CRTC Windfall for Incumbents

The CRTC’s Decision last week for the Deferral Account was a gift for Bell and TELUS capital budgets. The Decision takes money that had been accumulating and requires that the incumbent carriers spend 95% on expanding broadband access to underserved territories and take the rest to improve access for the disabled.

BC and Ontario should be the biggest winners – Alberta already spent tax dollars on its SuperNet project; Quebec’s remote territories, in general, don’t belong to Bell. We’ll want to watch to see what happens with Fixed Wireless.

Alternative Suppliers of Digital Network Access Facilities 2005 Update

Abstract

High speed telecommunications services are increasingly provided using new deployments of fibre optic based access facilities. For these new optical access technologies and related services, we believe that traditional telecom carriers have no incumbent network advantage.

Fibre optic facilities in the access network can be characterized as a “green field” environment for incumbent telephone companies and new entrants alike. Both classes of carriers must build new facilities, with similar challenges, similar risks and similar opportunities for success. In most major centres, and many smaller communities, alternative suppliers of fibre optic transmission facilities have emerged. Beyond the incumbent telephone companies, there are a number of companies that are leveraging existing businesses, and existing rights-of-way derived from these businesses, in order to compete in the provision of fibre optic-based broadband telecommunications services.

Electric utilities and cable companies have been particularly active in the exploitation of their outside plant resources and their available rights-of-way in order to cost-effectively enter the broadband communications marketplace. As a result, in Bell Canada territory, a vibrant competitive market for high speed digital network access facilities can be observed.

In this report, we identify the major sources of competitive supply of fibre optic based digital network access facilities and conclude that alternative suppliers for these facilities exist and are firmly entrenched in many geographic areas.

PDF Download the full report.

CRTC: Let VoIP market alone

Major change in Canada’s communications industry is at hand, much as the arrival of cellular service two decades ago ushered in a new era in voice communications. In 2005, new phone services based on internet protocol technology will move into the mainstream, offering more service capabilities, lower prices and increased packaging choices for consumers.

We hope. There are potential roadblocks. And perhaps the biggest is the possibility of unnecessary regulatory intervention.

In today’s world of rapid technological developments, entrepreneurs regularly compete against larger companies. Winners and losers are ultimately decided by the marketplace. And while big players may often be slow to respond to competitive threats, they are nevertheless free to do so. Not so in telecommunications – at least, not here in Canada.

In Canada, as in most countries around the world, we have a regulator that oversees the market for telecom. But what sets the CRTC apart from regulators in nations that are also some of our most important trading partners is the Commission’s presumption that new technologies and services should be regulated. It isn’t surprising. Regulators regulate. It is just what they do.

For over a year now, Canadian consumers have been able to choose from a growing number of Voice over Internet Protocol, or VoIP, service providers. Indeed, VoIP is enabling a new era of competition for residential dial tone that the economics of conventional telephone technologies simply did not allow.

VoIP is a software application that people can choose to purchase and use for some or all of their phone conversations. It doesn’t have to be tied to the underlying physical infrastructure like conventional phone lines. All that’s required is an inexpensive adapter to connect a standard telephone set to any high-speed Internet connection, whether provided by phone companies, cable companies or other internet service providers. The provider of VoIP does not need to be, and often is not, the provider of the high-speed Internet connection.

And yet the CRTC issued a preliminary determination in March of last year suggesting that VoIP is just another technology upgrade to deliver conventional local phone service. VoIP, said the Commission, should be regulated in the same way as regular phone service is today – that is, full regulation for the incumbent phone companies, light regulation for new competitors.

It’s hard to understand how consumers could benefit from such an approach. While companies like Bell Canada and TELUS may be incumbent providers of traditional phone service, they currently have no market presence in the consumer VoIP market. Where there are competitive alternatives, tying the hands of certain players would only restrict the range of choices available to consumers.

The CRTC has recently announced that it will take a little longer than originally expected for its final decision. In our view, the CRTC should take the time to examine a page from its own book when ruling on the issue of VoIP regulation.

Like VoIP, mobile wireless services share many of the characteristics of conventional voice services. Yet when wireless services were first introduced, the CRTC found that Canadians would obtain the greatest benefits if wireless services were governed, as much as possible, by market forces rather than regulation. Such thinking has, without doubt, contributed to the success of competition and innovation in Canada’s wireless industry.

We understand why the CRTC would want to ensure that basic consumer safeguards – including access to emergency safeguards, general protections related to privacy and service level disclosure – are guaranteed. We also recognize that this will likely entail a degree of regulation that, by necessity, should apply equally to all companies offering communications services.

But to go beyond that – to deny certain companies the freedom to offer innovative new services, new capabilities and lower prices without first receiving approval from the Commission – goes too far.

Both VoIP and cellular are emerging as substitutes for conventional phone service, but both services also offer many more distinguishing characteristics, and innovations are continuing to broaden the gap. This is why wireless services and VoIP are the leading trends in telecommunications around the world.

The CRTC had it right when it found that “the benefits which users may derive from this innovative service are likely to be greater if the terms of its provision are governed, as much as possible, by market forces rather than by regulation.”

The CRTC used those words more than 20 years ago when establishing a regulatory framework for wireless services. The Commission should reach the same conclusions today with respect to VoIP.

This originally appeared as an Op-Ed in the National Post.

PDFDownload our report on VoIP Regulation

PDFDownload the National Post Op-Ed (Feb 17, 2005)

Consolidation Goes West: MTS to buy Allstream

In a bold move to expand its reach outside the confines of its Manitoba borders, MTS has acquired Allstream, a company that has a long history of national communications in Canada, dating back 150 years to the era of railroad telegraphs. Allstream’s predecessor companies include CNCP, Unitel and AT&T Canada. The move creates a third national integrated competitor which is certain to drive interesting changes for the Canadian services marketplace.

Background

MTS was the historic monopoly carrier in the province of Manitoba. Formerly owned by the Manitoba government, MTS was reorganized as a private company in 1996. Since it has been largely constrained in its geographic reach, MTS has entered into various arrangements to find revenue growth opportunities, including a joint venture (Bell West) with Bell Canada to jointly enter Western Canadian markets controlled by TELUS. In February, Bell announced that it was going to buy the MTS stake in Bell West. MTS had been asked by shareholders to explore an income trust restructuring. This acquisition was MTS’ pre-emptive response.

Implications for the marriage

Two thirds of the forecasted synergies, $80M per year, arise from MTS unlocking Allstream’s tax losses. Forward looking operational savings are only $40M, representing about 2% of the combined revenues. Allstream gains access to a deeper capital base, which should permit it to better manage its requirements, which have been constrained since it emerged from creditor protection. For the first time in its recent operating history, Allstream will have an incumbent base in the province of Manitoba. As a result, it will be faced with similar regulatory challenges to those faced by Bell Canada with its Nexxia operations. For example, its national services operating in Manitoba may be captured under the federal bundling rules and may therefore require public disclosure and CRTC approval of tariffs. Allstream’s regulatory strategy is certain to change as a result of its new perspective as an integrated incumbent.

Implications for Bell

There was a close alignment in its national service offerings with Bell Canada that owned as much as 22% of MTS. Under this transaction, it appears certain that this relationship will end. The new joint venture will likely face intense competition from Bell Canada, operating under its own brand. Much of the population and business base in Manitoba is centred in a single market. There will be an intense drive to build or acquire infrastructure in Winnipeg in order to provide local access to customers and to build a city-wide mobile wireless overlay. The mobile operations of MTS are likely to face some intense new competition from Bell, on top of existing pressures from Rogers and TELUS, especially in the national corporate market.

Implications for other carriers

The Canadian landscape is now mapped with three national operators integrated with regional incumbent networks: TELUS in Alberta and British Columbia, MTS/Allstream in Manitoba and Bell Canada in all territories east of the Ontario/Manitoba border. Sprint Canada and SaskTel remain as independents.

As Bell seeks alternate channels for local access, there may be other consolidations and companies put into play, including cable companies or pure local fibre companies.

Conclusion

With Allstream’s next incarnation as part of a facilities-based incumbent, there is likely a need to re-examine a number of regulatory safeguards imposed by the CRTC. Many Commission concerns may be addressed by commercial arrangements between relatively equally situated comeptitor/suppliers. Other concerns about powers of incumbency may dissipate with services enabled by Internet Protocol, such as VOIP (see our report: PDFGuerilla Telecom versus Gorilla Telecom).

As signs of a recovery are beginning to emerge for the telecom industry, this transaction may trigger a fresh look at equity based combinations for other Canadian carriers.

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