Mark Goldberg


www.mhgoldberg.com





Fox Group Dispatch

Incentives matter: Winning the race for ultra-fast broadband

As Canada seeks to develop an innovation agenda, a new report [pdf, 6MB] from the MacDonald Laurier Institute warns Canada to avoid Europe’s state-imposed mandates and top-down regulations that have contributed to underinvestment and poor network quality.

The report, “Winners and Losers in the Global Race for Ultra-Fast Broadband: A cautionary tale from Europe,” was authored by Andrea Renda, who is Senior Research Fellow and Head of the Regulatory Policy Unit at CEPS, the Centre for European Policy Studies. He is also a Senior Fellow at Duke University’s Rethinking Regulation Program, based at the Kenan Institute for Ethics.

MacDonald Laurier Institute says the report “demonstrates Europe’s policy of mandatory network sharing has discouraged investment in the continent’s networks and diminished the positive economic benefits that high-quality networks can enable.”

For example, fibre to the premises coverage is approximately double in the US compared to Europe (23 percent versus 12 percent); and overall next generation access coverage reaches 82 percent in the United States versus 54 percent in Europe. Furthermore, telecommunications revenues are dramatically higher in Australia, the US, Switzerland, Japan, Canada, Iceland, and Norway than in EU nations, which all fall below the OECD average.

It warns that “continuing down the European path could lead to a substantial price to pay in terms of growth and jobs.”

As indicated by Renda’s report, the development of broadband communications creates both challenges and opportunities for policy-makers.

  • How does public policy create the conditions for high-quality broadband infrastructure?
  • How does it ensure market competition and protect consumer interests?
  • And to what extent are these objectives in conflict?

Renda says the tension of these conflicting objectives resulted in many governments mandating “network sharing” where the owners of broadband infrastructure are required to grant access to competitors, particularly in the “narrowband” era of lower capacity networks.

But today’s ultra-fast broadband has become an information superhighway on which users can find all sorts of products and services that run “on top of” the network (so-called “over-the-top” services such as Netflix). These services are what users want when they connect to the broadband network; having 10 alternative identical ways to reach the same slow Internet is not going to add a lot of value to end users, especially if competition stifles incentives to deploy better networks, or to ultimately create products or services that highly depend on network speed.

The study investigates the policies most likely to create conditions for a jurisdiction to win the race for leadership in global ultra-broadband connectivity, with significant economic implications. It observes that the experience from Japan and South Korea suggests “a light regulatory touch can create the conditions for private investment in broadband networks and in turn help to produce the digital networks that can serve as the foundation for innovation, digital adoption, and economic growth.”

On the other hand, the study observes that the European Union has largely applied heavier-handed regulation (originally crafted for the age of legacy copper networks), with very different results. “The main takeaway is that Europe’s policy of mandatory network sharing has discouraged investment in the continent’s networks and diminished the positive economic benefits that high-quality networks can enable.”

While the report discusses the impact of the EU regulatory approach on competition, innovation, and investment with exclusive reference to wireline telecommunications, the author states “many of the findings apply also to wireless.”

“The lesson for the Trudeau government is that heavy-handed telecommunications regulations such as mandatory network sharing can lead to underinvestment in digital networks and in turn undermine its broader goals with regard to innovation and entrepreneurship.”

Enforcing privacy in Canada

Canada’s Office of the Privacy Commissioner has issued its report on the customer information data breach for Ashley Madison discovered in July, 2015. The Privacy Commissioner’s office launched its investigation a month later, under Canada’s Personal Information Protection and Electronic Documents Act (PIPEDA). Canada’s Privacy Commission worked together with Australia’s Information Commission, which also issued an identical report on the findings of the joint investigation.

The Compliance Agreement between the Office of the Privacy Commissioner and Avid Life Media, the owners of Ashley Madison, is considered to be legally binding. The Agreement outlines steps Ashley Madison must take, including:

  • enhancing privacy safeguards;
  • amending information retention practices;
  • improving information accuracy; and,
  • increasing transparency.

Ashley Madison was found to have used a fictitious security trustmark, and concluded that meant individuals’ consent was improperly obtained.

Finally, with respect to transparency, investigators found that at the time of the breach, the home page of the Ashley Madison website included various trustmarks suggesting a high level of security, including a medal icon labelled “trusted security award.” ALM officials later admitted the trustmark was their own fabrication and removed it.

The Privacy Commissioner also identified important lessons for all organizations to consider. The Privacy Commissioner’s website organizes some of the key takeaways from the investigation, using the following headings.

  • General
    • Harm extends beyond financial impacts.
    • Safeguards should be supported by a coherent and adequate governance framework.
  • Safeguards
    • Documentation of privacy and security practices can itself be part of security safeguards.
    • Use multi-factor authentication for remote administrative access.
  • Deletion and Retention
    • There is a high bar associated with charging a fee for deletion.
    • Retention policies should be based on a demonstrable rationale and timeline.
  • Accuracy
    • The level of accuracy required is impacted by the foreseeable consequences of inaccuracy, and should also consider interests of non-users.
  • Transparency
    • False or misleading statements may impact the validity of consent.
    • Omission or lack of clarity of material statements may also impact the validity of consent.

Each of these items is more completely described with a paragraph and links for further information to aid in corporate best practices and compliance with the legislation. Among the more interesting items was the consideration that a lack of email address verification could allow “the creation of a potentially reputation-damaging fake profile for an email address owner.”

Ashley Madison‘s website encourages its members to “find your moment” while the company tries to promote discretion, promising to help its members keep their private life private.

A year after its data breach, the lessons from Ashley Madison need to help other firms ensure that they won’t find their own moment in the spotlight, and keep their customers’ private information private.

Driving costs higher

The CRTC released its 2016 report comparing the price of telecommunications services in Canada to “select foreign jurisdictions.” Among the charts that seemed to attract the most interest from the media was the steady increase in entry level wireless rates in Canada:

Table D.2.1: International Wireless Telephony and Text Messaging Service (PPP-Adjusted CA$)- Level 1: 150 Minutes
Year Canada U.S.A. Australia U.K. France Italy Germany Japan
2008 $32.73 $40.92 $21.96 $26.57 $23.55 n/a n/a n/a
2009 $33.03 $42.51 $19.98 $24.33 $25.37 n/a n/a n/a
2010 $34.03 $40.43 $18.96 $23.31 $26.54 n/a n/a $24.20
2011 $33.73 $33.38 $20.95 $18.64 $26.13 n/a n/a $25.29
2012 $34.32 $33.78 $22.44 $17.21 $24.09 n/a n/a $25.53
2013 $30.71 $33.08 $21.82 $21.97 $20.24 n/a n/a $28.09
2014 $35.70 $30.34 $25.28 $26.46 $20.75 $10.85 $16.68 $28.88
2015 $37.29 $37.04 $25.35 $23.50 $14.26 $12.15 $15.23 $27.23
2016 $41.08 $27.00 $28.19 $20.84 $22.49 $17.70 $17.15 $29.06
CAGR 2.9% -5.1% 3.2% -3.0% -0.6% 12.0% 1.4% 3.1%

Looking at the point of inflection in 2013, I asked in a tweet earlier today, “Does anyone wonder what might have caused entry-level wireless prices to go up?”

In its zeal to appeal to consumers, the government has introduced measures that are actually increasing the cost of your phone service, not decreasing them.

I wrote about some of these a few years ago in a piece called “The cost of regulation“. I thought it might be time for an update.

Here are just some of the measures:

  • Removal of option for 3-year amortization on smartphones: It’s simple math: A $600 subsidy amortized over 2 years is 50% more than a $600 subsidy recovered over three.
  • 15 day trials: Under the Wireless Code, customers can get a new $1000 phone from a wireless carrier store and return it 15 days later, no questions asked. The wireless carrier now is stuck with a used phone that it cannot easily sell and it cannot charge a restocking fee. This adds costs to the carriers that are not incurred by competing retailers.
  • Banning paper bill charges: The government was shown that adoption of electronic billing was an order of magnitude higher in companies that pass on the increased cost of sending paper bills. Phone companies offered exemptions for people without internet, for seniors, and a number of other classes, including people with disabilities and veterans of the Canadian Armed Forces. Paper bills cost more, so your prices went up.
  • Disconnection rules: Under the Wireless Code, the CRTC has dramatically increased the amount of time that a wireless service provider has to continue to provide service to a customer who is not paying. The rules are reminiscent of the disconnection regime from a monopoly wireline world, when the local phone company was the only communications service provider. Is it unnecessarily raising the cost of service?
  • Regulatory proceeding cost awards: The Affordable Access Coalition filed a application for nearly half a million dollars to cover the cost of its participation in the CRTC’s recent Basic Service Obligation proceeding. Open Media asked for $170,000 for the same proceeding. That proceeding is just one of the hearings that attract cost awards, and it appears to be on track to set new records for the level of costs. If approved, these will be charged to all the telephone companies and can be expected to be recovered in your monthly bills.

Frequently, there are unintended consequences to measures that would or should have been predictable if only a bit of serious analysis was undertaken.

The CRTC has launched a proceeding to review the Wireless Code, with submissions due September 26 and an oral hearing in February 2017.

Will groups that represent the public interest seek to relax some of the regulatory measures that drive up costs for consumers?

How resilient are your operations?

A Bloomberg article about the impact of system failures at Delta Airlines earlier this week said “Delta System Failure Marks Wake-Up Call for Airline Industry“.

In fact, I suspect Boards of Directors in every industry, not just the airline industry, are asking their CEOs for an assessment of the risk of their systems having a similar system-wide failure.

The Wall Street Journal is reporting that Delta’s CEO, Ed Bastien, is taking full responsibility for the outage:

Over the past three years, the nation’s No. 2 airline by traffic has spent “hundreds of millions” in upgrades and systems, including $150 million this year alone. Delta earlier this year named a new chief information officer and has brought in new leaders for its information technology and infrastructure team.

“It’s not clear the priorities in our investment have been in the right place,” Mr. Bastian said. “It has caused us to ask a lot of questions which candidly we don’t have a lot of answers for.”

Years ago, I spent a fair bit of time with an external auditor who wanted to understand more about how our network was configured. We talked about risks and ways to mitigate those risks. When negotiating fibre swaps, we looked at detailed maps to ensure that we were really getting improved physical diversity, not sharing the same railroad tracks, bridges, etc. As a result, physical failures from fibre cuts or power outages often have backups to restore service or, at worst, will generally result in a limited, somewhat localized outage.

Software changes often present the most substantial risk, with updates being rolled out system wide over a short period of time. How often have we seen failures arise from software failures that weren’t detected in the labs and did not materialize until subjected to peak traffic loads?

It isn’t enough to spend money on system resilience. Delta shows that money needs to be spent in the right places.

As more devices get connected in the Internet of Things, and with autonomous drones and cars, companies need to take a fresh look at system resilience, understanding the risk of failures and the costs that can arise.

Not every system has to be up all the time. But does your Board understand the cost of failure?

Innovation needs more than just engineering

Sara Diamond, President and Vice-Chancellor of OCAD, and Karel Vredenburg, head of IBM Studios Canada, wrote a piece in the weekend Globe and Mail, entitled “There’s no innovation agenda without design thinking“.

Today, competitive success is determined by the ability to understand human needs and desires and to deliver richly imagined ways of addressing them. Many organizations recognize the importance of innovation, but they don’t know how to achieve it. The answer is design.

Now, of course the head of Ontario’s college of art and design will say that the “answer is design.” But there is merit to considering the need to include the arts, humanities and social sciences together with the typical focus on science, technology, engineering and mathematics.

A few years ago, I wrote “Is your recruiting smart enough?” in which I extolled the virtues of increased diversity in hiring. I recall that at Bell Laboratories, we had geography and music graduates working alongside engineering and mathematics grads as we designed new capabilities for the AT&T long distance network. Our customers weren’t all engineers; we needed to make sure that human factors were part of feature design work, not just engineering elegance. I wrote about how we used to recruit at Bell Labs in a post “A diversity of views“.

We need to do better leveraging the diversity that makes Canada such a great country. Our technology companies need to do a better job hiring from non-traditional areas including the arts, humanities and social sciences. And we should do a better job reading resumes from our military veterans, leveraging their experience and leadership develop under the most trying conditions.

As Diamond and Vredenburg write, “This would be a profoundly Canadian tack, using our creative talent and culturally diverse know-how to effectively address and build markets and ensure a competitive advantage against purely STEM plays in other jurisdictions.”