Setting expectations

For the past couple years, I have frequently referred to the tension between the government’s telecom policy objectives, balancing quality, coverage and price. Think of it as a three legged stool. All three legs – Quality, Coverage, and Price – must be maintained in some form of balance to achieve stability in the marketplace.

Last September, in “Yes, it’s time to reboot Canada’s digital agenda”, I wrote that Cabinet’s determination in its review of the CRTC’s August 2019 Wholesale Internet rates was consistent with its stated policy priorities when it expressed concern “that these rates may undermine investment in high-quality networks, particularly in rural and remote areas.” I wrote:

as should be evident to most Canadians over the past 6 months, the pandemic has helped elevate awareness in the importance of Quality and Coverage, the other two legs of the Minister’s priorities. The government called for improving the balance to preserve incentives for investment, the key input to ensure Canadians have access to world leading network quality, covering urban and rural areas.

Cabinet was right to be concerned.

Last August, I prepared a bried tutorial on “The economics of broadband expansion”. There exists a boundary that defines the digital divide: where the total expected revenues from wholesale and retail services are unable to support traditional investment in infrastructure. On one side of the boundary, usually the more urban side, the private sector can line up investors willing to support broadband expansion. On the other side of the boundary, the more rural side, a different approach is required. The households on the other side of the line are candidates for government rural subsidy programs.

What happens if wholesale rates are lowered by a regulatory decision? The total expected revenues for the project logically drop and the result is that more homes end up on the wrong side of the digital divide. More homes are left having to wait for government rural broadband funding; total government funding would have to increase.

Cabinet understood this logical progression. Cabinet told the industry – and the regulator – “Incentives for ongoing investment, particularly to foster enhanced connectivity for those who are unserved or underserved, are a critical objective of the overall policies governing telecommunications, including these wholesale rates.”

As we saw in the C.D. Howe communique last week, “the federal government must provide facilities-based providers will a clear and predictable regulatory framework that coherently balances vigorous price competition with incentives for ongoing investment to improve network and service quality.”

CRTC figures show that the major facilities-based carriers in Canada invest nearly $10B per year in wireline capital, contrasted with just $50M (0.5%) invested by the wholesale services based ISPs.

Simply put, extending the reach of broadband networks (the Coverage leg) requires massive levels of investment, as does the need to maintain Canada’s leadership in the Quality of our networks (Canada’s wireless and wireline networks are consistently rated among the world’s fastest). Government rural broadband funds are simply unable to replicate the investment capacity of the private sector.

The Court appeals looked at very narrow issues of law and jurisdiction, as stated by the Court at paragraph 23:

[23] Significantly, neither section 62 nor subsection 12(1) circumscribe the types of questions that may be raised before the CRTC or the Governor in Council. This stands in contradistinction to the prescription in subsection 64(1) that limits this Court to reviewing questions of law or jurisdiction.

For that reason, no one should expect the Courts’ rulings to be harbingers of the outcome of the CRTC’s review of wholesale rates. The CRTC’s scope is much more broad than that undertaken by the Courts, and must carefully consider the policy considerations set out by Cabinet and the legislative framework under which it operates. The message from Cabinet was very clear: “Canada’s future depends on connectivity.”

If Canada’s future depends on connectivity, the corollary is certainly that Canada’s connectivity future depends on billions of dollars of continued private sector investment. We can expect CRTC to keep this in focus in how it makes determinations in both of the key proceedings under review at this time: wireless services and wholesale internet rates.

Canada’s future depends on connectivity.

#CTS21: Save the Date

With hope for a return to some semblance of normality, preliminary planning has begun for The 20th Annual Canadian Telecom Summit. This year’s event will take place November 15 to 17, 2021. Organizers are planning a hybrid format, enabling online participation as well as in-person attendance at the International Centre near Toronto’s Pearson Airport.

For 3 full days, The Canadian Telecom Summit delivers thought-provoking presentations from the thought leaders of the industry. This is your chance to hear from and talk with them in both a structured atmosphere of frank discussion and high-octane idea exchange and networking in a more relaxed social setting of genial conversation.

Mark the dates into your calendar: November 15 – 17, 2021

Sign up for conference updates.

The 2021 Canadian Telecom Summit.

Telecom investments as a key to future prosperity

Investment in the telecommunications sector is vital for ensuring Canada’s next generation digital infrastructure. Reliable and leading-edge infrastructure has been seen as essential, thanks to a pandemic-driven shift to remote work and digital services. These are just two of the conclusions drawn from a new report [pdf, 331KB] released last week by the Telecommunications Working Group of the C.D. Howe Institute.

The Telecommunications Working Group identifies policy challenges facing Canada’s telecommunications sector. The group is composed of experts from the private sector and academia. It is co-chaired by Len Waverman, Dean of DeGroote School of Business at McMaster University and Steve Orsini, Adjunct Professor, Public Policy & Administration, Carleton University and President and CEO of the Council of Ontario Universities.

The Telecommunications Policy Working Group was established by C. D. Howe Institute to identify and distill policy directions on strategic questions facing Canadian telecommunications concerning: vigorous competition for competitive pricing and high-quality telecommunications services; investment in next generation infrastructure; and inclusive access to telecommunications services and participation in the digital economy. “Broadly, the Working Group believes governments must focus on regulatory clarity, timeliness, and stability to ensure greater investments in critically needed infrastructure.”

The report leads with 4 key conclusions:

  • Action by governments is urgently needed to ensure that public policy and the regulatory framework encourage deployment of the next generation of telecommunications infrastructure for Canada to remain competitive in an increasingly digitally mediated global economy.
  • Government policy should support sustainable competition that will ensure that Canadians and Canadian businesses have choice with respect to their telecommunication services in all regions of the country.
  • Infrastructure investment by Canadian telecommunications providers outpaces that of their peers internationally. Return on capital is in line with global peers when adjusting for capital intensity.
  • Facilities-based providers build the essential infrastructure necessary to deliver telecommunications services. Regulatory certainty, jurisdictional disentanglement and predictable policy is essential for long-term investments and sustainable competition in such a capital-intensive sector.

The report highlights the need for telecom sector investment as a key takeaway: “The current cross-roads for Canada’s telecommunications sector and the economic imperative for expedient deployment of next generation digital infrastructure requires decisive government action to resolve pressing policy challenges. In particular, the federal government must provide facilities-based providers will a clear and predictable regulatory framework that coherently balances vigorous price competition with incentives for ongoing investment to improve network and service quality.”

The communiqué highlights CRTC data that shows the lopsided nature of investment by industry participants. “Resellers make comparably negligible aggregate investments in telecommunications infrastructure: for example, resellers invested $50 million in capital expenditures in 2018, compared with $5.7 billion spent by incumbents and $3.9 billion spent by facilities-based providers.” Fifty million is just 0.5% of the total investment. No wonder some executives in the reseller community have trouble understanding the need for higher EBITDA margins to support the higher levels of investment by Canada’s facilities-based industry participants. Substantial EBITDA margins are needed for businesses with substantial levels of investment.

Analysis by Boston Consulting Group’s Centre for Canada’s Future found that, over the 2005-to-2015 period, Canadian telecommunications infrastructure investment was US$255 per capita compared to an average of US$156 across the OECD, with Canadian per capita investment exceeding all other members of the G7. BCG also observes that, while Canadian telecommunications providers achieve higher earned margins relative to revenue, return on capital is in line with global peers when adjusting for their greater capital intensity. Specifically, while Canadian providers generated higher EBITDA/revenue than those in other OECD countries over 2016-18, their return on capital invested (ROCE) was equivalent with their peers.

According to the report, future communiqués from the Telecommunications Working Group will address specific policy recommendations regarding rate-setting for mandated access and for MVNOs, the framework and timeliness for allocating spectrum, and how to streamline federal and provincial programs and clarify jurisdiction.

In the early days of the COVID-19 pandemic, I wrote about a few of the reports related to telecommunications that emerged from the C. D. Howe Institute:

We’ll be watching for further communiqués as they are released.

Regulating competitive markets

It isn’t easy being a regulator.

Just look at the way people talk about the CRTC, Canada’s radio, television and telecommunications regulator. Complaining about the CRTC is part of our national birthright. Regardless of whether an issue actually falls under its purview, Canadians rush to blame the CRTC. Next to the post office, there may not be another government institution that engenders such opprobrium in our hearts and minds. I have observed before that “most Canadians feel they have a right, if not a duty, to criticize” the CRTC.

Some complaints legitimately fall firmly within the CRTC’s jurisdiction; some complaints are shared responsibilities with other branches of government; but, many other complaints (like Canadians being upset that off-shore streaming services block access to certain shows) simply aren’t issues that can be resolved by the CRTC. That doesn’t keep people from blaming the Commission.

Recently, some social media have taken aim at the regulator for moving at “sloth speed”, claiming “The speed at which the CRTC is operating is failing both the Canadian Telecommunications industry and Canadians as a whole.” An OpEd in the Toronto Star prods the CRTC to accelerate its wholesale internet pricing decision, claiming “The fact that Toronto is even considering building its own network to ensure affordable pricing for an essential utility is a shameful indictment of the regulatory delay in putting these options in place at the federal level.” In a bizarre approach to government relations, a wholesale-based internet service provider launched a campaign to flood the CRTC with emails, months after the close of a proceeding. It is unclear to me how this could have accomplished anything but add a further delay to the regulatory process.

One might say that such forms of complaining may succeed at inciting, without providing any clear insights to advance the regulatory processes or policy framework.

On the point of wholesale services, let’s be very clear. Even if the CRTC upholds its wholesale rates at the August 2019 level, these will not result in the $10 per month price plans being sought for low income households. As I have written before, “in recent weeks, we have seen the term ‘affordable broadband’ hijacked and applied to alternate agendas”. Such is the case with these recent, very public attacks on the regulator and the policy makers on both sides of the river in the National Capital Region.

This past weekend, I spotted a relevant 11-part Twitter stream related to the challenges of utilities regulation. Although it was written largely in response to power regulators in the wake of widespread blackouts in the south central United States, many of the comments resonated with me.

Professor Gus Hurwitz is the The Menard Director of the Nebraska Governance and Technology Center and the Co-Director of the Space, Cyber, and Telecommunications Law Program at the University of Nebraska. I encourage you to follow him on Twitter. Here is the essence of his 11-part weekend rant:

I spent much of last week watching recordings of meetings of local utilities regulators from around the country. They were terrible. Simply terrible. This isn’t a criticism of the regulators, however.

They are under-resourced, frequently staffed by well-intended but non-expert individuals — sometimes staffed by ideological nut jobs (from the left or right) hell-bent on using the regulator to impose their own policies.

There is frequent illegality. Either citizens demanding they do illegal things, investigation of malfeasance of prior commissions, or commissioner fighting over how to do things that the law says they cannot. But again, this isn’t a criticism of the regulators. They perform an important function, and are often trying to thread impossible needles.

This is especially true when they are trying to navigate changing technologies being used in new ways by a changing society with different needs, using static laws developed for older, generally simpler, technologies, the anticipated multi-decade CapEx and cost recovery.

And “federalize regulation” isn’t all that great a solution, either. Putting aside the legal issues, the local regulators often are responding to legitimately localized concerns. And federal regulators often face similar resource and expertise constraints!

I keep saying this: I’m not blaming the regulators. So who am I blaming?

Well, I’m blaming you, and me, and everyone who takes for granted their work or expects both regulators and industry to magically deliver perfect, low cost, zero risk, reliable results, while consistently voting to under-fund the regulators, passing punitive laws that harm industry, and electing lying politicians based on their promises to cut red tape and hold industry accountable. And while refusing to actually get involved with the process ourselves.

All the great stuff that makes our modern lives so wonderful … it takes public and private collaboration and a society that’s both willing to fund it and understanding of its limitations.

Today, we have overt public and private antagonism and a society that expects everything to work perfectly at no cost. Given that, expect things to get worse before they get better; expect things to get worse unless those who are able to help are willing to get involved.

It’s easy to complain about the performance of a regulator, or indeed about many regulated industry participants. And it is certainly within our rights to complain. I suspect that prospective staff members at the CRTC are warned (or should be warned) that if they have a thin skin, they may want to look at another line of work. I’ve attracted my fair share (or more than my fair share) of critiques for the crime of providing an alternate point of view.

While it is easy to complain, it is a lot tougher to get involved and help make things better. It takes much deeper thought to improve regulatory processes, maintaining balance to improve outcomes for consumers (especially vulnerable consumers).

Regulating competitive markets isn’t easy in the best of times. During COVID-19 induced lockdowns, it must be much more complicated for staff to collaborate on complex economic calculations and determinations and prepare carefully nuanced decisions.

The Telecom Act explicitly acknowledges that the regulator won’t always get it right when issuing an Order or Decision. That is why a number of channels of appeal exist, channels that have been used by major carriers and smaller service providers alike. Filing an appeal isn’t an abuse of process. Indeed, it is precisely a proper use of the processes established in the Act, as part of the checks and balances that exist for the regulator and the Courts.

Let the regulator do its job. When it issues its determination, if you don’t like it, file an appeal.

15 years later

This is an exceptional weekend post, marking an exceptional anniversary that happens to occur on a Saturday this year.

I started blogging fifteen years ago today. My first post was pretty brief, effectively it was just a test:

It is a start!

The beginning of the Blog for Mark H. Goldberg & Associates.

You can reach us on the web at www.mhgoldberg.com or drop me a note: mark@mhgoldberg.com

Short, sweet, to the point.

Later this year, I’ll be celebrating 25 years of independent consulting. As I said on Twitter last fall when celebrating 40 years of working in telecom, “My career in telecommunications has been a great ride so far. I continue to enjoy waking up and finding new opportunities every single day.”

In the early days, I would write a few little tidbits each day; now I tend to write one or two in-depth pieces each week.

There are now more than 2900 posts in the searchable archives for this blog, including a number of flash reports that I prepared for clients in the days before I started blogging. I hope this site provides a useful reference tool, tracking the evolution of competitive telecommunications in Canada.

Do you have any favourite posts?

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