The wrap up of the deferral account last week should cause a re-think of supply side broadband programs.

The amount of money that was directed to be poured into serving so few homes should make us pause. In Bell territory, $300M of subscribers’ money is to be used to subsidize access for 60,000 homes.

Because of the long delays in the CRTC’s processes, many of the so-called unserved areas already have access from alternate service providers who entered the markets without subsidies.

So you and I are spending $5000 per household to install the capability to subscribe to Bell’s DSL service.

Maybe three quarters of the homes will sign up, so we are spending more than $6000 per new DSL subscriber with no financial means test to see if these homes needed a subsidy. In a patronizing urban-centric way of thinking, we seem to have been caught up with a view that rural and remote subscribers all need financial help.

That doesn’t make sense to me.

If broadband access is an essential part of our modern households, then can’t we consider the connectivity cost as part of the total cost of the home? How many people in Toronto or Vancouver or Calgary would gladly trade their total household cost with that of rural Canadians?

As I told the Edmonton Journal, we need to turn our attention to focus on stimulating broadband adoption. We should be concerned that there are still so many households in Canada that don’t have access to a computer in the home.

How many households with school age children have no computer? As a country, we are hovering around 80% of households owning computers, but well beyond that with wireline broadband access. With wireless access added into the mix, we are in the very high 90’s for broadband access and satellite-based broadband completes the job (and yes, I have tried satellite broadband – it works well, thank you).

According to Statistics Canada, nearly every household in the upper income category has a computer (97.0%) with virtually all of these households (96.7%) subscribing to broadband access. On the other hand, only half of the lowest income households have a computer, and one in five of these homes weren’t connected.

How many of these households have school-aged children?

We should be ensuring that public funds being spent on broadband stimulus have clear targets and measurable objectives. It seems to me that we are getting diminishing returns from programs that artifically tilt the economics of extending the reach of DSL.

How many more Canadians would benefit from a broadband program that targets putting a computer with broadband into every household with children?

Following up on my recent post about about placing calls from with GMail, there is a need to clarify some issues and explore others.

First off, I received some clarification from a Google spokesperson:

The call phones feature in Gmail will generate revenue through international calling.  We’re not using this feature to sell ads, and have no plans to do so.

I understand that Google is not planning to make use of personal call data to place ads, including use of location information or destination of your calls to place ads either. Google is not listening in on the phone conversations, and it does not record them, contrary to what you may have read elsewhere. 

A history of calls made from your computer gets logged, but users will need to log-in in order to see this history, which enables users to view, manage, and delete this history from google.com/voice. When you delete the call history, Google anonymizes the data so it has no way of knowing who placed which calls.

We can leave these privacy types of issues to others to pursue; we will watch to see if there will be commitments from Google to hold to these initial design principles.

I have not yet heard back from Google regarding a registration with the CRTC as a Telecommunications Service Provider (TSP). From what I have seen, it certainly appears that Google is offering its international voice service to the public in order to generate revenue on a per minute basis – a pretty conventional long distance business model. As such, one would expect that Google should be registered as a TSP and apply for a Basic International Telecommunications Services (BITS) License. The same holds for Skype and others in this business.

 A Basic International Telecommunications Services (BITS) licensee is an entity that the CRTC has authorized to carry telecommunications traffic between Canada and another country. All Facilities-Based Providers and those Non-Facilities Based Providers that carry telecommunications traffic internationally must obtain a BITS licence.

These filing requirements ensure that all service providers are subjected to the same regulations, including contributions to the universal service fund and CRTC data collection.

An examination of Table 5.2.1 of the CRTC’s 2010 Communications Monitoring Report seems to indicate there may be a lot of missing minutes. In 2005, long distance minutes grew by 10% – about 6 billion minutes – over 2004, In 2006, the growth rate was about 8%.  But the last 3 years have seen virtually no growth – even a modest contraction in long distance minutes.

Some of this traffic is exempt computer-to-computer substitution. But do any of us believe that there is really less long distance calling today than there was 5 years ago? Where did those minutes go?

While some may disagree with the universal service subsidy mechanism, the CRTC needs to ensure that all of the industry participants are playing by the same set of rules and sharing equally in the costs.

There were a few headlines dealing with mobile operating systems that caught my eye yesterday.

The first one said “Sony Ericsson plans to be top Android-handset maker“; the second was “Windows Phone 7 released to manufacturers.” Finally, there was news of the launch of Samsung and Toshiba tablet devices, released with Android 2.2.

The next 4 months are a very busy period for the mobile industry. With many high school and university students signing up for services, followed by the Christmas season, this is “showtime” for the mobile industry. So part of the common thread between these articles, the subtext, was preparing for the fourth quarter selling crunch.

But the other common thread I noticed was that Sony Ericsson is in both camps: Android and Windows Phone 7. In fact, there are a number of device manufacturers that offer both operating systems.

The consumer electronics firms are offering consumers a choice of operating systems; and, it works in the other direction as well: the operating system developers are empowering competitive creativity among the manufacturers.

The consumer electronics business can be fickle – some people are more concerned about the colour than the functionality, the polish, the shape, keys on the dial pad or keyboard. The consumer electronics business is subjected to all sorts of twists that may seem completely irrational to the people who focus on more technical characteristics.

Having multiple hardware platform developers is an interesting hedging strategy for the operating system companies, and in the case of a number of hardware companies, there is a hedging of operating systems as well.

Contrast this approach with the Apple and RIM closed environment.

Benefits and handicaps of each?

Yesterday, the CRTC issued 4 decisions that try to close out the final chapter on the much maligned deferral account.

The account was a concept established in 2002, with the creation of Canada’s transitional Price Cap regulatory regime. At the time, the idea was that the CRTC was concerned that embyonic competitors wouldn’t provide sufficient discipline for phone rates and, seemingly in contradiction, the CRTC did not want consumer prices to fall to a point that would discourage these new competitors from entering the fledgling local phone business.

So prices in urban areas were kept artificially high and the ‘extra’ money was put in an account – the deferral account – to be used for projects to be defined later. Over time, the accounts became pretty sizable and in 2006, the CRTC decided that it would freeze the plan and use the accumulated money to expand broadband, improve access for Canadians with disabilities, and refund what ever was left over (see the introductory paragraphs of Decision 2006-9 for a description of the history of the plan).

That was 4 and a half years ago. There have been court challenges and cabinet appeals and yesterday, the CRTC made its final determinations – ordering Bell to abandon a proposal to use mobile wireless technology and revert to DSL while generally approving the proposed plans from MTS Allstream and TELUS (that first had an adjustment approved for funding its service improvement plan).

The Commission’s rejection of Bell’s HSPA proposal is not surprising; I have alluded to signals a number of times over the past month or so, foreshadowing that the CRTC was not prepared to accept mobile wireless as a full substitute for urban grade broadband internet access.

What was surprising was the language that was used in paragraph 35 of 2010-637:

the Commission directs the Bell companies to provide broadband services using DSL technology to implement their broadband proposal. The variety of services provided must be comparable to those offered in urban areas, using the same DSL technology, in terms of their rates and terms and conditions.

This has no flexibility. Despite current provisioning in urban centres that has DSL among the tools used for broadband deployment – alongside fibre or other technologies – Bell has been ordered to used DSL as the only technology choice for the $300M to be spent over the next 4 years.

Contrast this order with the flexibility acknowledged to be considered for TELUS, in permitting them to select its own fibre backbone, despite the availability of Alberta SuperNet (paragraphs 25-26 of 2010-639):

The Commission has reviewed the costs provided by TCC and Axia, and concludes that there are some communities where it would be less costly for TCC to use SuperNet facilities than to build its own. However, the Commission considers that, for these communities, if TCC withdraws from its deferral accounts only the amount of the cost to use the SuperNet network, the company would withdraw the same amount as if it had chosen the least-cost option.

The Commission notes that the service provided to subscribers will be the same regardless of which facilities TCC uses, and will be equivalent to TCC’s broadband services provided in urban areas, thereby satisfying the Commission’s determination in the deferral account decisions. Further, while the Commission considers that it would be beneficial to avoid the duplication of facilities in certain approved communities, it concludes that the benefits associated with TCC having greater control over its end-to-end broadband network are significant.

Why wasn’t Bell given the same discretion? The CRTC could have denied the use of HSPA as a solution, but ordered Bell to provide a specific grade of service with a maximum level of funding from the deferral account without limiting the engineering degrees of freedom.

That was what is behind the dissenting opinion by Vice Chair Len Katz, filed with the Bell decision.

I submit that once the Commission has established the appropriate allocation of funding from the deferral accounts, the ILECs should be free to deploy new and innovative technologies as long as they meet the price, quality, reliability, service and access conditions imposed by the Commission.

Unfortunately, there will likely be yet another appeal, based on the lack of flexibility to allow Bell to use the technology that it chooses.

Just over 60,000 households will gain access to broadband over the next 4 years, from this $300M investment sourced from urban consumers being overcharged for local phone service. The funding works out to $5000 per household that gains the ability to connect (not signing up) – it is a remarkable level of subsidy compared to other broadband stimulus programs. If broadband adoption reaches levels seen in the rest of the country, it will work out to around $6000 per new subscriber.

It gets worse. Because of the lengthy process, smaller internet service providers already stepped into some of these markets, and 60% of the so-called unserved homes already have access to broadband service. So that means there are really just 20-25,000 homes getting access to broadband for our $300M.

For nearly five years, the deferral account has been promising broadband to some communities; the rollout plan (assuming no further procedural delays) will have some people waiting 4 more years for implementation.

That’s nearly 10 years from the time the CRTC first spoke of using our money to promote broadband expansion and refund the rest. Yesterday saw more than $300M dollars of our money committed by the CRTC to order Bell to expand broadband access to a fraction of a percent of Canadian households.

Do you think you got your money’s worth?

Yesterday’s decision from the CRTC provides fast temporary relief for the smaller ISPs; it may still leave the bigger telcos with indigestion.

Telecom Regulatory Policy CRTC 2010-632: Wholesale high-speed access services proceeding, is designed to preserve a delicate balance that ensures “that the retail Internet service market is sufficiently competitive to protect the interests of users.”

In effect, the CRTC has found that the current retail marketplace is enhanced by the presence of the smaller players, providing price competition and service innovation beyond that of the major telephone companies and cable companies. That has been the situation to date that has allowed retail internet services to avoid price regulation. The decision was predicated on the view that two facilities-based service providers, the phone company and cable company, are not sufficient; the CRTC was not persuaded that mobile wireless companies and satellite services are yet able to serve to discipline the marketplace.

The Commission notes, for example, that current prices for wireless- and satellite-based retail Internet services generally significantly exceed wireline retail Internet service prices for comparable service and that speed issues can occur as those systems’ capacities are approached.

But make no mistake, this is not going to be the long term situation. The CRTC is not setting the mandated wholesale regime in place for all time:

The Commission notes, however, that it expects that as technologies and retail Internet service markets evolve, retail Internet services provisioned using wireless and satellite facilities are likely to become substitutes for those provisioned using wireline facilities.

This is likely a 5-year lifeline to the smaller ISPs, because the alternative technologies will need to establish a measurable share of the market (say, 5-10%), followed by a proceeding that provides a CRTC endorsement of the proposition that these facilities-based competitors are able to provide sufficient discipline to ensure consumer benefits.

In the meantime, competitors will be compensating the phone companies with an additional 10% margin, an amount found by the CRTC to be sufficient to satisfy the increased shareholder risks associated with deploying fibre infrastructure.

The dissenting view of Commissioner Denton says that the CRTC should have gone further, a sentiment captured in the official reaction from Teksavvy. However, aspects of the Policy Direction, specifically the requirement to rely on market forces to the maximum extent feasible, would likely not have survived a challenge on this point – appeals mean delays.

For smaller ISPs, that would prevent the fast, temporary relief associated with this decision. The heartburn medication for smaller ISPs may be giving stomach upset to others. Ask your doctor.