Mark Goldberg


www.mhgoldberg.com






Where do you think the money comes from?

The CRTC’s decision earlier this week set final wholesale rates for broadband internet access services, a proceeding that has been dragging on since interim rates were set in 2016. The CRTC’s final rates are up to 77% lower than the interim rates, and retroactive adjustments could cost carriers close to a third of a billion dollars.

Bell responded, indicating that the retroactive payments will have impacts of up to $100M and will result in cutting back on capital investment in rural markets. A news story in Cartt.ca indicates that Minister Bains is “‘disappointed’ but believes others will step up as incumbents pull back from network investment”.

Bell’s announcement referred specifically to its plans for Wireless Home Internet, a program that had aimed to offer wireless broadband to up to 1.2M households. As a result of the CRTC’s decision, Bell said it needed “to scale back Wireless Home Internet rollout in smaller towns and rural communities by approximately 20%”. As Cartt.ca observed, other carriers have similarly indicated that there would be impacts on capital investment programs.

Although the Minister may be disappointed, one has to wonder where people thought the money would come from. With a material impact on cash, there has to be a reassessment of budgets inside all of the companies. Put yourself in the shoes of the Chief Financial Officer and you have to find $100M. What choices do you have? You would look at various lines in the budget and find projects with the lowest return on investment.

There are always some projects with better returns on investment than others; some areas that have more marginal business cases. Bell’s announcement appears to be indicating that 20% of its Wireless Home Internet program had lower potential returns and that it would be the best source for funding the CRTC order.

Rural broadband, even using wireless technology, has a lower return on investment, almost by definition. After all, if it had a strong business case, then we would see all sorts of service providers fighting over that space. Instead, the business case is typically so poor that the government has had to give away billions of dollars in incentives to get service providers to build and operate rural networks.

In the case of the projects that are being impacted by this week’s CRTC decision, there was no direct government money other than an accelerated investment incentive – basically a faster capital tax write-off. So, the Minister may be hopeful that “others will step up as the ‘incumbents’ pull back from network investment,” but it is far more likely that the business cases for many communities won’t work any better for smaller players than for the major carriers. If there was a strong business case for smaller players to build in these communities, wouldn’t those networks have been built already?

Those rural areas may find that they have to wait for the next wave of government broadband funding programs. At the end of the day, that may end up being the answer to where the money comes from.

Examining the digital income divide

The Association of Community Organizations for Reform Now, ACORN Canada, released a study [“Barriers to Digital Equality in Canada“] that aims to “shine a light on the urgent need to tackle [the] barriers to ensure equal access to digital opportunities.”

This is a theme that I have discussed frequently on these pages for more than a decade. Government programs have distributed billions of dollars to expand broadband networks based on geographic considerations, without regard to affordability. Typically, we have seen funding focused on expanding supply rather than addressing demand, through efforts aimed at affordability or digital literacy. See these posts for example:

Unfortunately, the ACORN study fell short of its objective. In its Introduction, the study cites a government statistic that says “Almost half of households with an annual income of $30,000 or less do not have high-speed internet access.” But ACORN conducted its own survey of 472 respondents and found 80% of those with household incomes of less than $30,000 had an internet connection. Either the government statistic is out of date or ACORN’s survey is not representative, or both. I suspect it is both. Statistics Canada data shows that 89% of Canadian households had an internet connection by year-end 2017. The data point of roughly 50% of low income households lacking a connection is very old – it was reported by Statistics Canada in its “Daily” on May 25, 2011, reporting on the results of the Canadian Internet Use Survey.

The Connecting Families initiative, a program funded entirely by the telecommunications industry, has gone a long way in helping to get affordable computers and broadband connections into low income households with school-aged children, thanks to the driving by leadership at TELUS and Rogers. This was always my first target: helping to bridge what FCC Commissioner Jessica Rosenworcel has termed the Homework Gap.

Frankly, I was disappointed with the quality of the ACORN research study. There is not a very big difference between the 80% adoption rate among low income households in the ACORN study and the current 89% adoption rate among all Canadian households. How does this “shine a light on the urgent need to tackle … barriers to ensure equal access to digital opportunities”? I have no doubt that there is a problem; I am not persuaded that ACORN has illuminated the subject.

We need to understand the factors that are inhibiting universal broadband adoption. That will require more research, improved data and increased dialog among stakeholders. Canada’s Internet Registry Authority (CIRA) apparently supported the development of the ACORN report through its Community Investment Program. Perhaps CIRA should consider commissioning better quality research on its own, to contribute to the development of policies that further its objective “to build a better online Canada.”

An expectation, backed by a threat

On Friday, the CRTC issued a letter to wireless service providers (WSPs), warning them that it “expects that all WSPs cease offering device financing plans on terms longer than 24 months until the Commission has had an opportunity to complete a full review of the practice.”

Although the letter is not an actual Order, it is signed by the Secretary General, representing a letter from the Commission (as contrasted with a staff opinion), and the letter includes a sharp warning:

Should the Commission determine that the device financing plans at issue, including those that have a term greater than 24 months, are non-compliant with the Wireless Code, it may issue a mandatory order prohibiting certain WSPs from offering these plans. In accordance with section 72.001 of the Telecommunications Act, the Commission may also impose on WSPs AMPs of up to $10,000,000 for every contravention of the Wireless Code, and up to $15,000,000 for every subsequent contravention.

This is a Commission expectation that we expect will be treated like an Order. The potential penalty for defiance is set out in plain language, up to $15M for “every contravention.”

The Commission is of the preliminary view that certain device financing plans may create a new barrier for customers to take advantage of competitive offers in the market. In particular, customers, who may benefit in the immediate term from lower monthly costs related to their devices, appear to be asked to accept terms and conditions that may require them to stay with their current WSP past the end of their wireless service commitment period.

Let’s look at this section of the CRTC letter in a little more detail. The CRTC is acknowledging that these newly forbidden plans provided a “benefit in the immediate term from lower monthly costs related to their devices”. Consumers were benefiting. What was wrong? Well, the CRTC says that the consumers appear to be asked to stay with their service provider beyond the 24 month maximum set out in the Wireless Code. If this is the concern, we seem to be about 23 months away from the first problems emerging. If consumers aren’t happy with the early termination fees associated with the new plans, don’t they already have recourse through the Commission for Complaints for Telecom-Television Services?

It can be argued that the Commission’s letter was premature; the CRTC should have allowed the marketplace to work, intervening only when there is a failure. Zero percent financing is consumer-friendly for every income bracket.

As a matter of national policy, shouldn’t we be looking for ways to make advanced devices more accessible to a wider demographic? In the CRTC’s upcoming “full review” of the device financing plans, what kind of data will be produced to understand the type of people who choose longer term financing plans? Groups claiming to represent consumer interests should be prepared to demonstrate public support for policy positions that favour shorter terms and the resultant higher monthly payments.

A few weeks ago, I wrote a post called “Increasing consumer choice” that concluded “if the Wireless Code prohibits these kinds of choices, then maybe it’s the Code that needs changing, not the option of such innovative consumer pricing plans.”

I continue to hold that view.

Retooling Rewheel’s reports

A report by a Managing Director at NERA Economic Consulting says policy makers and regulators should ignore the Digital Fuel Monitor, an international mobile pricing study regularly published by Finland’s Rewheel Research. According to the new report, there is no “simple fix” for the Digital Fuel Monitor; it needs “a complete redesign of the study’s methodology.”

The Digital Fuel Monitor, published regularly for the past 5 years, is somewhat simplistic (eg. “how many 4G gigabytes will €30 buy”) and many industry observers rely on the abbreviated ‘public’ version of the study. Most have likely never examined the complete report in detail.

Each time Rewheel releases its studies, I have found them to be problematic, especially with some of the conclusions that don’t seem to follow from the methodology of the study. Among other problems, Rewheel’s studies are premised on the overly simplistic belief that low prices are the sole indicator of competitiveness of mobile markets as stated succinctly in a 2017 tweet:

Its statement at the time was in response to a posting from Verizon that pointed to other key indicators of competition: “falling prices, exploding demand, significant investment, boundless consumer choice and innovation.”

The report by Dr. Christian Dippon, Chair of NERA’s Global Energy, Environment, Communications & Infrastructure Practice, challenges the study methodology and conclusions drawn by Rewheel. “Oversimplified and Misleading International Price Comparisons Must Not Guide Policy and Regulatory Decisions” concludes that Rewheel’s report is a “simplistic ranking exercise that assumes away the complexities of an international comparison by treating all plans, networks, and countries as identical. This apples-to-oranges comparison offers no economic insights, and governmental agencies cannot use it as the basis for proper regulatory and policy decisions.”

The report, commissioned by TELUS, takes the reader through what Dr. Dippon calls fundamental and fatal flaws in Rewheel’s approach:

Rewheel’s methodology:

  1. ignores all plan differences except the monthly data allowance;
  2. ignores all network quality and country cost differences;
  3. distorts its results by omitting the most popular plans, including family and prepaid plans;
  4. ignores several price elements including multiple plan requirements and activation fees;
  5. fails to adjust for PPP; and
  6. includes VAT.

Dr. Dippon demonstrates the fallacy of using price as the sole measure of comeptitiveness by examining Rewheel’s assertions about its home market, Finland.

Rewheel presents Finland as one of the cheapest and most competitive countries in its 41 study countries. Rewheel bases this conclusion on its understanding that Finland offers unlimited data at €25, ahead of most other countries. Rewheel’s own data, however, demonstrate that the average Finnish subscriber does not demand unlimited data. Instead, Rewheel reports that the average Finnish subscriber demands 23.8 GB of data per month, which Rewheel reports costs €25. At this average Finnish demand level, Finland is by far not the cheapest country because Austria, Australia, Romania, Ireland, Slovenia, Sweden, the United Kingdom, Israel, Poland, France, and the Netherlands all offer plans that meet and/or exceed the average Finnish demand level of 23.8 GB with price points cheaper than €25.

Among the other problems discussed by Dr. Dippon is what he terms a failure by Rewheel to consider overall consumer expenditures. For example, Austria has 1.7 mobile subscriptions per person; Canada has 0.865. “By focusing exclusively on the price of a single plan, the Rewheel study fails to recognize that in many of its study countries consumers purchase more than one plan and thus spend more on mobile wireless service per month.”

Specific to Canada, Dr. Dippon points out that “Canada is home to some of the fastest and most advanced wireless networks in the world. Yet, based on its simplistic ranking exercise, Rewheel labels that country [Canada] as noncompetitive and laggard.”

Dr. Dippon points out the contradiction: “Quite simply, a market cannot both be noncompetitive and offer some of the best mobile wireless services in the world.”

The report is an important critique by a recognized authority in regulatory economics, confirming my long-held view that there are problems with Rewheel’s studies. It merits a close read by Canada’s regulators and policy makers.

Increasing consumer choice

Over the past few weeks, new mobile plans have been met with mixed reviews.

The major carriers launched mobile data services plans that remove the fear of ‘overage’ charges, slowing down access speeds after the subscriber reaches the monthly tier maximum; these plans are being reviewed by the regulator to determine compliance with the CRTC’s network neutrality framework.

In a recent article (“Will net neutrality force the CRTC kill the new $75 wireless plans?“), Cartt.ca observed that the CRTC asked carriers to justify the plans compliance:

Address, with rationale and data, why these practices should not be considered to amount to blocking the delivery of content or Internet traffic to an end-user. Your answer should include information to explain, for example, how the reduced speed does not cause degradation to the service to such an extent that it would amount to controlling the content and influencing the meaning and purpose of the telecommunications in question.

Earlier this week, Rogers announced new financing plans “allowing customers to choose either 24- or 36-month $0 down and interest free options.” Critics quickly denounced the 36-month option, charging that the plan violates the early termination rules set out in the CRTC’s Wireless Code. One industry critic denounced the plan saying “People who can’t afford a down payment shouldn’t be financing the latest iPhone.”

The new plans provide new options for consumers to manage their monthly bills, enabling them to access the latest devices with no money down and lower monthly payments.

As I wrote on Twitter earlier this week, if the Wireless Code prohibits these kinds of choices, then maybe it’s the Code that needs changing, not the option of such innovative consumer pricing plans.