I am going to take a little vacation time over the next couple weeks, so while I am gone, I thought I would provide a collection of quotations that I think are relevant for a couple hot regulatory issues these days: the state of Canada’s mobile wireless industry and the appeals associated with wireline wholesale.

As noted by the 2006 Telecom Policy Review Panel, the CRTC originally encouraged competition via resale through various rulings that “established a general policy requiring an incumbent who chose to offer a retail telecommunications service to permit resale of that service, whether by competitors or others.” When the CRTC approved facilities-based competition in 1992, “it did so recognizing that the construction of network facilities by entrants was necessary for the full benefits of competitive entry to be realized.”

Have those fundamental principles changed?

From Telecom Decision CRTC 92-12:

The Commission considers that resale can provide many benefits, but it is not a substitute for facilities-based entry. Facilities-based entry permits sustainable and more broadly-based competition, thereby increasing the benefits to be derived from competition.
…
However, resellers can complement facilities-based competition by providing price discipline, ensuring greater responsiveness and serving niche markets.

Testimony of Marc Gaudrault, CRTC Notice of Consultation 2009-261, Transcript 31 May 2010, Line 926:

In order for the ladder of investment to work most effectively, the wholesale services provided by ILECs and cable carriers at each rung of the ladder should be constructed so as to facilitate the maximum amount of service differentiation downstream at the retail level and the ability of competitors to climb the ladder. This means differentiation of functional attributes such as speed, throughput, quality and types of service, geographic coverage and service bundling.

From the report of the Telecom Policy Review Panel:

The Proper Scope of Mandated Wholesale Access
As stated above, a fundamental objective of mandated wholesale access should be to maintain incentives for innovation, network efficiency and investment. In the Panel’s view, the most effective method for promoting these incentives is to ensure that competitive market forces apply to the broadest possible range of network and service components in as many locations as economically feasible.

To this end, new entrants should have both opportunities and incentives to build their own facilities. Since by definition retail market entry is not possible without competitor access to essential facilities, the regulatory framework should continue to require incumbents to make these available, on a mandatory basis if necessary.

However, the Panel concludes that, given the current state of competition in Canada, continuing to require that incumbents make non-essential facilities available to competitors undermines the incentives for the latter to build alternative facilities. This in turn undermines competitive market incentives for all service providers to be efficient, to innovate and to invest, for several reasons.

First, when designing their networks, entrants can either build non-essential facilities or lease them from the incumbent. Mandated wholesale access at regulated prices reduces the cost and especially the risks associated with leasing relative to building. It thus increases the likelihood that leasing will be more attractive than building. Mandated wholesale access therefore tends to discourage entrants from supplying their own facilities, even where doing so would otherwise be economical. The potential negative impact is much more limited if mandated wholesale access is limited to essential facilities.

Second, regulated wholesale pricing reduces the revenues that entrants who build facilities can generate in the wholesale market when they lease those facilities to other providers. This arises because regulatory constraints on ILEC wholesale prices also effectively place upper limits on the price that other service providers can charge for facilities in the wholesale market. This in turn affects investment decisions of both incumbents and new entrants in cases where the viability of constructing network facilities is dependent on their ability to profitably supply facilities on a wholesale basis to other service providers. The broader the scope of mandated access, the greater the negative impact on investment decisions.

Third, artificially low wholesale rates undermine the price levels and revenues that could otherwise be sustained in the retail market. The broader the scope of mandated access, the more significant the impact on retail prices. This compromises the ability of both entrants and incumbents to recover potential network investments.

The argument in support of mandating the availability of non-essential facilities is that it can actually facilitate, rather than hamper, construction of facilities by entrants by providing them with a “stepping-stone” until the day they can build their own facilities. The validity of this argument rests entirely on the assumption that the CRTC can set prices that are both:

• low enough to facilitate entrants’ ability to expand their networks and more quickly acquire the customer base that would justify construction of their own facilities
• high enough to provide entrants with sufficient incentives to build such facilities.

The Petition to the Governor in Council procedure: Canada’s wholesale broadband policies, the appeal mechanisms that challenge them, and broader regulatory trajectories
Daniel Mackwood, 2016 Paper
CRTC Prize for Excellence in Policy Research

CRTC decision hearing outcomes have regularly supported wholesale competition in the fixed access broadband market. The agency’s ongoing aim has been for its regulatory decisions to help usher new-entrant and competitor ISPs into an eventual transition from service- to facilities-based competition. Referred to as the “ladder of investment” (LOI) or the “stepping-stone” approach, this regulatory strategy encourages an evolution from ISPs existing as wholesale access customers relying on tariffed usage of incumbents’ networks, to eventually being able to invest in and maintain their own facilities and infrastructure.

The CRTC is in the midst of a proceeding reviewing mobile wireless services in Canada, focusing on three areas: Competition in the retail market; The current wholesale mobile wireless service regulatory framework, with a focus on wholesale MVNO access; and, The future of mobile wireless services in Canada, with a focus on reducing barriers to infrastructure deployment.

It isn’t yet clear there is a justification to mandate wholesale access services for the mobile wireless market. That is the first gate.

Missing from the historical documents (cited above) is a discussion of the need to preserve appropriate incentives for facilities-based service providers to invest in network expansion in terms of reach and capacity.

Should there be a third principle in setting wholesale prices? Perhaps wholesale rates need to be:

• low enough to facilitate entrants’ ability to expand their networks and more quickly acquire the customer base that would justify construction of their own facilities
• high enough to provide entrants with sufficient incentives to build such facilities
• structured in a manner that encourages incumbents to expand capacity and reach for their own network facilities.

I will have spotty internet access for the next 10 days or so, a reminder that not every country has coverage as good as Canada; I look forward to reading your comments.

The financial reports are in and it was an interesting quarter for Canada’s wireless providers.

Interestingly, you can see that the “new entrants”, Videotron and Freedom, were responsible for more than a quarter of the total new subscriptions, despite having something less than 10% total market share. And this doesn’t include results from privately held Eastlink. So, despite continued growth for all the industry participants, competitors are growing proportionately faster and gaining market share.

And despite election campaign concerns about affordability of mobile services, well over half a million new subscribers found mobile plans they felt they could afford.

This is not to say that there aren’t some Canadians in disadvantaged households who need assistance participating in the digital economy, just as they need help meeting their day-to-day needs. Since the introduction of broadband services for low income households, there is evidence that it isn’t only an issue with pricing. What other factors are inhibiting adoption?

As I wrote last week (echoing earlier posts), we need to develop a better understanding of how to target service delivery to help promote a more connected Canada.

Bernard Baruch is credited with the coining the statement “Every man has a right to an opinion but no man has a right to be wrong in his facts.”

Important phrase to keep in mind as I read competing opinion pieces: Timothy Denton in the Financial Post and Dr. Robert Crandall in Cartt.ca.

Tim is a former CRTC commissioner and his piece was authored to respond to an opinion piece by Gael Campan of The MEI in support of its recent research paper (the subject of last week’s blog post “Permissionless innovation: is regulation penalizing infrastructure investments?”. Mr. Denton’s clients include Tucows, the parent of Ting, a company that has been trying to get the CRTC to mandate MVNOs.

Dr. Robert Crandall is is a senior fellow at the Technology Policy Institute, a Washington-based think tank that focuses on the economics of innovation, technological change, and related regulation around the world. Dr. Crandall has taught economics at Northwestern University, MIT, the University of Maryland, George Washington University, and the Stanford in Washington program. His opinion piece is based on data in The Inclusive Internet Index 2019, a study by the Intelligence Unit of The Economist. He has prepared evidence for TELUS in the CRTC’s review of mobile wireless services.

Now in its third year, the index assesses the performance of 100 countries in four categories of inclusion: Accessibility, Affordability, Relevance and Readiness. Each category incorporates key indicators of internet inclusion, including quantitative measures such as network coverage and pricing, and qualitative measures such as the presence of e-inclusion policies and the availability of local-language content.

Mr. Denton’s piece is titled “Some truths about why Canada’s cellphone bills are higher and our adoption rate lower than most OECD countries” but it actually mixes up a lot of facts confusing European regulatory obligations for wireline services (that we also have in Canada) in his discussion of what he (or his clients) think should be imposed for wireless. Like the discredited consultant report from Rewheel, Mr. Denton tries to compare Canada’s mobile service to Finland (“with their vast regions as empty as Canada”), failing to consider that Finland’s population density is 5 times that of Canada. He also refers to wireless penetration using the familiar, but invalid metric “SIM cards per capita”, as though it is a good thing for people to have to carry multiple subscriptions (and forgetting to consider that also means people are paying multiple bills). When looking at unique subscribers, Canada’s figure of 78% is in line with the US (85%) and Europe (86%).

The fact is, Canadians enjoy superior quality network performance, thanks in part to carriers’ capital investment per connection that is nearly double the average of their European counterparts. As Dr. Crandall observes, “Canada has among the highest spectrum prices in the developed world because of these policies, thereby increasing wireless carrier costs and, thus, wireless prices.”

We are entitled to our own competing opinions. But those opinions should be informed by facts.

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 Gaël 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.

Statistics Canada has released its latest edition of the “Canadian Internet Use Survey”, providing data from 2018. I wrote about its last report, released in 2013 with data from 2012.

Some interesting data emerged by examining Tables 22-10-0081-01 and 22-10-0113-01 together.

I have asked Statistics Canada to clarify some of the anomalies that appear.

It is worthwhile noting that 80.9% of households in the lowest income quartile now have a home internet connection. At the time of the last Internet Use Survey six years ago, there was an internet connection in only 58% of those homes. This 40% increase is a testament, in part, to the focus of an industry led initiative, Connecting Families, to make affordable connected computers available to low income households. It also indicates that more households are coming online, even those in the lowest income quartile.

What are the factors that are standing in the way of universal adoption or internet services?

As recently as last week, I have written about the need to do more research to help us build a better understanding of digital economy issues:

I have often written about the need to understand all of the factors that have inhibited universal adoption of broadband and mobile services, such as in “Understanding the digital divide”. In “Do we know what we don’t know?”, I asked, “Is Canada doing enough research to explore the nature of its digital divide?”

The price of connectivity is just one of the elements. How can we find solutions for a problem that we may not fully understand?

It should be embarrassing to Canada’s policy makers that it has been 6 years since the last Internet Use Survey. How is Canada supposed to be engaged in evidence-based policy making when there is so little information being gathered about who is online, how Canadians are using the internet and perhaps most importantly, who isn’t online yet and why not?

We need more data. We need to do better.