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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.

The economics of broadband expansion

Ok kids. Gather around. Today’s lesson is engineering economics. How do you put together a business case for expanding broadband into a previously unserved area?

Putting together a business case is an important life skill. You can apply these kinds of studies to personal purchase decisions, or putting together a business case to launch a new service or discontinue an old one. And most importantly, it will help you understand better how to analyse discussions about rural broadband.

Let’s look at a business plan to expand broadband service into a certain area. For the sake of simplicity, we’ll start with an assumption that there are sufficient investment funds available to fund all the construction into unserved areas, subject to a condition that the investor is able to get a certain return on their investment.

Based on that constraint – a positive return on investment, the engineering department should be able to define an area that qualifies for construction. Their calculations would be based on a variety of assumptions: Capital cost of equipment and construction; annual operating expenses including maintenance; retail market share (and thereby retail revenue); wholesale market share (and wholesale revenue); taxes, etc.

All these numbers go into a spreadsheet and the engineer can keep adding more homes to the construction plan as long as the business case continues to be positive.

At some point in the exercise, the next incremental home has a negative impact on the business plan. The engineer can then draw a line on a map delineating a boundary.

That boundary effectively defines the digital divide: where the economics are unable to support traditional investment in infrastructure. On one side of the boundary, 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. These households are candidates for government rural subsidy programs.

But let’s go back and look at the ‘urban’ side of the boundary line. That boundary is defined as precisely where the business case goes from positive to negative. Homes on the boundary effectively have a net present value (NPV) of revenues less costs of zero.

What happens if the revenue assumption changes? If revenues somehow increase, the boundary gets pushed outward. More homes (on the ‘rural’ side of the boundary) would potentially now have a positive business case. On the other hand, if revenues somehow decreased, the boundary gets pushed in the other direction and the business case is no longer positive for as many homes.

When the CRTC sets wholesale rates, it is implicitly setting the wholesale revenues for our mythical engineer’s business case calculations. The CRTC doesn’t impact the capital costs, they don’t change the retail rates, or even the market share assumptions. But, the regulated wholesale rates are what drives the wholesale revenue line in the business case. Drop the rates, wholesale revenues go down and total revenues for that area go down.

When the facilities-based carriers warn that changes to wholesale rates impact the incentives to invest in rural broadband, this is what they are talking about. These aren’t threats; it’s just basic economics.

The Federal Cabinet understood these principles of economic studies.

Now you do, too.

Permissionless innovation: is regulation penalizing infrastructure investments?

The MEI think tank has released a new paper calling “for the CRTC to stop overregulating the telecommunications sector and penalizing infrastructure investments.” The MEI paper argues in favour of a presumption of competition for policy making and against the presumption of regulation.

In the context of the continuing discussion on telecommunications service pricing, we often forget that Canada has top quality telecommunications infrastructure, that the MEI claims is despite a regulatory framework that is very restrictive for the sector.

Canada’s mobile speeds are among the fastest the world, thanks to investments per connection that are nearly twice as high as in Europe. According to the MEI press release, “Canada’s relatively high prices are explained in part by the country’s low population density, by the quality of the infrastructure, and by the substantial investments that are made.”

“Canada does well despite its regulatory framework, not because of it. The country could do even better!” according to GaĂ«l Campan, Senior Associate Researcher at the MEI and author of the publication, “Permissionless Innovation: For an End to the Presumption of Regulation in Telecommunications”, written in collaboration with Daniel Dufort, Director of External Affairs at the MEI.

The easy to read report is divided into 3 main chapters, as listed below with some highlights:

  • Chapter 1 – Innovation, Growth, and Regulation
    • The main source of growth in an economy is figuring out new approaches for being more productive with the same resources: in a word, innovation
    • By making it more expensive to run a business, or invest in a new technology, regulation delays projects, or diminishes the chances that projects will be undertaken
  • Chapter 2 – Regulation by Default: A Misconstrued Approach to Markets and Competition
    • Consumers commonly substitute across markets, as when cellular phones — originally considered separate and distinct — came to offer a compelling alternative to fixed line telephone monopolies, eliminating the market power of legacy network providers.
    • Customers of fixed line providers in an industrialized country aren’t captive at all, since alternative services (such as satellite, mobile, and cable operators) are already available and improving fast, but also because of the emergence of “third places” such as coffee shops offering good Wi-Fi speed.
    • The number of mobile and fixed operators has not changed much over the past few years, but the number of their suppliers has decreased drastically, with a few equipment manufacturers becoming giant players, and their bargaining power increasing significantly.
    • Equipment manufacturers, terminal manufacturers, internet service providers (whether wireless, wireline, or cable companies) and content providers all belong to the same ecosystem, and must adapt their strategies to each other’s progress, always driven by what the general public is willing to pay for.
  • Chapter 3 – Reintegration of the Telecommunications Industry under the General Competition Regime
    • Rescinding the specific regulation of the telecommunications industry will create immediate economic value, as some financial and human resources currently devoted to compliance matters will be freed up and made available for productive use.
    • Commercial offers which were banned by the regulator even after having already found their customers, such as the zero-rating practices banned by the CRTC in 2017, will likely be reinstated if possible.

The MEI argues that as a sector specific regulator, the CRTC can have a tendency “to see the state of the market and of competition as a fixed reality, rather than an evolving one.” In calling for regulatory humility, the MEI expresses its concern that regulations can slow investment and create a drag on technological and service innovation as well as new business models. “The CRTC must rescind its special regulatory policies as soon as possible and let the sector fall under the general competition regime in order to enjoy the proceeds of unhampered competition.”

Your comments are welcomed.

Should the CRTC be phased out?

According to the Montreal Economic Institute (MEI), the CRTC has outlived its usefulness.

“Since Canada has successfully transitioned from monopoly to competition, there is a case to be made that the CRTC should be phased out as Canada’s telecommunications regulator.” That is one of the conclusions of the 5th annual edition of “The State of Competition in Canada’s Telecommunications Industry,” released today by MEI [pdf]. Instead of a sector specific regulator, the report says oversight of the telecommunications industry could move to a more general regulatory framework under competition law.

The report also contends that, despite what it calls “simplistic and misleading” comparisons, Canadian wireless prices are competitive.

“The average bill that Canadians pay for their wireless and internet services keeps increasing not because they have to pay more for the same services, but because they are paying more for more and better services.” The MEI report cites numerous international metrics that Canada has some of the highest quality wireless networks in the world, and comparisons of prices rarely account for service quality.

According to the report, “Wireless carriers in Canada invested on average US$78 per connection between 2010 and 2016, almost twice as much as their European counterparts, which only invested $40.”

Looking at the regulatory framework, the report observes, “The main concrete difference so far between the FCC’s and the CRTC’s approaches to net neutrality has been the steadfast opposition of the Canadian regulator to zero-rating. … In banning innovative and pro-competitive targeted pricing plans, the CRTC has not protected the integrity of the internet; rather, it has raised prices for certain consumers and lowered prices for no one.” This is a familiar refrain to my readers for whom I have made the same observation over the years.

A little over a week ago, I asked on Twitter “What if #CRTC had given market forces a chance to work?”

MEI points out the irony of the CRTC, having an agenda of increasing competition in Canada’s wireless marketplace, ended up banning an innovative pricing plan from a new entrant (Videotron). According to MEI, that ultimately hurts Canadian consumers. Similarly, the report takes aim at the CRTC’s overly prescriptive Wireless Code as having “reduced consumer choice and limited the ability of carriers to develop innovative customer offerings.”

In this instance — as in many others — Canadians would have been better off if the CRTC had relied on market forces instead of attempting to manage the competitive process.

The report points to the December 2017 wireless price war sparked by Freedom Mobile’s $50 per month 10GB plan as evidence of the market’s competitiveness. Quoting the 12-year old report of the Telecom Policy Review Panel (TPRP), MEI says “the Canadian telecommunications industry has evolved to the point where market forces can largely be relied on to achieve economic and social benefits for Canadians, and where detailed, prescriptive regulation is no longer needed in many areas.”

It has been more than 12 years since the TPRP’s report was issued and, as discussed above, the CRTC has shown few signs of restraint in its approach to telecommunications regulation. While it has abandoned its prior focus on retail regulation, it has also expanded mandatory network access schemes, created policies that dull incentives to invest, and rewarded product imitators instead of product innovators. If maintained, these policies are bound to hurt Canadian consumers in the long run.

Although dismantling Canada’s telecommunications regulator might meet with stiff opposition from partisans of continued heavy-handed regulation, it would be of net benefit to Canadian consumers and to Canada’s economy. The CRTC—while a necessary actor in Canada’s telecommunications landscape during the transition from monopoly to competition—has outlived its usefulness.

No doubt, the assertions made in the MEI report will feature prominently in the Regulatory Blockbuster at The 2018 Canadian Telecom Summit, taking place June 4 – 6 in Toronto. The Regulatory Blockbuster will feature leading advocates from Bell, TELUS, Rogers, Teksavvy and Ice Wireless.

Have you registered yet?


[Update: May 8, 11:50am] The MEI report author has an opinion piece on the Financial Post website, entitled “The CRTC should celebrate its 50th birthday by giving up telecom regulations entirely” with the caption “Martin Masse: You may be wondering why exactly we still need a dedicated telecommunications regulator. We don’t”.

An internet of things or services?

In the wake of this year’s Consumer Electronics Show, Geoffrey Fowler’s recent piece in the Washington Post (reprinted in the Toronto Star) caught my eye. “How gadget-makers have gotten off track, and how tech can be great again” suggests that connected devices need to solve actual problems. “Putting a refrigerator on the internet isn’t in itself useful — it’s just more expensive.”

His article suggests 4 ways to make gadgets great again:

  • Respect our time: “I’m heartened to find products starting to explore not how to fill more of our time, but rather help us spend our time better.”
  • Security is not our job: “When I buy a car, I don’t have to purchase seatbelts and bumpers on my own — I trust the automaker took care of making it safe. But the electronics industry puts the responsibility for security largely on us, selling way too many smart products that are the equivalent of cars with zero-star safety ratings.”
  • Focus on the “Internet of Services,” not the “Internet of Things”: “Putting a refrigerator on the internet isn’t in itself useful — it’s just more expensive.”
  • Don’t lock us in: “I’ve got four different talking assistants on various devices in my house, but unfortunately my virtual staff doesn’t communicate well with each other.”

Fowler reflected some overlapping themes about system security that were raised by NY Times writer Zeynep Tufekci [reprinted in the National Post]: “We built our digital world too fast, and cut too many corners“.

Modern computing security is like a flimsy house that needs to be fundamentally rebuilt. In recent years, we have suffered small collapses here and there, and made superficial fixes in response. There has been no real accountability for the companies at fault, even when the failures were a foreseeable result of underinvestment in security or substandard practices rather than an outdated trade-off of performance for security.

He concludes noting that we continue to suffer through hack after hack, security failure after security failure.

If commercial airplanes fell out of the sky regularly, we wouldn’t just shrug. We would invest in understanding flight dynamics, hold companies accountable that did not use established safety procedures, and dissect and learn from new incidents that caught us by surprise.

And indeed, with airplanes, we did all that. There is no reason we cannot do the same for safety and security of our digital systems.

We will be exploring these issues and much more at The 2018 Canadian Telecom Summit, taking place June 4-6, in Toronto. Early bird rates are now available. Save more than $200 by registering before the end of February. Why not register today?

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