One of the key points of .AU has been, in my experience, that it is held 
as something you need to earn by Joe public.
i.e. Generally speaking "Joe" has certain rights (real or imagined) if 
he has the business name and conduct business under that name, he will 
be seen as having a right to the name in question over and above someone 
who doesn't fit that description.

This perception has been mentioned to me by many clients looking to 
start a web site for their business, in other words the marketing for 
.AU has 'educated' them on the security of a .AU name. Until this thread 
I have never felt hypocritical in agreeing with the spirit of their 
belief. It sounds like the death knell for .AU's prominence, and I think 
if this becomes more wide spread then the false security people feel in 
.AU will crumble. Surely we don't want the this to be a situation where 
it's just another domain name?

As a related example...
My understanding of copyright law, in some trades, is that you need to 
change something by 30% in form or content in order to be considered 
outside the protection of the copyright. Change it by 29% and you're in 
breach. This was true when we altered our first house plans, and is true 
in regards to many forms of artwork, though not all. If the spirit of 
that same principal were brought into this, then they would need to 
change more than just one letter in order to register a potential 
competitor site, while not even being in the competitor's field.

I'll keep my fingers crossed, though I won't hold my breath.