Accountability Office, concluded that markets in which cable overbuilders had deployed

96 See OECD IPTV 97 Id. at 106.


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competing infrastructures enjoyed 23 percent lower pay TV prices as a result.98 A Bank of

America survey of markets in which Verizon had deployed FiOS pay TV services found even

deeper price cuts, ranging from 29 percent to 43 percent.99

125. Infrastructure competition is also producing lower prices for telephone service in the U.S.,

with some cable companies offering unlimited calling plans for as little as $12.99 per month. A

2007 report by consultancy Micra found that “Subscribers to cable voice service save almost

$12.00 a month on their telephone bills compared to the rates charged by the incumbents.”100

126. Infrastructure competition has also yielded lower broadband prices. For example, FCC

Chairman Kevin Martin reported in a recent speech that prices for entry-level DSL service

dropped from $49.99 to $14.99 between 2002 and 2006, i.e., during the period cable companies

were aggressively rolling out their cable modem services.101

C. Infrastructure Competition Results in More Choices for Consumers and Higher Broadband Uptake

127. As the ACCC has previously found, infrastructure-based competition allows providers to

offer differentiated services which more nearly match the needs of individual consumers and

encourages them to compete across a greater range of inputs and technologies.102

Infrastructure-based competition also leads providers to compete more intensely for consumers,

as they seek to capture sufficient customers to achieve minimum efficient scale. Competition is

98 See FCC Twelfth MDVP Report at ¶91 (“GAO found that communities with overbuild competition experienced lower rates (an average of 23 percent lower for basic cable) and higher quality service.”)

99 George S. Ford and Thomas M. Koutsky, “In Delay There is No Plenty: The Consumer Welfare Cost of Franchise Reform Delay,” Phoenix Center Policy Bulletin No. 13 (January 2006) at 12 (“A January 2006 Bank of America survey of three areas where Verizon has rolled out FiOS video service revealed video service price cuts by incumbent cable operators Cox, Charter and BrightHouse of 42.8%, 28.6%, and 37.8%, respectively.”)

100 Michael D. Pelcovits and Daniel E. Haar, “Consumer Benefits from Cable-Telco Competition,” Micra Economic Consulting (November 2007) at i.

101 Kevin Martin, “Remarks to the Georgetown University McDonough School of Business Center for Business and Public Policy” (November 30, 2006).

102 ACCC, Fixed Services Review, A Second Position Paper (April 2007) at iii (“[F]acilities-based competition is more likely to promote the LTIE. This is because this form of competition allows rivals to differentiate their services and compete more vigorously across greater elements of the supply chain.”).


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especially intense, for example, in U.S. markets where both cable and telephone companies

have rolled out triple-play capable networks.103

128. In part as a result, various studies have found that competition between different platforms

increases broadband uptake.104 By removing the ULL “safety net” that allows Optus to avoid

investing in its HFC infrastructure, Telstra’s proposal would thus promote a wider range of

choices for consumers. For example, if Optus were to make the investments required to deploy

DOCSIS 3.0 technology, more than 20 percent of Australian households could be offered

affordable broadband service at download rates of up to 160 Mbps.

D. Infrastructure-Based Competition Allows for Lighter Regulation

129. Not least among the benefits of infrastructure-based competition is that it permits

regulators to adopt a lighter touch. For example, numerous U.S. state regulatory commissions

have cited the presence of extensive infrastructure-based competition in decisions to deregulate

retail telephone prices. And, based on extensive infrastructure competition, the FCC has

recently forborne from requiring incumbent telephone companies to offer unbundled network

elements (UNEs) in Anchorage, Alaska and Omaha, Nebraska.105

103 Nathan Hurst, “Comcast, AT&T Rivalry Heats Up: Companies Blitz Metro Detroit Consumers with Ads Touting Deals on Digital TV, High-Speed Internet,” The Detroit News (December 18, 2007) available at http://www.detnews.com/apps/pbcs.dll/article?AID=/20071218/BIZ/712180404/1001 (quoting industry analyst Jeff Kagan: “’Comcast has a lot at stake,’ he said. ‘They're being challenged, and challenged hard. But in the end, customers will win. Neither of these companies will be a take-all winner. But customers will see better offerings and lower prices.’”)

104 See, e.g., Walter Distasoy Paolo Lupiz Fabio M. Manentix, “Platform Competition and Broadband Uptake: Theory and Empirical Evidence from the European Union” Paper presented at the joint PURC - University of Florida and LBS 2005 telecommunications conference (April 2005) (available at SSRN: http://ssrn.com/abstract=518382) (“[C]ompetition between different platforms seems to be one of the main drivers of broadband uptake.”)

105 See Federal Communications Commission Petition of ACS of Anchorage, Inc. Pursuant to Section 10 of the Communications Act Of 1934, As Amended, For Forbearance From Sections 251(C)(3) And 252(D)(1) In The Anchorage Study Area, Memorandum Opinion And Order, WC Docket No. 05-281 (January 30, 2007) [hereafter ACS Forbearance Order]; see also Federal Communications Commission, In the Matter of Petition of Qwest Corporation for Forbearance Pursuant to 47 U.S.C. § 160(c) in the Omaha Metropolitan Statistical Area, Memorandum Opinion And Order, WC Docket No. 04-223 (December 2, 2005) [hereafter Qwest Forbearance Order].


http://www.detnews.com/apps/pbcs.dll/article?AID=/20071218/BIZ/712180404/1001

http://ssrn.com/abstract=518382

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130. Optus notes that the FCC recently failed to approve forbearance petitions by Verizon to

end UNE obligations in six U.S. markets.106 Nothing in the FCC’s decision, however, provides

a basis for denying Telstra’s petition in this matter.107

131. First, the FCC’s Omaha and Anchorage forbearance decisions rested primarily on the

existence of a competing infrastructure-based provider which had “substantially built out its

network” and which covered 75 percent or more of a wire center territory.108

132. The initial Verizon forbearance petitions requested relief across much broader territories

than just wire centers. Rather, Verizon requested relief for six entire Metropolitan Statistical

106 Optus March 2008 Submission at 3.51 (“Finally, Optus notes that in the United States, for example, despite the advantages enjoyed by cable operators (which are not available to Optus in Australia), the FCC has not consistently found in favour of rolling back access regulation in cable areas. Optus notes that Telstra has referred to forbearance decisions of the FCC in order to claim that its approach is conservative by comparison with international precedent, in particular the Omaha UNE decision and the Anchorage UNE decision. Optus refers the ACCC to a more recent FCC decision where the FCC did not grant forbearance in six Metropolitan Statistical Areas (MSAs) since there was not a sufficient level of facilities based competition (‘the Verizon decision’).”)

107 I am intimately familiar with the FCC’s decision for two reasons. First, in 2007 I provided expert testimony before the Virginia State Corporation Commission on the state of telecommunications competition in Virginia, including the Virginia Beach market which was the subject of one of Verizon’s FCC forbearance petitions. In the course of preparing that testimony, I was provided access to the same confidential information which formed the basis of Verizon’s FCC petition. Second, earlier this year, I provided expert testimony before the District of Columbia Public Service Commission. My testimony in that matter included providing my expert opinion on the significance, from an economic perspective, of the FCC’s Order denying Verizon’s petitions. See Direct Testimony Of Dr. Jeffrey A. Eisenach On Behalf of Verizon Virginia Inc. and Verizon South Inc., Application of Verizon Virginia Inc. and Verizon South Inc. For a Determination that Retail Services Are Competitive and Deregulating and Detariffing of the Same, Before the Virginia State Corporation Commission, Case No. PUC-2007-00008, (January 17, 2007); see also Rebuttal Testimony Of Dr. Jeffrey A. Eisenach On Behalf of Verizon Virginia Inc. and Verizon South Inc., Application Of Verizon Virginia Inc. and Verizon South Inc. For a Determination That Retail Services Are Competitive and Deregulating and Detariffing Of The Same, Before the Virginia State Corporation Commission, Case No. PUC-2007-00008, (July 16, 2007); see also Rebuttal Testimony Of Jeffrey A. Eisenach On Behalf Of Verizon Washington, D.C., In The Matter Of Verizon’s 2007 Price Cap Plan For The Provision Of Local Telecommunications Services In The District Of Columbia, Before The District Of Columbia Public Service Commission, Formal Case No. 1057 (January 31, 2007).

108 Qwest Forbearance Order at ¶2 (“We grant Qwest forbearance from the obligation to provide unbundled loops and dedicated transport pursuant to section 251(c)(3) in those portions of its service territory in the Omaha MSA3 where a facilities-based competitor has substantially built out its network.”). See also ACS Forbearance Order at ¶1 (“Today, we grant ACS forbearance, subject to specific conditions, from the obligation to provide unbundled loops and dedicated transport pursuant to sections 251(c)(3) and 252(d)(1) in those portions of its service territory in the Anchorage study area where a facilities-based competitor has substantially built out its network.”) The 75 percent threshold was disclosed subsequent to the issuance of the Qwest and ACS petitions. See Wireline Competition Bureau Discloses Cable Coverage Threshold in Memorandum Opinion and Order Granting Qwest Corporation Forbearance Relief in the Omaha Metropolitan Statistical Area, WC Docket 04-223, Public Notice, 22 FCC Rcd 13561 (2007).


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Areas. The FCC denied this relief, and in so doing imposed a new test (the precise level of

which has not been publicly disclosed) based on the market shares of competitors throughout an

MSA.109 In so doing, it did not overturn the 75 percent deployment test, but left it in place. It is

undisputed that the cable company competitors in the six MSAs did not cover 100 percent of the

territory of each MSA; indeed, in some wire centers, even the 75 percent test was not met.110

133. Telstra’s petition, of course, does not request relief from unbundling throughout an MSA.

Nor does it even request relief in all ESAs where Optus’ HFC platform covers more than 75

percent of mass market customers. Rather, Telstra’s petition is far more narrowly tailored,

requesting relief only in those areas which can demonstrably be served by Optus existing HFC

network. Thus, the FCC’s denial of MSA-wide relief for Verizon has little if any bearing on

Telstra’s petition for relief only in areas where Optus HFC has actually been deployed.

134. The ACCC should also take note of two further developments. First, Verizon has appealed

the FCC’s decision in U.S. Federal Court, arguing that that the FCC’s market share test is not

consistent with prior FCC rules, prior court decisions, or the underlying statute.111 At the core

of Verizon’s appeal is the contention that the basis for forbearance under U.S. law rests on a

showing that infrastructure competitors are capable of serving an area, a test which does not

109 See Federal Communications Commission, Petitions of the Verizon Telephone Companies for Forbearance Pursuant to 47 U.S.C. § 160(c) in the Boston, New York, Philadelphia, Pittsburgh, Providence and Virginia Beach Metropolitan Statistical Areas, Memorandum Opinion And Order, WC Docket No. 06-172 (December 5, 2007) [hereafter Verizon Forbearance Order] at ¶27 (“As a threshold matter, the record evidence does not reflect that in any of the 6 MSAs do the cable operators, even in the aggregate, have more than a [REDACTED] percent share of the market for mass market telephone services in an MSA.”) (emphasis added).

110 Verizon Forbearance Order at ¶36 (“[W]e note that the evidence does show that cable operators have deployed facilities that meet the 75 percent coverage threshold in some wire centers.”) (emphasis added). See also United States Court of Appeals for the District of Columbia Circuit, Case No. 08-1012, On Petition for Review of an Order of the Federal Communications Commission, Brief for Petitioners the Verizon Telephone Companies, (June 3, 2008) [hereafter Verizon Appeal Brief] at 16 (stating that the 75 percent test was not met for 140 of the 790 wire centers in the six MSAs).

111 See Verizon Appeal Brief .


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depend on having achieved a particular market share.112 From an economic perspective, the

“capability” standard is the correct test, and is, as Verizon’s brief explains, consistent with the

test the FCC has applied in the past in this and similar contexts. In any case, the FCC’s order

cannot be taken as final so long as Verizon’s appeal is pending.113

135. Second, Verizon has filed new forbearance petitions for portions of two of the six areas

covered by the FCC’s order, Providence, Rhode Island and Virginia Beach, Virginia.114 In each

case, it has narrowed its request for relief to cover only those portions of each MSA which are

actually served by the primary cable provider in the area, Cox Communications. Verizon

(which is privy to the market share test imposed in the Six MSAs Order) submits in each

petition that all of the FCC’s forbearance criteria, including the market share test, are met within

the service territories for which it now requests relief.115

136. Thus, contrary to Optus’ assertion that the FCC’s Six MSAs Order shows “the FCC has

not consistently found in favour of rolling back access regulation in cable areas,” the fact is that

the Six MSA Order does not apply to “cable areas” at all, but rather to much larger geographic

areas, significant portions of which are not even served by cable. Moreover, the fact that

Verizon has filed new petitions strongly suggests that, even when the FCC’s questionable

market-share test is applied, competition from cable companies in the areas they serve is

sufficient to warrant forbearance.

112 See Verizon Appeal Brief at 21-24. 113 It should be noted that the FCC’s decisions in matters relating to the statutory criteria for

telecommunications regulation have frequently been overturned in Federal Court. 114 See Federal Communications Commission, In the Matter of Petitions of the Verizon Telephone

Companies for Forbearance Pursuant to 47 U.S.C. § 160(c) in Cox’s Service Territory in the Virginia Beach Metropolitan Statistical Area, Petition of the Verizon Telephone Companies for Forbearance, (March 31, 2008) [hereafter Verizon VA Beach Petition]; see also Federal Communications Commission, In the Matter of Petition of Verizon New England Petition for Forbearance Pursuant to 47 U.S.C. § 160 in Rhode Island, Petition of Verizon New England for Forbearance, (February 14, 2008) [hereafter Verizon Rhode Island Petition];

115 See Verizon VA Beach Petition at 3; see also Verizon Rhode Island Petition at 2-3.


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VI. SUMMARY OF CONCLUSIONS

137. In summary, Optus’ assertions that investment in its HFC infrastructure would be

uneconomic in the event Telstra’s petition was approved are not supported by the evidence.

The performance of HFC infrastructures in other countries demonstrates that the CAN is not a

natural monopoly, nor is HFC an “old technology,” as Optus submits. Moreover, my analysis

of Optus’ service territories demonstrates that they compare favorably with the operating

territories of successful cable companies in the United States; and, my analysis of Optus’ key

penetration and revenue metrics demonstrates that its HFC infrastructure is performing well

relative to U.S. cable companies, and outperforming U.S. cable overbuilders. Finally, my

analysis demonstrates that Optus’ prior analyses of returns on HFC investment fail to reflect

developments in technology and the marketplace, and cannot be relied upon.

138. In preparing this report, I have made all the inquiries that which I believe to be desirable

and appropriate. No matters of significance which I regard as relevant have, to my knowledge,

been withheld.


APPENDIX A: CV OF JEFFREY A. EISENACH

JEFFREY AUGUST EISENACH

Education

Ph.D. in Economics, University of Virginia, 1985

B.A. in Economics, Claremont McKenna College, 1979

Professional Experience

Chairman, Criterion Economics, LLC, June 2006-present

Chairman, The Cap Analysis Group, LLC, July 2005-May 2006

Executive Vice Chairman, The CapAnalysis Group, LLC, February 2003-July 2005

President, The Progress & Freedom Foundation, June 1993-January 2003

Executive Director, GOPAC, July 1991-May 1993

President, Washington Policy Group, Inc., March 1988-June 1991

Director of Research, Pete du Pont for President, Inc., September 1986-February 1988

Executive Assistant to the Director, Office of Management and Budget, 1985-1986

Special Advisor for Economic Policy and Operations, Office of the Chairman, Federal Trade

Commission, 1984-1985

Economist, Bureau of Economics, Federal Trade Commission, 1983-1984

Special Assistant to James C. Miller III, Office of Management and Budget/Presidential Task

Force on Regulatory Relief, 1981

Research Associate, American Enterprise Institute, 1979-1981

Consultant, Economic Impact Analysts, Inc., 1980

Research Assistant, Potomac International Corporation, 1978


Teaching Experience

Adjunct Professor, George Mason University School of Law, 2000-present (Courses Taught:

The Law and Economics of the Digital Revolution; Seminar on Government Regulation)

Adjunct Lecturer, Harvard University, John F. Kennedy School of Government, 1995-1999

(Course Taught: The Role of Government in the 21st Century)

Adjunct Professor, George Mason University, 1989 (Course Taught: Principles of Economics)

Adjunct Professor, Virginia Polytechnic Institute and State University, 1985, 1988 (Courses

Taught: Graduate Industrial Organization, Principles of Economics)

Instructor, University of Virginia, 1983-1984 (Courses Taught: Value Theory, Antitrust

Policy)

Teaching Assistant, University of Virginia, 1982-1983 (Courses Taught: Graduate

Microeconomics, Undergraduate Macroeconomics)

Awards, Activities and Concurrent Positions

Member, Board of Directors, PowerGrid Communications, 2008-present

Member, Board of Advisors, Washington Mutual Investors Fund, 2008-present

Member, Board of Advisors, Pew Project on the Internet and American Life, 2002-present

Member, Board of Directors, The Progress & Freedom Foundation, 1993-present

Member, Attorney General’s Identity Theft Task Force, Virginia, 2002

Member of the Board of Directors, Privacilla.com, 2002-2003

Member, Executive Board of Advisors, George Mason University Tech Center, 2001-2004

Contributing Editor, American Spectator, 2001-2002

Member, Bush-Cheney Transition Advisory Committee on the FCC, 2001

Member, Governor's Task Force on E-Communities, State of Virginia, 2000-2001

Member, 2000-2001 Networked Economy Summit Advisory Committee, 1999-2001


Member, Board of Directors, Internet Education Foundation, 1998-2003

Member, Internet Caucus Advisory Committee, 1998-2003

Member, American Assembly Leadership Advisory Committee, 1996 -2002

Member, Commission on America's National Interests, 1995-2000

Adjunct Scholar, Hudson Institute, 1988-1991

Visiting Fellow, Heritage Foundation, 1988-1991

President's Fellowship, University of Virginia, 1981-1984

Earhart Foundation Fellowship, University of Virginia, 1981-1983

Member, Reagan-Bush Transition Team on the Federal Trade Commission, 1981

Henry Salvatori Award, Claremont Men's College, 1979

Frank W. Taussig Award, American Economic Association, 1978

Publications and Major Presentations

“The Benefits and Costs of I-File,” (with R. Litan and K. Caves) Criterion Economics, LLC,

April 14, 2008

“Irrational Expectations: Can a Regulator Credibly Commit to Removing an Unbundling

Obligation?” (with Hal J. Singer), AEI-Brookings Joint Center Related Publication 07-

28, December 2007

“Due Diligence: Risk Factors in the Frontline Proposal,” Criterion Economics, LLC, June 28,

2007

“The Effects of Providing Universal Service Subsidies to Wireless Carriers” (with K. Caves)

Criterion Economics, LLC, June 13, 2007

“A New Takings Challenge to Access Regulation,” American Bar Association, Section on

Antitrust Law, Communications Industry Committee Newsletter, Spring 2007.

“Assessing the Costs of the Family and Medical Leave Act,” Criterion Economics, LLC,

February 16, 2007


“Improving Public Safety Communications: An Analysis of Alternative Approaches,” (with P.

Cramton, T. Dombrowsky, A. Ingraham, H. Singer) Criterion Economics, LLC,

February 6, 2007

“Sell Globally, Sue Locally: The Growing Perils of Global ‘Dominance,’” Antitrust Section,

Ohio State Bar Association, October 27, 2006

“The Growing Global Perils of ‘Dominance,’” Aspen Summit Conference, August 21, 2006

“Economic and Regulatory Implications of Unregulated Entry in the Canadian Mortgage

Insurance Market,” Criterion Economics, LLC, June 20, 2006

“Telecoms in Turmoil: What We Know and (Mostly) Don’t Know About the Telecom

Marketplace in 2006,” National Regulatory Conference, May 11, 2006

“The FCC’s Further Report on A La Carte Pricing of Cable Television,” (with R. Ludwick) The

CapAnalysis Group, LLC, Washington, DC, March 6, 2006

“Mandatory Unbundling in the U.S.: Lessons Learned the Hard Way,” Telstra Corporation,

November 25, 2005

“The EX-IM Bank’s Proposal to Subsidize the Sale of Semiconductor Manufacturing Equipment

to China: Updated Economic Impact Analysis,” (with J.C. Miller III, R. Ludwick) The

CapAnalysis Group, LLC, Washington, DC, November 2005

“Retransmission Consent and Cable Television Prices,” (with D. Trueheart) The CapAnalysis

Group, LLC, Washington, DC, March 2005

“The EX-IM Bank’s Proposal to Subsidize the Sale of Semiconductor Manufacturing Equipment

to China: An Economic Impact Analysis,” (with J.C. Miller III, R. Ludwick, O. Grawe)

The CapAnalysis Group, LLC, Washington, DC, January 2005.

“Reagan’s Economic Policy Legacy,” (with J.C. Miller III), The Washington Times, August 8,

2004


“Peer-to-Peer Software Providers’ Liability Under Section 5 of the FTC Act,” (with J.C. Miller

III, L. Fales, C. Webb) The CapAnalysis Group, LLC and Howrey LLP, Washington,

DC, April 2004

“Mandatory Unbundling: Bad Policy for Prison Payphones,” (with D. Trueheart, J. Mrozek) The

CapAnalysis Group, LLC, Washington, DC, March 2004

“UNE Rates Do Not Reflect Underlying Costs: A Rebuttal to Ekelund and Ford,” (with J.

Mrozek), January 30, 2004

“Do UNE Rates Reflect Underlying Costs?” (with J. Mrozek) The CapAnalysis Group, LLC,

Washington, DC, December 2003

“Rising Cable TV Rates: Are Programming Costs the Villain?” (with D. Trueheart) The

CapAnalysis Group, LLC, Washington, DC, October 2003

“Do Right by Minority Farmers,” The Washington Times, July 17, 2003

“The Fourth ‘S’: Digital Content and the Future of the IT Sector,” Federal Communications Bar

Association, May 2, 2003

“Economic Implications of the FCC’s UNE Decision: An Event Analysis Study,” (with J.C.

Miller III, P. Lowengrub) The CapAnalysis Group, LLC, Washington, DC, April 2003

“Telecom Deregulation and the Economy: The Impact of ‘UNE-P’ on Jobs, Investment and

Growth” (with T. Lenard) Progress on Point 10.3, The Progress & Freedom Foundation,

January 2003.

“Pruning the Telecom Deadwood,” Washington Times, November 1, 2002

“The Real Telecom Scandal,” Wall Street Journal, September 30, 2002

“Ensuring Privacy’s Post-Attack Survival,” CNET News.com, September 11, 2002

“The CLEC Experiment: Anatomy of a Meltdown,” (with L. Darby and J. Kraemer) Progress on

Point 9.23, The Progress & Freedom Foundation, September 2002

“One Step Closer to 3G Nirvana,” CNET News.com, August 6, 2002


http://news.com.com/2010-1071-957381.html

The Digital Economy Fact Book 2002, (with W. Adkinson Jr. and T. Lenard) The Progress &

Freedom Foundation, August 2002

“Reviving the Tech Sector,” The Washington Times, July 10, 2002

“Restoring IT Sector Growth: The Role of Spectrum Policy in Re-Invigorating ‘The Virtuous

Circle,’” National Telecommunications and Information Administration Spectrum

Summit, April 2, 2002

“The Debate Over Digital Online Content: Understanding the Issues,” (with W. Adkinson, Jr.)

Progress on Point 9.14, The Progress & Freedom Foundation, April 2002

“Electricity Deregulation After Enron,” Progress on Point 9.11, The Progress & Freedom

Foundation, April 2002

Privacy Online: A Report on the Information Practices and Policies of Commercial Web Sites,

(with W. Adkinson, Jr., T. Lenard) The Progress & Freedom Foundation, March 2002

“Profiting From a Meltdown,” The Progress & Freedom Foundation, March 11, 2002

“Watching the Detectives,” The American Spectator, January/February 2002

“Political Privacy: Is Less Information Really Better?” Progress on Point 9.2 , The Progress &

Freedom Foundation, January 2002

“Broadband Chickens in Age of the Internet,” The Washington Times, March 11, 2002

“Can Civil Liberties Survive in a Society Under Surveillance?” Norfolk Virginian-Pilot,

November 18, 2001

“Restoring IT Sector Growth-Why Broadband, Intellectual Property and Other E-Commerce

Issues Are Key to a Robust Economy,” Remarks, August 2001

The Digital Economy Fact Book 2001, (with T. Lenard, S. McGonegal) The Progress &


“Communications Deregulation and FCC Reform: Finishing the Job,” (with R. May), in

Communications Deregulation and FCC Reform: What Comes Next? (ed., with R. May)

Kluwer Academic Publishers and The Progress & Freedom Foundation, 2001


“Microsoft Case: There Are Still Antitrust Laws,” Newport News Daily Press, July 6, 2001

“Dear Diary: There’s Still an Antitrust Law,” Los Angeles Times, June 29, 2001

“Lost in Cyberspace? Does the Bush Administration Get the New Economy?” The American

Spectator, June 2001

“Local Loop: NASDAQ Noose, Al Gore’s Internet Socialism is Choking the Technology

Sector,” The American Spectator, April 2001

“Local Loop, High-Tech Noose,” The American Spectator, March 2001

“Rescue Opportunity at the FCC,” The Washington Times, February 4, 2001

“Does Government Belong in the Telecom Business?” Progress on Point 8.1, The Progress &

Freedom Foundation, January 2001

“Economic Anxieties in High-Tech Sector,” The Washington Times, December 12, 2000

The Digital State 2000, (with T. Lenard) The Progress & Freedom Foundation, September 2000

The Digital Economy Fact Book 2000, (with T. Lenard, S. McGonegal) The Progress &


“Critics Fear Surveillance of Web Surfers Compromising Personal Privacy,” Progress on Point

7.11, The Progress & Freedom Foundation, July 2000

“Access Charges and The Internet: A Primer,” Progress on Point 7.9, The Progress & Freedom

Foundation, June 2000

“The Need for a Practical Theory of Modern Governance,” Progress on Point 7.7, The Progress

& Freedom Foundation, May 2000

“The Microsoft Monopoly: The Facts, the Law and the Remedy,” (with T. Lenard) Progress on

Point 7.4. The Progress & Freedom Foundation, April 2000

“Remarks at the 2000 Global Internet Summit,” March 14, 2000

“Nation’s Conservatives Should Support a Breakup of Microsoft,” The Union Leader & New

Hampshire Sunday News, February 22, 2000


“Regulatory Overkill: Pennsylvania’s Proposal to Breakup Bell Atlantic,” (with C. Eldering, R.

May) Progress on Point 6.13, The Progress & Freedom Foundation, December 1999

Digital New Hampshire: An Economic Factbook, (with R. Frommer, T. Lenard) The Progress &

Freedom Foundation, December 1999

“Benefits Riding on a Breakup,” The Washington Times, November 14, 1999

“Is There a Moore's Law for Bandwidth?” (with C. Eldering, M. Sylla), IEEE Communications

Magazine, October 1999

“The High Cost of Taxing Telecom” Progress on Point 6.6, The Progress & Freedom

Foundation, September 1999

The Digital Economy Fact Book, (with A. Carmel and T. Lenard), The Progress & Freedom

Foundation, August 1999

“Creating the Digital State: A Four Point Program,” Progress on Point 6.4, The Progress &


“How to Recognize a Regulatory Wolf in Free Market Clothing: An Electricity Deregulation

Scorecard,” (with T. Lenard) Progress on Point 6.3, The Progress & Freedom

Foundation, July 1999

Competition, Innovation and the Microsoft Monopoly: Antitrust in the Digital Marketplace, (ed.,

with T. Lenard), Kluwer Academic Publishers, 1999

“Still Wondering What Cyberspace is All About?” Insight on the News, Vol. 15, No. 11, March

22, 1999.

“The Digital State: Remarks on Telecommunications Taxes,” Address Before the Winter

Meeting of the National Governors Association, February 21, 1999

“Computer Industry Flexes Its Muscle,” Intellectual Capital.com, January 28, 1999

“Into the Fray: The Computer Industry Flexes Its Muscle on Bandwidth,” Progress on Point

5.9, The Progress & Freedom Foundation, December 1998


“Surprise: Even in Electricity, the Market Works,” The Progress & Freedom Foundation, Nov.

1998

“The Digital Economy,” Address at the George Mason University Conference on The Old

Dominion and the New Economy, November 1998

“Finally! An ‘Electricity Deregulation’ Bill That Deregulates,” Progress on Point 5.7, The

Progress & Freedom Foundation, October 1998

“A Convergence Strategy for Telecommunications Deregulation,” Address at the United States

Telephone Association’s Large Company Meeting, September 1998

“Time to Junk the Telecom Act,” Investor’s Business Daily, July 23, 1998

“Consumers Win in Mergers,” Denver Post, July 5, 1998

“Microsoft’s Morality Play,” News.com, March 11, 1998

“California Will Soon Be Eating Dust,” Forbes Magazine, August 1997

“Watch Out for Internet Regulation,” The Washington Times, July 9, 1997

“Time to Walk the Walk on Telecom Policy,” Progress on Point 4.3, The Progress & Freedom

Foundation, July 1997

“Ira Magaziner Targets the Internet,” The Washington Times, March 26, 1997

“Revolution -- or Kakumei” Forbes ASAP, December 1996

“Digital Charity,” Intellectual Capital.com, November 28, 1996

“The FCC and the Telecommunications Act of 1996: Putting Competition on Hold?" (with G.

Keyworth), Progress on Point 2.1, The Progress & Freedom Foundation, October 1996

“Forebearance, Self-Certification and Privatization,” (with J. Gattuso, et al) Future Insight No.

3.2, The Progress & Freedom Foundation, May 1996

“Privatizing the Electromagnetic Spectrum,” (with R. Crandall, et al) Future Insight No. 3.1, The

Progress & Freedom Foundation, April 1996

“Broadcast Spectrum: Putting Principles First,” (with R. Crandall et al) Progress on Point 1.9,

The Progress & Freedom Foundation, January 1996


“Those GOP Blockheads Just Don’t Get It; Block Grants Are Merely Another Bogus Solution,”

The Washington Post, September 3, 1995

The People’s Budget, (with E. Dale, et al), Regnery Publishing, 1995

The Telecom Revolution: An American Opportunity, (with G. Keyworth, et al) The Progress &

Freedom Foundation, 1995

“Replace, Don’t Reinvent, HUD,” The Wall Street Journal, May 11, 1995

“How (Not) to Solve the Liability Crisis,” in P. McGuigan, ed., Law, Economics & Civil Justice

Reform: A Reform Agenda for the 1990’s, Free Congress Foundation, 1995

“The Future of Progress,” Future Insight 2.3, The Progress & Freedom Foundation, May 1995

“Poor Substitute,” (with P. du Pont), National Review, December 31, 1994

“American Civilization and the Idea of Progress,” in D. Eberly, ed., Building a Community of

Citizens: Civil Society in the 21st Century, University Press of America, 1994

Readings in Renewing American Civilization, (ed. with S. Hanser) McGraw-Hill, Inc, 1993

America's Fiscal Future 1991: The Federal Budget's Brave New World, Hudson Institute, 1991

“Just Say No To More Drug Clinics,” St. Louis Post-Dispatch, June 14, 1991

“Drug Rehab Funding is No Panacea,” Chicago Tribune, June 7, 1991

Winning the Drug War: New Challenges for the 1990’s, (ed.) The Heritage Foundation,

Washington, DC, 1991

Drug-Free Workplace Policies for Congressional Offices, (ed.) The Heritage Foundation,

Washington, DC, 1991

“Fighting Drugs in Four Countries: Lessons for America?” Backgrounder 790, The Heritage

Foundation, Washington, DC, September 24, 1990

America's Fiscal Future: Controlling the Federal Deficit in the 1990’s, Hudson Institute, 1990

“The Vision Thing, Conservatives Take Aim at the ‘90’s,” Policy Review 52, Spring 1990

“Drug Legalization: Myths vs. Reality,” Heritage Backgrounder 122, The Heritage Foundation,

Washington, DC, January 1990


“How To Ensure A Drug-Free Congressional Office,” The Heritage Foundation, Washington,

DC, January 1990

“A White House Strategy for Deregulation,” in Mandate for Leadership III, The Heritage

Foundation, Washington, DC, 1989

“From George Bush, A Convincing Declaration of War on Drugs,” Executive Memorandum No.

250, The Heritage Foundation, Washington, DC, September 14, 1989

“What States Can Do To Fight The Drug War,” The Washington Times, September 4, 1989

“Winning the Drug War: What the States Can Do,” Heritage Backgrounder 715/S, July 7, 1989

“Congress: Reform or Transform,” (with P. McGuigan) Washington Times, June 12, 1989

“How To Win The War on Drugs: Target The Users,” USA Today, January 1989

“Invest Social Security Surplus in Local Project Bonds,” Wall Street Journal, January 4, 1989

The Five-Year Budget Outlook, Hudson Institute, 1988

“Why America is Losing the Drug War,” Heritage Backgrounder 656, June 9, 1988

“The Government Juggernaut Rolls On,” Wall Street Journal, May 23, 1988

“Selectivity Bias and the Determinants of SAT Scores,” (with A. Behrendt and W. Johnson)

Economics of Education Review 5;4, 1986

“Review of Banking Deregulation and the New Competition in the Financial Services

Industry,” Southern Economic Journal 52;3, January 1986

The Role of Collective Pricing in Auto Insurance, Federal Trade Commission, Bureau of

Economics Staff Study, 1985

“Warranties, Tie-ins, and Efficient Insurance Contracts: A Theory and Three Case Studies,”

(with R. Higgins and W. Shughart II), Research in Law and Economics 6, 1984

“Is Regulatory Relief Enough?” (with Marvin H. Kosters), Regulation 6, March/April 1982

“Regulatory Relief Under Ronald Reagan," (with James C. Miller III), in Wayne Valis, ed., The

Future Under President Reagan, Westport, Conn.: Arlington House, 1981


“Price Competition on the NYSE,” (with James C. Miller III), Regulation 4, Jan./Feb. 1981

Testimony, Government Filings and Expert Reports

In the Matter of Bright House Networks LLC. et al v. Verizon California et al, Federal

Communications Commission File No. EB-08-MD-002, Expert Declaration on Behalf

of Verizon Communications (February 29, 2008)

In the Matter of Review of the Commission’s Program Access Rules and Examination of

Programming

Tying Arrangements, Federal Communications Commission Docket MB 07-198, Reply

Report on Behalf of the Walt Disney Company (February 12, 2008)

In the Matter of Verizon’s 2007 Price Cap Plan for the Provision of Local Telecommunications

Services in the District Of Columbia, District of Columbia Public Service Commission,

Formal Case No. 1057, Rebuttal Testimony (January 31, 2008)

In the Matter of Review of the Commission’s Program Access Rules and Examination of

Programming

Tying Arrangements, Federal Communications Commission Docket MB 07-198, Expert

Report on Behalf of the Walt Disney Company (January 4, 2008)

In the Matter of Verizon’s 2007 Price Cap Plan for the Provision of Local Telecommunications

Services in the District Of Columbia, District of Columbia Public Service Commission,

Formal Case No. 1057, Direct Testimony (December 7, 2007)

In the Matter of the Commission’s Investigation Into Verizon Maryland, Inc.’s Affiliate

Relationships, Maryland Public Service Commission, Case No. 9120, Rebuttal

Testimony (November 19, 2007)

On Petition for a Writ of Certiorari to the United States Court of Appeals for the Ninth Circuit,

Pacific Bell Telephone Company d/b/a AT&T California, et al., Petitioners, v. Linkline

Communications, Inc., et al., Respondents, Brief of Amici Curiae Professors and


Scholars in Law and Economics in Support of the Petitioners (with R. Bork, G. Sidak, et

al) (November 16, 2007)

In the Matter of the Commission’s Investigation Into Verizon Maryland, Inc.’s Affiliate

Relationships, Maryland Public Service Commission, Case No. 9120, Direct Testimony

(October 29, 2007)

Application of Verizon Virginia, Inc. and Verizon South for a Determination that Retail Services

Are Competitive and Deregulating and Detariffing of the Same, State Corporation

Commission of Virginia, Case No. PUC-2007-00008, Rebuttal Report (July 16, 2007)

Testimony on Single Firm Conduct, “Understanding Single-Firm Behavior: Conduct as Related

to Competition,” United States Department of Justice and United States Federal Trade

Commission, Sherman Act Section 2 Joint Hearing (May 8, 2007)

Testimony on Communications, Broadband and U.S. Competitiveness, Before the Committee on

Commerce, Science and Transportation, United State Senate (April 24, 2007)

Application of Verizon Virginia, Inc. and Verizon South for a Determination that Retail Services

Are Competitive and Deregulating and Detariffing of the Same, State Corporation

Commission of Virginia, Case No. PUC-2007-00008, Expert Testimony and Report

(January 17, 2007)

In re: ACLU v. Gonzales, Civil Action No. 98-CV-5591, E.D. Pa., Rebuttal Report (on behalf of

the U.S. Department of Justice) (July 6, 2006)

In re: ACLU v. Gonzales, Civil Action No. 98-CV-5591, E.D. Pa., Expert Report (on behalf of

the U.S. Department of Justice) (May 8, 2006)

In re: Emerging Communications Shareholder Litigation, “The Valuation of Emerging

Communications: An Independent Assessment” (with J. Mrozek and L. Robinson),

Court of Chancery for the State of Delaware (August 2, 2004)


In the Matter of Review of the Commission’s Rules Regarding the Pricing of Unbundled

Network Elements and the Resale of Service by Incumbent Local Exchange Carriers,

WC Docket No. 03-173, Declaration of Jeffrey A. Eisenach and Janusz R. Mrozek,

Federal Communications Commission (December 2003)

In the Matter of Disposition of Down Payments and Pending Applications Won During Auction

No. 35 for Spectrum Formerly Licensed to NextWave Personal Communications, Inc.,

NextWave Power Partners, Inc. and Urban Comm – North Carolina, Inc., Federal

Communications Commission, (October 11, 2002)

In the Matter of Echostar Communications Corporation, General Motors Corporation, and

Hughes Electronics Corporation, Federal Communications Commission (February 4,

2002)

In the Matter of United States v. Microsoft Corp. and New York State v. Microsoft Corp.,

Proposed Final Judgment and Competitive Impact Statement (with T. Lenard), U.S.

Department of Justice, Civil Action No. 98-1232 and 98-1233 (January 28, 2002)

In the Matter of Implementation of Section 11 of the Cable Television Consumer Protection and

Competition Act of 1992 (with R. May), Federal Communications Commission (January

4, 2002)

In the Matter of Request for Comments on Deployment of Broadband Networks and Advanced

Telecommunications (with R. May), National Telecommunications and Information

Administration (December 19, 2001)

In the Matter of Implementation of the Telecommunications Act of 1996, Telecommunications

Carriers’ Use of Customer Proprietary Network Information and Other Consumer

Information; Implementation of the Non-Accounting Safeguards of Sections 271 and 272

of the Communications Act of 1934, As Amended (with T. Lenard and J. Harper),

Federal Communications Commission (November 16, 2001)


In the Matter of Flexibility for Delivery of Communications by Mobile Satellite Service

Providers (with W. Adkinson), Federal Communications Commission (October 22,

2001)

In the Matter of Deployment of Advanced Telecommunications Capability (with R. May),

Federal Communications Commission (October 5, 2001)

In the Matter of Deployment of Advanced Telecommunications Capability (with R. May),

Federal Communications Commission (September 24, 2001)

In the Matter of Nondiscrimination in Distribution of Interactive Television Services Over Cable

(with R. May), Federal Communications Commission (March 19, 2001)

In the Matter of High-Speed Access to the Internet Over Cable and Other Facilities (with R.

May), Federal Communications Commission (December 1, 2000)

Testimony on Federal Communications Commission Reform Before the Committee on

Government Reform, Subcommittee on Government Management, Information and

Technology, United States House of Representatives (October 6, 2000)

In the Matter of Public Interest Obligations of TV Broadcast Licensees (with R. May), Federal

Communications Commission (March 27, 2000)

Testimony on Truth in Billing Legislation Before the Subcommittee on Telecommunications,

Trade and Consumer Protection, Committee on Commerce, United States House of

Representatives (March 9, 2000)

In the Matter of GTE Corporation, Transferor and Bell Atlantic, Transferee for Consent to

Transfer of Control, (with R. May), Federal Communications Commission (February

15, 2000)


Testimony on Reforming Telecommunications Taxes in Virginia, Governor’s Commission on

Information Technology (October 26, 1999)

Testimony on Telecommunications Taxes, Advisory Commission on Electronic Commerce

(September 14, 1999)

In the Matter of GTE Corporation, Transferor and Bell Atlantic, Transferee for Consent to

Transfer of Control, Federal Communications Commission (December 23, 1998)

In the Matter of Inquiry Concerning the Deployment of Advanced Telecommunications

Capability to All Americans in a Reasonable and Timely Fashion, and Possible Steps to

Accelerate Such Deployment Pursuant to Section 706 of the Telecommunications Act of

1996 (with C. Eldering), Federal Communications Commission (September 14, 1998)

Testimony on Section 706 of the Telecommunications Act of 1996 and Related Bandwidth Issues

Before the Subcommittee on Communications Committee on Commerce, Science, and

Transportation, United States Senate (April 22, 1998)

Testimony on the Impact of the Information Revolution on the Legislative Process and the

Structure of Congress Before the Subcommittee on Rules and Organization of the House

of the Committee on Rules, United States House of Representatives (May 24, 1996)

Testimony on Efforts to Restructure the Federal Government Before the Committee on

Governmental Affairs, United States Senate (May 18, 1995)

Testimony on The Role of the Department of Housing and Urban Development and the Crisis in

America’s Cities Before the Committee on Banking and Financial Services, United

States House of Representatives (April 6, 1995)


APPENDIX B: FEDERAL COURT GUIDELINES

I. GUIDELINES FOR EXPERT WITNESSES IN PROCEEDINGS IN THE FEDERAL COURT OF AUSTRALIA

This replaces the Practice Direction on Guidelines for Expert Witnesses in Proceedings

in the Federal Court of Australia issued on 6 June 2007.

Practitioners should give a copy of the following guidelines to any witness they propose

to retain for the purpose of preparing a report or giving evidence in a proceeding as to an

opinion held by the witness that is wholly or substantially based on the specialised knowledge

of the witness (see - Part 3.3 - Opinion of the Evidence Act 1995 (Cth).

M.E.J. BLACK

Chief Justice

5 May 2008

Explanatory Memorandum

The guidelines are not intended to address all aspects of an expert witness’s duties, but

are intended to facilitate the admission of opinion evidence (footnote #1), and to assist experts

to understand in general terms what the Court expects of them. Additionally, it is hoped that the

guidelines will assist individual expert witnesses to avoid the criticism that is sometimes made

(whether rightly or wrongly) that expert witnesses lack objectivity, or have coloured their

evidence in favour of the party calling them.


Ways by which an expert witness giving opinion evidence may avoid criticism of

partiality include ensuring that the report, or other statement of evidence:

(a) is clearly expressed and not argumentative in tone;

(b) is centrally concerned to express an opinion, upon a clearly defined question or

questions, based on the expert’s specialised knowledge;

(c) identifies with precision the factual premises upon which the opinion is based;

(d) explains the process of reasoning by which the expert reached the opinion

expressed in the report;

(e) is confined to the area or areas of the expert’s specialised knowledge; and

(f) identifies any pre-existing relationship (such as that of treating medical

practitioner or a firm’s accountant) between the author of the report, or his or her

firm, company etc, and a party to the litigation.

An expert is not disqualified from giving evidence by reason only of a pre-existing

relationship with the party that proffers the expert as a witness, but the nature of the pre-existing

relationship should be disclosed.

The expert should make it clear whether, and to what extent, the opinion is based on the

personal knowledge of the expert (the factual basis for which might be required to be

established by admissible evidence of the expert or another witness) derived from the ongoing

relationship rather than on factual premises or assumptions provided to the expert by way of

instructions.


All experts need to be aware that if they participate to a significant degree in the process

of formulating and preparing the case of a party, they may find it difficult to maintain

objectivity.

An expert witness does not compromise objectivity by defending, forcefully if

necessary, an opinion based on the expert’s specialised knowledge which is genuinely held but

may do so if the expert is, for example, unwilling to give consideration to alternative factual

premises or is unwilling, where appropriate, to acknowledge recognised differences of opinion

or approach between experts in the relevant discipline.

Some expert evidence is necessarily evaluative in character and, to an extent,

argumentative. Some evidence by economists about the definition of the relevant market in

competition law cases and evidence by anthropologists about the identification of a traditional

society for the purposes of native title applications may be of such a character. The Court has a

discretion to treat essentially argumentative evidence as submission, see Order 10 paragraph

1(2)(j).

The guidelines are, as their title indicates, no more than guidelines. Attempts to apply

them literally in every case may prove unhelpful. In some areas of specialised knowledge and

in some circumstances (eg some aspects of economic evidence in competition law cases) their

literal interpretation may prove unworkable.

The Court expects legal practitioners and experts to work together to ensure that the

guidelines are implemented in a practically sensible way which ensures that they achieve their

intended purpose.


Nothing in the guidelines is intended to require the retention of more than one

expert on the same subject matter – one to assist and one to give evidence. In most cases

this would be wasteful. It is not required by the Guidelines. Expert assistance may be

required in the early identification of the real issues in dispute.

Guidelines

1 General Duty to the Court (footnote #2)

1.1 An expert witness has an overriding duty to assist the Court on matters r relevant to the expert’s area of expertise.

1.2 An expert witness is not an advocate for a party even when giving testimony that is necessarily evaluative rather than inferential (footnote #3).

1.3 An expert witness’s paramount duty is to the Court and not to the person retaining the expert.

2 The Form of the Expert Evidence (footnote #4)

2.1 An expert’s written report must give details of the expert’s qualifications and of the literature or other material used in making the report.

2.2 All assumptions of fact made by the expert should be clearly and fully stated.

2.3 The report should identify and state the qualifications of each person who carried out any tests or experiments upon which the expert relied in compiling the report.

2.4 Where several opinions are provided in the report, the expert should summarise them.

2.5 The expert should give the reasons for each opinion.

2.6 At the end of the report the expert should declare that “[the expert] has made all the inquiries that [the expert] believes are desirable and appropriate and that no matters of significance that [the expert] regards as relevant have, to [the expert’s] knowledge, been withheld from the Court.”

2.7 There should be included in or attached to the report; (i) a statement of the questions or issues that the expert was asked to address; (ii) the factual premises upon which the report proceeds; and (iii) the documents and other materials that the expert has been instructed to consider.

2.8 If, after exchange of reports or at any other stage, an expert witness changes a material opinion, having read another expert’s report or for any other reason, the change should be communicated in a timely manner (through legal representatives) to


each party to whom the expert witness’s report has been provided and, when appropriate, to the Court (footnote #5).

2.9 If an expert’s opinion is not fully researched because the expert considers that insufficient data are available, or for any other reason, this must be stated with an indication that the opinion is no more than a provisional one. Where an expert witness who has prepared a report believes that it may be incomplete or inaccurate without some qualification, that qualification must be stated in the report (footnote #5).

2.10 The expert should make it clear when a particular question or issue falls outside the relevant field of expertise.

2.11 Where an expert’s report refers to photographs, plans, calculations, analyses, measurements, survey reports or other extrinsic matter, these must be provided to the opposite party at the same time as the exchange of reports (footnote #6).

3 Experts’ Conference

3.1 If experts retained by the parties meet at the direction of the Court, it would be improper for an expert to be given, or to accept, instructions not to reach agreement. If, at a meeting directed by the Court, the experts cannot reach agreement about matters of expert opinion, they should specify their reasons for being unable to do so.

footnote #1

As to the distinction between expert opinion evidence and expert assistance see Evans

Deakin Pty Ltd v Sebel Furniture Ltd [2003] FCA 171 per Allsop J at [676].

footnote #2

See rule 35.3 Civil Procedure Rules (UK); see also Lord Woolf “Medics, Lawyers and

the Courts” [1997] 16 CJQ 302 at 313.

footnote #3

See Sampi v State of Western Australia [2005] FCA 777 at [792]-[793], and ACCC v

Liquorland and Woolworths [2006] FCA 826 at [836]-[842]

footnote #4


See rule 35.10 Civil Procedure Rules (UK) and Practice Direction 35 – Experts and

Assessors (UK); HG v the Queen (1999) 197 CLR 414 per Gleeson CJ at [39]-[43]; Ocean

Marine Mutual Insurance Association (Europe) OV v Jetopay Pty Ltd [2000] FCA 1463 (FC) at

[17]-[23]

footnote #5

The “Ikarian Reefer” [1993] 20 FSR 563 at 565

footnote #6

The “Ikarian Reefer” [1993] 20 FSR 563 at 565-566. See also Ormrod “Scientific

Evidence in Court” [1968] Crim LR 240.


APPENDIX C: MATERIALS PROVIDED BY GILBERT + TOBIN

1 Public Version of Telstra’s Response to ACCC Discussion Paper on Telstra’s Exemption Application Relating to SingTel Optus’ HFC Network Submitted on 25 March 2008

2 Optus Submission to Australian Competition and Consumer Commission on Telstra’s December 2007 Exemption Application for Fixed Line Services in the Optus HFC Area, March 2008 (Confidential Version)

3 Optus Supplementary Submission to Australian Competition and Consumer Commission on Telstra’s December 2007 Exemption Application for Fixed Line Services in the Optus HFC Area, May 2008 (Confidential Version)

4 CiC begins CIC ends


APPENDIX D: COMMERCIAL-IN-CONFIDENCE
