Cross subsidies cost consumers real cash.

Based on a number of recent CRTC decisions, it appears the Commission wants consumers to pay inflated prices for internet and mobile services in order for the CRTC to fund other projects.

A couple months ago, in “Ending regulated cross subsidies”, I wrote about the CRTC setting wholesale fees paid by Videotron to Rogers at rates below cost, saying that the financial shortfall can be made up “through other telecommunications services,” all of which are competitive.

Let’s be clear what that means. In the eyes of the CRTC, Videotron, a multi-billion dollar vertically integrated national telecommunications company, should be subsidized by Rogers consumers paying more for their mobile and internet services.

Does that seem right?

Last week, the CRTC sent a letter proposing to grant special dispensation to Corus noting “Corus’ unique position as Canada’s largest non vertically integrated private broadcaster.” Under the proposed Order, Corus would not have to spend as much on Canadian programming. Scotiabank estimates that this could represent around $30 million in savings annually.

Let’s focus on the language in the letter that characterizes Corus as having a “unique position” as a non vertically integrated private broadcaster. There are other private broadcasters that have been seeking relief as well. Bell (CTV and Noovo), Rogers (CityTV), and Quebecor (TVA) have all sought relief, but they are integrated companies. The CRTC has decided “the that it is appropriate to give immediate consideration to Corus’ application on an exceptional basis”, presumably because it believes the integrated companies can sustain financial losses, propped up by profits in other segments.

This makes no sense from a business perspective. Effectively, the CRTC is now depending on profits from other lines of business – internet and mobile services – to prop up money losing broadcast business units. It is an unsustainable business model, punishing shareholders and consumers alike. As I have written before, “A rational business will restructure, or shut down those units that have no opportunity to climb out of the red.”

Bell has filed an application with the Federal Court of Appeal over the CRTC’s automatic broadcast license renewals, concerned the Commission will delay hearing broadcasters appeals for regulatory relief on Canadian program expenditures.

This Commission has now provided numerous instances where it indicates a belief in a system of regulated cross subsidies from unregulated business segments. At the end of the day, these cross subsidies cost consumers real cash.

As Dvai Ghose wrote in the Globe and Mail, “While the CRTC may have good intentions, it demonstrates naiveté when it comes to the private sector, and the consequences could be incredibly destructive for wireless investment and quality in Canada, risking our ability to compete globally.”

Are regulators losing sight of the target objectives? Are we sometimes confusing the means with the end? Do we even know where we are aiming?

Big questions. What do I mean?

When Navdeep Bains was Minister of Innovation, Science and Economic Development, there was a very clear statement summarizing his communications policy objective: “Canada’s future depends on connectivity”. It was clear, concise, and measurable. The telecom sector was told that there was an understanding of the tension that exists as we balance affordability, quality, and coverage in the achievement of those objectives.

Sometimes, it can be easy to lose sight of the target when we don’t pause for a moment to surveille the situation.

Earlier this week, I wrote “Regulators regulate”. If the only tool you have is a hammer, it is tempting to treat everything as if it were a nail.

Take a look at what is going on south of the border with the FCC seeking to resurrect network neutrality regulations. As Professor Daniel Lyons of Boston College writes (quoting Justice Scalia), “Like some ghoul in a late-night horror movie that repeatedly sits up in its grave and shuffles abroad, after being repeatedly killed and buried…”

After three years of quietly effective telecom regulation, the Federal Communications Commission has roared back to life with a new Democratic majority and an obsession to reimpose 2015’s Title II order on broadband providers. Back then, the AEI Tech Policy blog argued that these rules were, at best, unnecessary and, at worst, harmful to consumers and innovation. America’s experience since then has vindicated the decision to repeal net neutrality, leading one to wonder why this has become the Commission’s most pressing concern.

He rhetorically asks (and then answers), “if broadband providers have voluntarily adopted net-neutral practices, what’s the harm in enacting them into law?”

One concern is the chilling effect such rules have on innovation. For example, network slicing, which many providers have implemented since the original net neutrality overturn, can enhance 5G network productivity. This allows wireless providers to dedicate a portion of their capacity for specific services rather than general network packet delivery, thus improving the consumer experience for latency-dependent services.

He argues that net neutrality proponents have strayed from their roots, losing sight of the target. “When Professor Tim Wu first coined the phrase, he was concerned in part that without a neutrality principle, broadband providers would block disfavored speech online.”

Unsurprisingly, allegations that net neutrality’s repeal would mean consumers couldn’t get abortion information or receive the internet “one…word…at…a…time” were unfounded. This is because, as Wu himself notes, broadband providers also have incentives not to block content: the more content a consumer can reach, the more they’re willing to pay for access.

So why is the FCC seeking to re-introduce Net Neutrality? Regulators regulate. There is always the potential for regulatory creep. And, therein we find the concern. According to Professor Lyons, FCC Chair Jessica Rosenworcel has stated she has no intention of regulating broadband rates, despite those power being part of the proposed regulations. While this might be so, what happens with the next administration? Poorly drafted legislation – or trying to apply one set of regulations for something else – can lead to unintended consequences.

That is what I meant about being more concerned with the ‘means’ than the ‘end’. What problem are they trying to solve?

This is a problem that I think we have come to appreciate in Canada. The government is trying to apply Broadcasting Act legislation to internet content, expanding the role of the CRTC to act as an arbiter of new media.

What are we trying to achieve? How will we measure success?

Let’s look at how the government’s describes the legislation.

• C-11: “The Online Streaming Act modernizes the Broadcasting Act and helps ensure Canadian stories and music are widely available on streaming platforms to the benefit of future generations of artists and creators in Canada.”
• C-18: “The Online News Act aims to ensure that dominant platforms compensate news businesses when their content is made available on their services.”

In the government’s own words, these are the objectives of these Acts. Reading the legislation, one might be justified asking if we might have gotten lost along the way. As the government and the CRTC move forward with development of regulations that implement the Acts, how do we ensure we aren’t losing sight of the target?

When I load an address into my GPS, the system calculates a route and tells me how far the system expects me to travel. I’m told how long it expects the journey to take. Along the way, the system makes mid-course adjustments, considering traffic, routing around unexpected roadblocks along the way.

The Online News Act, and the Online Streaming Act are the first parts of Canada moving to regulate internet platforms and content.

What are the real objectives? Where are we trying to go? How will we know when we successfully reach our target? How do we know we are making progress toward the ultimate objective? Are these pieces of legislation still the best route?

When driving, we find alternate routes to avoid traffic jams and roadblocks. Is it time for the government to pause, reboot the system and recalculate?

Regulators regulate. It is just what they do.

Consider it to be a corollary to Maslow’s Hammer: “If the only tool you have is a hammer, it is tempting to treat everything as if it were a nail.”

Why does Canada’s current government seem to believe that regulation should be the primary approach for achieving its communications policy objectives? Indeed, it might help if the government could clearly state what those objectives are and how they are being measured.

A week ago, I wrote about regulating misinformation. Digging way back into the archives, I found this excerpt that appeared as well in a National Post OpEd [ pdf, 330KB] in 2005.

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.

That article (from more than 18 years ago) spoke of “major changes” in Canada’s communications industry being at hand, as phone services based on internet protocol technology began to move into the mainstream, offering more service capabilities, lower prices and a wider variety of choices for consumers. I identified potential roadblocks, “perhaps the biggest is the possibility of unnecessary regulatory intervention.”

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.

Unfortunately, empowered by recent legislation, the CRTC is extending its regulatory reach beyond the communications facilities and into the content carried over those facilities. In the old broadcast world, this was understandable. Radio waves – spectrum – is a limited resource, so there was only space for a limited number of voices to be carried over the public airwaves. No such limit exists in an internet world. Consumers have the ability to access every program offered anywhere.

That means our ears and eyeballs are no longer fixated on legacy media: newspapers, radio, television. In the case of radio and television, these are regulated by the CRTC under the Broadcasting Act. New media, whether it is streaming alternatives for TV, such as Netflix or Amazon Prime or Apple Plus or other subsciption services, or podcasts and other audio services, or short form content such as TikTok or YouTube, have typically been unregulated, subject only to the terms of service of the platforms.

There were two ways the government could have gone in order to provide regulatory parity for legacy media and new media: relax the regulations on the traditional services; or, regulate the new services. In Canada, the government has chosen to impose regulatory obligations on new media.

It is a consistent approach for Canada. As I wrote earlier this year, “Canada’s policy framework for net neutrality is among the most prescriptive and restrictive.”

Regulators regulate.

Intellectually, I understand the underlying motivation behind the approach that imposes regulation on all content providers. Unfortunately, the legislation has not benefited from meaningful committee review, with the government putting egos and partisanship ahead of genuine improvements to flawed sections of the various Online Acts. We were told that the CRTC will take care of concerns as it works through the details and regulations.

The first details emerged late in the day on the last Friday of September, setting out registration requirements in an 85-page Broadcasting Policy and Order [ pdf, 521KB]. While the CRTC is targeting platforms with more than $10M in Canadian revenue, there are real concerns that smaller content creators will be caught by indirect regulation – the CRTC imposing conditions on a platform, leading the platform to control hosted content produced by smaller independent creators.

Regulators regulate. I get that.

How do we avoid regulatory over-reach to avoid disincentives for Canadians to benefit from investment in content, infrastructure, and leadership in a next generation economy?

This decision helps to promote access to affordable telecommunications services for Canadians and to foster sustainable competition and continued investment.

That was how the CRTC summarized its decision last night on final offer arbitration between Bell Mobility and Quebecor for wholesale mobile virtual network operator (MVNO) access rates.

The decision was notable for a few reasons:

• A focus on creating and maintaining incentives for investment;
• Fostering “sustainable competition”, which has historically been CRTC and Competition Bureau language for “facilities-based competition”;
• Clarifying that the wholesale framework is not intended to guarantee profitability for wholesale-based service providers;
• The CRTC explicitly discounted the usefulness of comparisons to European rates;
• Recognition that average network costs don’t support investment in suburban and rural infrastructure.

The Bell – Quebecor decision should be read in the context of a similar arbitration between Rogers and Quebecor released by the CRTC nearly two months ago. In the earlier instance, the CRTC required Rogers to offer a wholesale service at rates acknowledged to be below Rogers’ costs. The CRTC said Rogers’ shortfall could be made up “through other telecommunications services”. The Rogers decision has been appealed to the courts because of the precedent-setting nature of wholesale rates being set below costs.

This week, the CRTC selected Bell Mobility’s offer.

The Commission clearly accepted the concern that wholesale rates impact the incentives for investment by both parties.

49. Nevertheless, the Commission considers that Bell Mobility has raised a valid concern regarding the long-term impact of artificially low wholesale rates on the policy objective of fostering network investments, which is particularly relevant in suburban and rural areas. While lower retail prices backed by lower wholesale rates are desirable, as discussed earlier, these different interests must be balanced with the wholesale MVNO access provider’s incentives for continued network investment. Accordingly, the Commission is of the view that Bell Mobility’s offer best strikes the balance of maintaining both parties’ incentives to invest.

The CRTC said “the MVNO access framework is not intended to guarantee a risk-free profit margin for [Quebecor’s] MVNO operations, and QMI’s ability to compete should not be assessed by looking at only the profitability of specific plans, but rather by looking at all of the wireless plans it offers.” While the CRTC wants to see lower-priced plans, it also needed to consider the potential negative consequences of lower rates on sustainable competition, and incentives for investment.

The Commission referred to the controversial cross subsidization aspect of the Rogers – Quebecor arbitration decision in this Bell – Quebecor determination, saying “that it does not necessarily have to ensure that costs are recouped over the short term for a rate to be considered just and reasonable, fair compensation for the wholesale MVNO access provider is still an important consideration in evaluating offers”.

Quebecor had asked the CRTC to compare Canadian wholesale rates to those found in Europe. The CRTC clearly stated European wholesale roaming rate structures “have very limited comparative value given the different contexts in which European and Canadian carriers operate, resulting in different cost structures.” Many Canadians have fixated on international comparisons that have such “limited comparative value” precisely because of the “different contexts in which European and Canadian carriers operate”. It was somewhat encouraging to see the CRTC explicitly discount such comparisons.

Finally, the CRTC seems to have given weight to the argument that wholesale-based service providers have uneconomic arbitrage opportunities when average rates are applied for urban, rural and suburban traffic. Such rate structures create incentives to build urban facilities but create a disincentive for investment in suburban and rural areas. “Bell Mobility submitted that, on average, a rural cell site costs more to build, while serving less data volume, than an urban one, resulting in higher costs per GB.” As Scotiabank observed in a research note this morning, Quebecor’s favourable MVNO deal with Rogers will result in Bell’s network being used only in areas where Rogers isn’t as strong. This would result in a disproportionate level of wholesale traffic running on rural and suburban while leading to disincentives for either party to invest.

Fostering sustainable competition and continued incentives for investment are clear themes of this wholesale wireless rate decision. To what extent does it provide clues for the way the CRTC will approach revisions to the wireline wholesale framework?

What should be the role of government in regulating misinformation?

That is an important question being considered in Canada and around the world as governments seek solutions to online harms and the spread of misinformation. My own views on the subject have been evolving, as I wrote early this year.

As the Center for News, Technology and Innovation (CNTI) writes, “the credibility of information the public gets online has become a global concern. Of particular importance… is the impact of disinformation – false information created or spread with the intention to deceive or harm – on electoral processes, political violence and information systems around the world.”

It’s important to distinguish between “hate” and that which is “merely offensive”. We may not like encountering offensive content, but does that mean there should be legal restrictions preventing it? Readers have seen me frequently refer to Michael Douglas’ address in Aaron Sorkin’s “The American President“. “You want free speech? Let’s see you acknowledge a man whose words make your blood boil, who’s standing center stage and advocating at the top of his lungs that which you would spend a lifetime opposing at the top of yours.”

My post in January referred to a Newsweek article in which Aviva Klompas and John Donohoe wrote:

The old saying goes, sticks and stones may break my bones, but words will never hurt me. Turns out that when those words are propelled by online outrage algorithms, they can be every bit as dangerous as the proverbial sticks and stones.
…
When it comes to social media, the reality is: if it enrages, it engages… Eliciting outrage drives user engagement, which in turn drives profits.

But my views are also informed by years living in the United States, a country that has enshrined speech freedoms in its constitution.

As CNTI notes “Addressing disinformation is critical, but some regulative approaches can put press freedom and human rights at great risk.”

Ben Sperry provides another perspective in a paper soon to be published in the Gonzaga Law Review. “The thesis of this paper is that the First Amendment forecloses government agents’ ability to regulate misinformation online, but it protects the ability of private actors — ie. the social-media companies themselves — to regulate misinformation on their platforms as they see fit.”

The Sperry paper concludes that in the US, regulating misinformation cannot be government mandated. Government could “invest in telling their own version of the facts”, but it has “no authority to mandate or pressure social-media companies into regulating misinformation.”

So, if government can’t mandate how misinformation is handled, by what rights can social media companies edit or block content? The author discusses why the “state-action doctrine” protects private intermediaries. According to Sperry, the social media platforms are positioned best to make decisions about the benefits and harms of speech through their moderation policies.

He argues that social media platforms need to balance the interests of users on each side in order to maximize value. This includes setting moderation rules to keep users engaged. That will tend to increase the opportunities for generating advertising revenues.

Canada does not yet have the same history of constitutional protection of speech rights as the United States. However, most social media platforms used here are US tech companies. Any Canadian legislation regulating online misinformation is bound to attract concerns from the United States.

About a year and a half ago, Konrad von Finckenstein and Peter Menzies released a relevant paper for the MacDonald Laurier Institute. In “Social media responsibility and free speech: A new approach for dealing with ‘Internet Harms’” [pdf, 619KB], the authors say that Canada’s approach to date has missed the mark. “Finckenstein and Menzies note that the only bodies with the ability and legitimacy to combat online harms are social media companies themselves. What is needed is legislation that establishes a regime of responsibility for social media companies.” Their paper proposes legislation that would protect free expression online while confronting disinformation, unrestrained hate speech, and other challenges.

The UK Online Safety Bill is continuing to work its way through British Parliament.

Canada already has laws prohibiting the wilfull promotion of hate, as applied in a recent case in Quebec. In that case, a man was convicted of promoting hatred against Jews in articles written for the no-Nazi website, the Daily Stormer. He was sentenced to 15 months in jail with three years of probation.

Does Canada need to introduce specific online harms legislation?

What is the right approach?

These papers provide perspectives worth consideration by policy makers.