Now playing at the CRTC: your precarious future on the Internet

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If the Competition Bureau is too short of “facts” on Canadian broadband to advise regulation, as it told the CRTC, here’s a start (source: Open Technology Institute).

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THIS week’s CRTC hearing, launched in October 2013, will cover the changing market in Canada for wholesale wireline telecommunications services, including Internet access. The Commission is hearing arguments as to whether any of its existing policies on wireline services should be eliminated or updated. The biggest bone of contention will involve the treatment of fiberoptic delivery platforms. New entrant ISPs want the Commission to guarantee wholesale access to these next-generation platforms. Deciding in their favor would be an important barometer of the health of Canadian broadband, but that goal is far from a sure thing. Meanwhile, recent data on broadband in 24 cities around the globe, compiled by the Open Technology Institute (OTI), shows once again how terrible the prices and speeds are here in Toronto.

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In my previous post on Barack Obama’s stunning pronouncement on open Internet policy, I misrepresented what the CRTC is up to these days. I claimed the CRTC is fiddling over the fate of broadcast television with few signs it’s prepared to address the much more important problems of broadband availability, high prices, slow speeds and unaccountable service.”

Not exactly. First, the CRTC recently finished a proceeding on the wholesale market for mobile wireless services. Second, this week features the hearings phase of a proceeding launched in the fall of 2013 that tackles many of the same policy problems on the wireline side. While the scope is all wholesale telecomm services, what really counts here is the Internet access market.

Thanks to the usual tumultuous changes in technology, markets and business models, the Commission has set itself an obscure but potentially far-reaching task (Telecom Notice of Consultation CRTC 2013-551, pdf uploaded here):

“The Commission initiates a proceeding to review the regulatory status of wholesale services and their associated policies, including the wholesale services framework, wholesale service pricing, and the appropriateness of mandating new wholesale services, including fibre-to-the-premises facilities. The purpose of wholesale services is to facilitate competition in retail markets to provide Canadians with increased choice.”

Why the CRTC regulates wholesale Internet access

It may not be clear as to why wholesale services should exist to make retail markets competitive. (Ironically, one of the least convincing arguments made by the incumbents during the wholesale wireless proceeding was that the wholesale arrangements they make with the smaller carriers like Wind have no effect on the health of the retail market for wireless.)

What the Commission means is that it regulates the wholesale market for some telecom services while leaving the retail market unregulated and does so in a way that will encourage retail competition indirectly. That’s exactly how residential broadband is treated in Canada. Since the big ISPs can in theory charge whatever they like for retail Internet access, the Commission has only one tool at its disposal to promote competition and other public policy objectives. It mandates open access to the networks of the incumbent carriers on behalf of new entrants, i.e. competitive ISPs like TekSavvy, Acanac, Distributel and so on. (The five big ISPs are the incumbents: Bell, Rogers, Shaw, Telus and Vidéotron.)

Thus, for the last 20 years, the Commission has required that the incumbent ISPs lease out their facilities at wholesale to their smaller competitors on a tariffed basis, meaning the wholesale rates are regulated. That policy is what allows TekSavvy to sell Internet access, since building all the infrastructure it would otherwise require would be impossibly expensive and wasteful.

If you have DSL from TekSavvy, it reaches you on the old twisted copper pair lines installed years ago by Bell when it was the monopoly phone provider. If you have TekSavvy’s hi-speed cable, it uses the coax installed and maintained by Rogers (and in some instances, Cogeco). This regime is known as service-based or non-facilities-based competition. Without it, it’s highly unlikely TekSavvy would be in a position to offer better prices and service than Bell or Rogers (see my recent post – “Rogers loses a sub” – for detailed comparisons of actual rates and terms).

Regulation vs competition and investment

The incumbents hate this arrangement and will tell anyone who listens that Canada doesn’t need mandated access any more. After all, they say, we have plenty of competition already – and besides, if you regulate us too much, we’ll get really mad and threaten to stop investing. The evidence shows the incumbents are dead wrong on both points. First, our five incumbent ISPs still control over 90% of the broadband access market across Canada, according to the CRTC’s data – not exactly a sign of sustainable competition. What little competition we do have is what’s known as “intermodal” – a reference to competition between the two major technical platforms, telco DSL and hi-speed cable. No serious observer would claim that this duopoly market provides real choice to consumers, disciplines prices or promotes innovation.

As for risks to investment, the threat to withhold capex from network development is usually brandished as a kind of axiom not requiring any real evidence. Derek Turner of Free Press has assembled some excellent data showing that investment in network infrastructure by the US incumbents actually rose during periods of “heavy-handed” regulation, as a Republican would say. Yet even if that argument is open to attack under the particular conditions of the Canadian market, my colleagues Reza Rajabiun and Catherine Middleton of Ryerson University have debunked the assumption that more investment produces more and better networks. And since the Commission’s goal is ultimately to promote better networks, they would do well to treat big investment numbers with caution.

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(Source: OECD, June 2013)

As Reza pointed out yesterday in a terrific appearance at the CRTC public hearing in Gatineau, the most damning counter-argument about the benefits of investment in Canada lies in the state of fiberoptic deployment. Across the whole retail broadband market in Canada, fiberoptic platforms account for barely over 2% of network connections, as my doctored chart above demonstrates. The average penetration in the OECD, by contrast, is nearly 16% (OECD spreadsheet uploaded here). Our incumbents have been left alone for many years to deploy fiber or not, and apparently that’s the best they can do. (Fiber platforms are usually divided into two main classes: fiber to the node or FTTN, and fiber to the home or FTTH. The latter is much faster but more expensive to deploy.)

What’s holding them back, since it’s obviously not the CRTC? Financial data cited by Reza at the hearing yesterday indicates the incumbents are too busy enjoying the free cashflow provided by their legacy networks to get serious about fiber. Why give up the money when customers who might want fiber have nowhere else to go? I would also argue that the incumbents are frightened by the prospect of not having either congestion or data caps as weapons with which to manipulate the retail market, as both of these are likely to disappear as access speeds approach one gigabit.

The Competition Bureau: “Give us no facts and we’ll give you no answers”

None of what I’ve just said prevented two reps speaking for the Competition Bureau from giving the Commission panel advice so evasive and bumbling they had the commissioners squirming and grimacing.

The Bureau was up first Monday morning. I can’t remember a more incompetent, unhelpful set of positions as those contained in the Bureau’s filings and oral presentation. To the chagrin of the open Internet community, their overall position is that the Commission must get out of the mandated wholesale access business and refrain from any interference with the fiber market. Why? Because we have to wait for the facts; once we have the facts we’ll make “the right decisions” – which includes most importantly not deincentivizing investment. And those facts, in the CB’s estimation, will be pretty much confined to consumer switching behavior, as between legacy platforms and next-gen fiber, which will apparently be decided by rational market actors when they bolt from their existing ISP after “small but significant” rises in the prices they pay. Meanwhile, throughout this whole performance, the economist and lawyer in question made not a single reference to fiberoptic technology as it exists today, how it has been deployed in other advanced economies or why it will eventually replace DSL.

The Commission panel was visibly upset that the two intervenors refused to commit to an answer on anything, including whether they thought in principle it would be better policy to sacrifice the welfare of the smaller ISPs by doing away with regulation or, alternatively, to sacrifice the welfare of investors in incumbent network development. Even this panel of ever-cautious regulators was stymied by the idea that having no policy on next-gen networks for some indefinite period would be better for the public interest than a policy based on looking into the future of networks. With geniuses like this looking after the health of our economy, it’s no wonder our telecom markets are so anti-competitive.

Yes, we do have some facts pointing to better options than no policy at all

The open Internet community is cautiously hopeful that the Commission will listen to reason and not roll back the mandated wholesale framework. What is much less certain is whether the Commission will expand this regime to cover fiberoptic delivery platforms. 

The eccentric views of the Competition Bureau notwithstanding, we have plenty of facts about Canadian broadband the CRTC would do well to consider in its deliberations. Last month the Open Technology Institute, an initiative of the New America Foundation, published exactly the kind of data that highlights the crying need for regulating wholesale Internet access in Canada.

OTI details coming up next – sneak preview below

D.E.

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