A consumer’s guide to CRTC rulings on Internet pricing (1)

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I’ve been gathering reactions to last week’s CRTC decisions on wholesale rates for Internet access. My takeaway is a lot of people are having trouble understanding what the hell it all means. So in this series of posts I’m going to provide some plain-language context.

Today, I’m covering broadband competition, and the unusual structure of Canada’s wholesale and retail Internet access market. In the next post, I’ll look at how the CRTC arrives at wholesale costs and what that will mean for your residential bill. Finally, I’m going to focus in the third post on the UBB controversy of two years ago and how that relates to the recent rulings.

A pig in a poke

Communications services play an increasingly important role in our lives. Yet the evidence is that awareness among consumers about what they’re getting when they buy broadband is stunningly low.

In 2010, the FCC conducted a national survey of broadband householdsflying-pig-6  and found 80% of respondents had no idea what broadband speed they were paying their ISP for. More recently, Canada’s Public Interest Advocacy Centre (PIAC) commissioned an online survey that asked respondents this question: “Do you happen to know what the speed of your home Internet service is according to the company that provides your service?” (See “Transparency in Broadband Advertising to Canadian Consumers,” Jan 2013, pdf uploaded here).

Three-quarters (75%) of respondents said I dunno, and I’ll wager many of the remaining 25% were lying to save face.

These figures, and many others in the PIAC study, point to a disturbing reluctance on the part of Canadian consumers to tackle basic product research on their communications services, which together rank as our 6th largest household expenditure. Canadian households now spend $181 a month on communications services, equal to their monthly spending on healthcare. I know people who’ve done way more product research on their toaster oven than on their lifeline to the rest of the planet.

Granted, broadband enabling technologies, market structure and regulation are tougher to understand than your average household appliance. But how exactly did this now-vital service get so murky and complicated?

Competition in broadband

Everybody likes competition, or says they do. It disciplines prices, encourages good service, promotes innovation. The CRTC says our retail broadband market is plenty competitive. The federal regulator has been convinced of this since the late 1990s, when it announced it would not be necessary to regulate broadband thanks to all the competition out there.

There’s plenty of evidence that wasn’t true then and is even less true today. First, that CRTC decree dates back to an era when most of us were still on dialup, not broadband. Second, the five major telcos and cablecos – the “incumbents” – hold a 93% share of the market, with the remainder divided up among scores of mostly very small ISPs. Third, as most Canadians have no real choice of provider apart from the cable guy and the phone company, our market is a duopoloy. Fourth, our prices and speeds suck by comparison with most other developed countries.

As if convinced by these arguments, the CRTC decided to have it both ways. Yes, we have competition, but more wouldn’t hurt. A Harvard-based study group reporting to the FCC once referred to the CRTC’s long-standing ambivalence as “regulatory hesitation” (Berkman Center, Next  Generation Connectivity). Successive chairs – and governments – have never quite managed to decide how vigorously to push for measures that would promote competition.

Twisted-Pair-Cable-UTP

We can blame much of this on the wiring.

coax-3Most homes in Canada have two vital communications links to the outside world. One is the old twisted copper pair that Bell and its fellow travelers put into the ground many decades ago to carry telephone service. The other is the only slightly less pervasive coaxial cable that Rogers, Shaw and other cable companies put in place to carry TV service. These are the incumbents, the guys with the wires in the ground. The CRTC saw this as a good thing. Canada was blessed with plenty of “intermodal” competition, a reference to the battle between the two big technologies that deliver your Internet: the high-speed cable platform (DOCSIS) and the phone company platform (DSL).

distributelUnfortunately, that intermodal thing has translated into an Internet access market that is now almost entirely controlled by the five largest incumbents: Bell, Rogers, Shaw, Telus and Videotron. Or what I referred to above as a duopoly market. Full of good intentions, the CRTC set out to add some options, in the form of independent ISPs, sometimes referred to as new entrants or resellers. These include Acanac, Distributel, TekSavvy and others, most of whom offer landline phone service as well as online access, but not mobile phone service or “cable” TV.

Non-facilities-based competition

Keep in mind that as territorial monopolies, the incumbents never had to worry about anybody else running a wire alongside theirs. That didn’t matter so much in the days of dialup. But it turned out to make a huge difference once we all got onto broadband. Those two wires snaking into your living room have conferred a huge amount of market power on the companies that put them there. This leverage is reflected in a common term for the last mile wiring – bottleneck facilities.

Independent ISPs (IISPs) can’t economically over-build the incumbent infrastructure. Therefore, the only way they can get to your living room is piggy-backing on one of those two existing wires. That policy option is called non-facilities-based competition. The IISPs have to borrow the facilities from the incumbents, especially the last-mile wire into your home. The problem of course is no rational firm is going to willingly lease out space on its wires so Mom and Pop ISP can take away their customers.

Colossus_of_Rhodes-2Regulators in many developed countries accordingly devised what’s known as an “open access” policy under which they oblige the incumbents to lease out parts of their network facilities to new entrants. The upside is the new entrants don’t have to commit millions in capital expenditures, which they don’t have and would never recover. The downside is the incumbents have to help the new entrants use their decades-old wires to take some of their own customers away, thereby creating a huge opportunity for foot-dragging, disputes, appeals and other diversions of exactly the kind that led to last week’s decisions. Most of those decisions were issued as the CRTC’s responses to a number of “review and vary” applications from both the old guard and the new guys. In other words, complaints from all concerned about the way the wholesale regime was set up in 2011.

Wholesale vs retail

Canada’s mandated open access regime created an unusual kind of market for broadband. Like many sectors of the economy, Internet access is divided into wholesale and retail segments. But with a big difference. The access wholesalers – the incumbent telcos and cablecos – are also retailers, and they have a strong and highly valued marketing and billing relationship with their end-users.

The new entrants are given a tricky row to hoe. They have to lease access to incumbent facilities at a wholesale rate low enough so they can mark up that rate high enough to cover all their costs and make some contribution to profit. At the same time, they need to keep the marked-up retail price low enough to make their offer at least as compelling as what Bell or Rogers is offering.

Ideally, the IISPs also want to be able to differentiate themselves in other ways – like offering tiers that have much higher, or no, data caps. These caps are the financial tools that implement “usage-based billing” or UBB, a service plan that punishes you financially for consuming more than a fixed monthly allowance of data transfers. We’ll get back to what happened to all the fuss that occurred a couple of years ago on the UBB file – including why the CRTC itself thought it was good idea to discourage Canadians from using the Internet (true story!).

Secret costs

This dysfunctional but unavoidable system gives the incumbents both the opportunity andtaximeter the incentive to attack anyone who tries to compete with them in either the retail access market, or the retail content market, like conventional TV or video on demand. Since the CRTC judged unsurprisingly that the incumbents would abuse their market power in selling wholesale access to tiny competitors, it elected to regulate wholesale access. The resulting prices are known as “tariffed rates,” much like what shows on the meter of a licensed taxi cab.

Unlike taxi fares, however, the wholesale rates are based on costing studies whose complexity rivals the designs for a space ship. On top of that, the costs the incumbents report to the CRTC are considered too sensitive to be scrutinized by third-parties, so they’re kept locked up in the Top Secret filing cabinet, leaving us to trust the regulator will do the right thing.

In the next post, I’ll look at the wholesale picture from two different angles:

  • why the CRTC changed the way it determines tariffed wholesale rates;
  • why it also changed the amounts of those rates as applied to each of the incumbents.

D.E.

2 thoughts on “A consumer’s guide to CRTC rulings on Internet pricing (1)

  1. Ben – No, the rules have not produced much competition, no argument there.

    The only list I recall seeing of the indies is on the Openmedia.ca “switch” page – and I note TekSavvy is the only one listed for your province. I can call Marc Gaudrault and ask if he knows of any really good ISPs out there ^_^

    DE

  2. I’d be interested to see a list of all the “IISPs” by province in Canada. I know we don’t have any companies renting wholesale access to incumbent local loops here in Manitoba – in Winnipeg, for wired access, you as a consumer have a choice between MTS or Shaw.

    The wholesale pricing rules are supposed to result in competition – but I don’t see that happening in reality other than a handful of token examples. T(eksavvy being the only one that comes to mind.)

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