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.
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.
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: Guerilla 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.
High speed telecommunications services are increasingly provided using new deployments of fibre optic based access facilities. For these optical access technologies and related services, 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.
Telecom Decision CRTC 2003-63, Review of Bell Canada’s customer-specific arrangements filed pursuant to Telecom Decision 2002-76, issued on September 23, 2003 follows up on directives from a ruling first issued by the CRTC in December, 2002. As we noted at that time, the rules imposed on Bell in Decision 2002-76 to disclose details from contracts for customer specific arrangements (CSAs) will significantly hamper the flexibility under which Bell can offer services. The new Decision goes further in its requirements for public disclosure, mandating disclosure to a level that gives competitors virtually complete details about the terms and conditions for bids won by Bell and in some cases, compromising customer specific details about telecom and network evolution strategies.
Background
In Telecom Order CRTC 2000-425, Bundling framework developed for customer-specific arrangements, the CRTC established the rules for CSAs, bundling tariffed telecom services with non-tariffed and / or non-telecom services. A year ago, in Telecom Decision CRTC 2002-76, Regulatory Safeguards With Respect To Incumbent Affiliates, Bundling By Bell Canada And Related Matters, the CRTC added additional services to the definition of a bundle, by including those sold by Bell Nexxia, acting as an agent. Subsequently, in Decision 2003-63, Bell was ordered to place on the public record “a description of each service and service component that is, or may be, provided under the contract, whether or not the service is a forborne telecommunications service, whether or not the service is a telecommunications service and whether or not the service is identified in the contract as a service with a discrete rate.”
State of Competition
The basis for the CRTC’s recent string of restrictive orders and decisions stems from concerns about the general state of competition in Canada. While in 1998, in Decision 98-20, the Commission found that many barriers to competitive entry had been solved, five years later, the CRTC cites its Report to the Governor in Council as evidence that competitors have stalled in their acquisition of market share from the incumbents. Unfortunately, the CRTC failed to consider the non-ILEC activities of Bell in the west and TELUS in the east as competitor market share. Further, the real market success of new entrants in major urban markets is masked by the Commission only looking at national averages.
Still, the report acknowledges that certain data services have seen up to half of the market captured by alternate carriers. Canada’s largest telecom customers routinely receive responses to Requests for Proposals (RFPs) from three to five credible service providers. With the bulk of their services required in Canada’s largest cities, customers and alternate service providers are also being courted by municipal electric companies ready to provide fibre-based access facilities. Contrary to general trends in the industry, the marketplace for major accounts is vibrant and has been characterized by fierce pricing and service competition.
Disclosure of Major Account Contracts
As we advised last December, tariffs are already being filed by Bell, disclosing details of rates and service quality objectives for some of the biggest customers in Canada. Having participated in the RFP process, competitors will be in a position to readily identify precisely which customer is associated with each CSA thanks to the level of disclosure required in Decision 2003-63. This will establish valuable benchmarks for pricing and service quality objectives in the terms of the tariff.
In the past, bids in response to RFPs were submitted on a “blindfolded” basis, with little knowledge about incumbent service or pricing strategies, leading to extremely aggressive competition among all participants in order to capture the client’s business. With the public disclosure of large customer benchmarks, one can expect prices and service quality commitments from Bell’s competition to begin to cluster around these new published floors.
The increase in public disclosure is bound to raise concerns for more than just Bell. Large customers may find that their competitors (e.g. other banks, etc.) may be able to discern direction for strategic deployment of information technology, thereby losing their own competitive advantage. This problem is magnified by the CRTC’s insistence to have details filed for non-telecom services being provided, such as data processing equipment. Besides the loss of competitive advantages, the details may increase the security risk of an attack on the customer’s network.
Summary
Over the past year, the CRTC has issued a number of decisions and orders that increasingly impose constraints on the flexibility of the incumbents in offering services to the largest telecom customers in Canada. This market segment is already the most competitive in Canada, with three to five qualified bidders responding to national requests for proposals, let alone additional competitors operating on a regional basis.
As we concluded in our report December 12, 2002, large businesses may be the losers in the end, with less competition and higher prices from the major ILECs. The level of disclosure ordered in Decision 2003-63 is more likely to incent other service providers to be less competitive, raising the spectre of less aggressive bidding for customer rates and service offerings. The ideal market should be characterized by multiple suppliers offering creative arrays of services with fierce price competition. Rather than delivering increased levels of competition to telecom users, the outcome of this Decision could be more suppliers of commoditized services at higher prices.
The CRTC has been seeking to discipline incidents of inappropriate pricing behaviour by the incumbents. Ensuring compliance with bundling rules and imputation tests is laudable. However, capital markets and sophisticated large business customers are looking for regulatory stability in addition to sustainable competition. The CRTC appears to be drifting away from its Price Cap framework and back into a model of micro-management of the incumbents. Public disclosure along the lines required in Decision 2003-63 moves the level of competition for the large business market segment in the wrong direction.
