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.
Large incumbent carriers face attacks from next generation voice service providers
Despite lingering predictions of its impending demise, voice service has remained the leading revenue generator for telecom networks. In the wake of the failed generation of competitive local exchange carriers (CLECs), a new generation of “guerilla” service providers is emerging, characterized by companies such as Vonage, threatening to capture substantial voice service revenues, without incurring many of the costs associated with building or leasing local access facilities.
Facilities-based high-speed internet access companies can no longer wait until voice over IP is perfect before launching their own IP-based services. Voice over Internet Protocol (VOIP) has already come to “prime time,” thanks to widespread availability of high-speed internet, coupled with tolerance of minor quality flaws in calls, helped by people being accustomed to imperfections in mobile calling.
Continuing to delay product launches until “carrier quality” VOIP can be achieved, could leave the gorillas of the telecom world, the incumbent phone and cable companies, in the position of providing raw utility capacity to the guerilla VOIP carriers, leaving the gorillas to incur the costs of carrying voice, without receiving any of the associated retail revenues.
Introduction
Guerilla: diminutive of the Spanish wordguerra, war, and means petty war, that is, war carried on by detached parties; generally in the mountains; one who carries on, or assists in carrying on, irregular warfare; especially, a member of an independent band engaged in predatory excursions in war time; a member of an irregular armed force that fights a stronger force by sabotage and harassment.
In this paper, we use the term “Guerilla Carriers” to refer to the new generation of telephone companies that exploit existing high speed internet connectivity to provide voice service to customers. The term is fitting. The guerilla carriers are offering an irregular service, using unconventional technology to fight the stronger force of the incumbent carriers. The first generation of competitive local carriers attempted to battle the much larger and better funded gorillas by fighting with the same weapons: standard telephone equipment, the same services, the same quality, but lower prices. These first generation competitors have largely disappeared. Funding dried up as the new companies spread themselves too thinly against a larger, well entrenched opponent.
Changing customer expectations
Conventional telephone companies have focused on competition in “carrier-quality” services. New entrants committed to build networks just as good as that provided by the incumbent gorillas.
Guerilla carriers have learned that many customers are willing to accept “good enough” quality, when providing value in the form of cost benefits, additional services or other types of value. Sometimes, “good enough” is just that – all things considered. Customers’ perception of telecom quality has changed, such that traditional indicators (audio characteristics, central office power, network availability) may not be as important to users today. New features (such as phone numbers from multiple locations or distant location emulation, flat rate long distance pricing, unified messaging with voice-to-email conversion, web feature activation, etc.) provide compelling reasons to switch.
When voice service is dependent on available commercial electric power, the telephone may not work when the lights go out. In an era of near ubiquitous mobile service, people often have a second carrier available. The mobile service can provide emergency backup for an internet based service. Such an alternative on those rare occasions of power failure is “good enough” for most consumers.
Mobile services have served to condition users to prioritize their values in telecom services; mobility as a feature was more important than perfect call quality. For VOIP, voice quality may sometimes be compromised, if the local access IP network is congested. However, expectations of the public have been compromised in an era of mobile and international calls experiencing clipping or dropping. VOIP service may not be everything people came to expect from their phone company, but the phone company has not always provided the emerging capabilities that people can expect to see.
Guerilla companies are innovating with new services, such as allowing customers to pick phone numbers in distant locations yet have the phone ring wherever they plug-in their VOIP adapter. Features for these services are instantly added and changed by visiting an easily navigated website. Unified messaging means that voicemails and faxes arrive by email attachment and can be heard or viewed from any internet connected computer. And new features will continue to be added, fueled by virtually limitless creative minds developing niche applications for micro-markets – one of the few true lessons of the internet economy.
In the not-so-distant future, guerilla services providers will need to innovate in order to have significant market impact. We do not expect these providers to attract substantial revenues by simply replicating conventional telephony at lower prices. One of the lessons learned from long-distance wars is that gorilla-sized incumbents can crush smaller competitors with price slashing and are better able to sustain losses, if a price war erupts. New feature innovations, in many cases targeted at micro-markets and specialized applications, may be the key to guerilla operators securing widespread VOIP adoption. Such an approach will enable a VOIP service provider to build its market presence from the fringe toward the mainstream.
Changing investment strategies
Until the bubble burst, investors saw infrastructure companies as the best way to profit from the explosive growth in demand for internet bandwidth and services. Rather than sorting winners and losers among the myriad of applications, considerable amounts of investment capital flowed into companies that built fibre optic backbones and internet data centres and to the manufacturers of equipment used by such construction. The theory behind this investment approach was that infrastructure was a tangible asset. Investment in telecom infrastructure was a way to hedge the inherent technology risk: derive New Economy yields out of Old Economy values – real estate and other tangible capital asset based companies.
Unfortunately, too much money was available with too little attention paid to realistic ability to derive a reasonable return on the capital investment. Corporate restructurings saw valuations on the assets frequently cut by more than 90%. Telecom infrastructure became so plentiful that its strategic value has diminished. Long haul networks are still being acquired from bankrupt network operators for pennies on the dollar of original investment.
In the past, carriers created competitive advantages for themselves associated with differentiation in products, routes and capacity. Condominium fibre routes, nearly infinite capacity driven by optical multiplexing technology and fire-sale asset acquisitions have made low cost ubiquitous networks available to all comers. Long haul capacity has become table stakes – no longer providing a competitive discriminator between carriers.
Still, there remains limited choice in local access. Most major centres have at best two communications pipes entering most homes: the incumbent telephone company and the cable company. Both compete for providing high speed internet service to users. Both have tended to dabble in providing services that compete with each other’s core business, in order to deliver the “triple play”: voice, TV and internet. In some cases, mobile services, both cellular and Wi-Fi data, are added to the mix. Competition, while limited, has enabled consumers to choose between at least two different suppliers for high speed internet. In Canada, almost a third of all households have broadband service from the incumbent cable or telephone company, creating a platform for guerilla attacks on voice revenues.
While voice calls only require a fraction of the bandwidth capacity of a high speed connection, voice is an especially demanding application. Unlike most internet sessions, voice connections have symmetric resources demands: both sides of the call generate balanced loads. In addition, voice traffic has a sustained level over a long period of time. A single side of a conversation can keep traffic flowing through the entire time that the people are speaking. Contrast this to a web browser request for a multi-media page. The multi-media may need more bits to be transmitted, but the server fills this single request as fast as the network will carry the traffic. The network is then available to serve any of the thousands of other clients. Voice transmissions on IP networks threaten to change the traffic engineering characteristics of existing broadband access infrastructures. As a result, guerilla carriers could drive increased costs for incumbent high speed service providers, as networks need reinforcement to meet end user demands.
Some cable companies have delayed introducing voice services because of concerns about network readiness. Telephone companies have hesitated to introduce voice over their own broadband plant, because of concerns in respect of revenue cannibalization. Ironically, both may find their networks being used for such purposes and those revenues are being gained by guerilla operators.
Conclusion
VOIP services will increasingly appear across cable and telephone company high speed networks, whether or not the incumbent service provider cooperates. In many ways, VOIP is another instance of peer-to-peer networking. Like it or not, broadband service providers will have to engineer their networks to accommodate the traffic associated with voice, just as carriers have to accommodate multi-media music, video and gaming applications. Broadband internet service is marketed as an enabler of capacity-intensive applications. Yet, some providers of high speed services, whether DSL from the local telephone companies or cable modem service from broadcast distribution companies, view VOIP as an annoying consumer of resources. When congestion occurs in the network, some operations departments of high-speed internet providers seem to discourage users that avail themselves of the capacity and capabilities promoted in the high-speed services sales pitch!
Such a perspective, discouraging a continuing increase in demand, is dangerous and contrary to a customer-focused business philosophy. Rather than being viewed as a capacity-hog, VOIP must be embraced as an important application. VOIP drives: improved customer loyalty (thereby reducing churn) for broadband service; increased penetration of high speed services (helping to migrate customers from dial-up and high speed “lite” products); and, differentiated service capabilities, such as unified messaging and geographic independence for numbers.
For more than 100 years, voice service has provided the revenue streams that funded network evolutions of worldwide telecom networks. The gorillas of telecom, the giant local phone and cable companies, must prepare for guerilla attacks by next generation carriers. Alternatively, the gorillas will be left to incur the costs of carrying voice, while foregoing the lucrative retail revenues.
Telecom Decision CRTC 2003-45, Provision of telecommunications services to customers in multi-dwelling units, issued on June 30, 2003, sets out the CRTC’s rules governing the relationship between landlords and telecom service providers. The decision follows a three year long paper process, initiated by Telecom Public Notice 2000-124.
Background
Despite the rhetoric of customer choice, this has been an issue of money: what will carriers pay to be in the buildings. Also, in many cases, building owners have sought partnerships for providing advanced telecom services as a competitive differentiator in offering new amenities to tenants while increasing revenues derived from the property.
The problems that led to the regulator’s intervention originally began at the height of the dot-com and telecom boom, when many new entrant service providers were seeking access to buildings. Landlords witnessed a continuing stream of new carriers, large and small, seeking access to limited space in telecom closets. In addition, building owners were required to pay for inside wiring for new buildings and found carriers unwilling to compensate them. At the same time, building owners have been faced with similar requests for access from broadcast distributors, using satellite or fixed wireless technologies, as well as data service providers seeking rooftop access for antennae. Other than with respect to broadcast distribution undertakings (upon which the CRTC has already ruled), the CRTC did not find any reason to address access by non-wireline carriers at this time.
Setting rules on access
In yesterday’s Decision, the CRTC has declared that:
it is illegal for Local Exchange Carriers (LECs) to enter into exclusive or preferred access arrangements with building owners, although the CRTC has recognized that preferred marketing arrangements have consumer benefits and should be permitted.
building owners have the right to manage the use of space and supervise the installation of wiring and equipment in their buildings. However, LECs that want to install or upgrade in-building wire should, subject to the building owner’s reasonable acceptance of the wiring plan, be given access to the any “pathways” required to do so. LECs that exercise this option will be responsible for paying the associated costs, including those reasonably incurred by the building owner.
where there is insufficient space available to install additional in-building wiring, the building owner must either permit the carrier to construct additional risers, or allow upgrading or replacement of the existing in-building wire to make more efficient use of the riser space available.
Where a building owner and a LEC cannot agree on terms for access consistent with CRTC guidelines, or on a timely basis, the CRTC has indicated that it will take further action, including (depending on the circumstances) an order under Section 42 of the Telecommunications Act, which purports to provide the CRTC with expropriation-like powers concerning private property.
New Buildings
Since 1999, new building owners have been required to install and maintain responsibility for in-building wiring, often at high cost, and frequently without compensation by carriers. This Decision rescinds that requirement and permits building owners, either to install and retain control of in-building wiring or to enter into arrangements with LECs, whereby they would install and control the wiring.
Compensation
The CRTC recognized that some building owners have already incurred costs to acquire or install copper in-building wire (such as in new buildings), or have upgraded in-building wire in order to provide superior facilities, such as fibre-optic cable or shielded cable, and may not have had the opportunity to recover their investment. Accordingly, the CRTC finds it appropriate for building owners to charge a fee for the use of in-building wire to recover any capital costs reasonably incurred for in-building wire. By corollary, the CRTC considered it inappropriate for building owners to charge a fee for the recovery of costs of in-building wire where the building owners acquired responsibility and control at no cost.
While the CRTC acknowledges that carriers should pay for space occupied and the power consumed by telecom facilities in the buildings, it does not believe building owners should be compensated for the construction of utility infrastructure (equipment rooms, risers, wiring runways, etc.). This could become an issue for negotiation under the terms of master access agreements for builders.
Building owners will be allowed to recover costs incurred for provision, installation, construction and supervision where additional floor space, ventilation or other building facilities must be constructed, at the request of a carrier. While the CRTC does not approve of “admission” or “entry” fees, building owners can pass along costs incurred for providing the approval of plans, or for safety and security measures and similar services reasonably required for installing and operating telecommunications facilities.
Disclosure issues
The CRTC is requiring that the terms and conditions of all access agreements between a LEC and building owner must be posted on the LEC’s website. For safety and privacy reasons, no customer specific information, nor wiring diagrams are to be disclosed, but the financial terms, whether written or unwritten, are to be open to examination by other carriers. In addition, the CRTC is requiring that LECs disclose agreements to install wiring for buildings under construction, in order to facilitate other companies that wish to install their own facilities at the same time. It will be interesting to see the impact on construction timetables potentially caused by multiple wiring crews.
Summary
Builders may have received relief from the costs of installing the wiring, subject to successfully negotiating reasonable terms with at least one carrier – likely, the local incumbent. Existing building owners have an opportunity to begin charging all carriers, including incumbents, for the space and power being consumed in their buildings and the security associated with controlling access to their premises.
While incumbents have now won access to the few buildings that had signed exclusive deals with new entrants, they may find that there are monthly fees to be paid that had never before been part of their budgets. In addition, carriers will have to choose whether to pay upfront capital for wiring in new construction or pay recurring monthly fees to builders or riser management companies.
Companies seeking to use alternate technologies, such as fixed wireless access, or broadband services have been left in the cold, with no help for mandated access or guidance for negotiations with property owners.
In order for building owners to protect their private property rights, they should take a firm but fair approach to new requests for building access. LECs must resist the temptation to abuse this Decision by making unreasonable demands on building owners, such as establishing mini-switching centres within buildings, absent an appropriate lease.
At the end of the day, the CRTC regulates telecom carriers, not landlords. Some of the areas covered in this Decision may be open to a court challenge in respect of the CRTC attempting to overextend its jurisdiction. The timing of a court challenge will depend on the reasonableness of carriers and building owners alike – presumably, both parties operating with a view to providing quality service and value to their mutual client: the tenant.
Telecom Decision CRTC 2003-23, GT Group Telecom Services Corp. v. Aliant Telecom Inc. – Tariff violations and contraventions of the Telecommunications Act, and Telecom Public Notice CRTC 2003-4,Measures with respect to incumbent telephone company regulatory compliance both issued on April 10, 2003, demonstrate the increasing level of frustration that the CRTC has felt with regulatory mischief on the part of Canadian incumbent telephone companies.
Background
In April of 2002, GT Group Telecom asked the CRTC to investigate the Atlantic incumbent carrier, Aliant, in respect of off-tariff pricing for Centrex services for Memorial University of Newfoundland (MUN). Group Telecom asked the CRTC to investigate and take steps to ensure that Aliant conforms with its tariffs and statutory obligations. In the past six months, the CRTC has found violations of various Decisions, Orders and directives by other major Canadian incumbent carriers, in response to complaints by Call-Net and Group Telecom.
Finding Fault
In today’s Decision, the CRTC agreed with Group Telecom and found that Aliant knowingly contravened its own tariffs in all three areas that were the subject of Group Telecom’s complaint in order to maintain the MUN account. The CRTC took the unusual step of asking Aliant to show cause as to why the Decision should not be registered with the Federal Court. Registering a Decision in this manner makes continued violations the subject of contempt proceedings.
Inspectors
Until now, the CRTC has relied on competitors to launch a complaints process before the Commission took the steps to investigate a problem. Given the nature of the relationship between the telephone companies and their customers, competitors often do not have the ability to provide the Commission with concrete evidence of misbehaviour. In today’s Public Notice, the CRTC has announced that it will designate inspectors, for the purpose of verifying compliance with the Telecom Act and stated that inspections could begin any time after mid-June, 2003.
Summary
Throughout the past 11 years of significant telecom competition, a number of CRTC Decisions have been released too late to be of assistance to the original complaining party. With the history of new entrants launching complaints and then withering away into bankruptcy, the CRTC had to be feeling pressure to be more proactive. The signals for this aggressiveness have been coming since the summer of 2002. Competitors have much reason to celebrate. While Bell and Telus have likely been reviewing their major contracts due to earlier bundling decisions, there will be a renewed focus given the clear lack of tolerance for continued abuses.
Incumbent carriers that are seeking increased flexibility in pricing will have their work cut out for them to explain new ways that customers are buying integrated services and new pricing models that such accounts are demanding. As we noted last December, in the end, large businesses may be the losers, with less competition, reduced incumbent flexibility and higher prices from the major ILECs.
