Search Results for: incentives

In his remarks to the National White House Conference on Small Business in 1986, Ronald Reagan said “Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”

“Tax it, regulate it, subsidize it” comes to mind when I look at how we seem to be approaching too many elements of Canada’s digital economy.

Last Friday, I read an opinion piece in the Wall Street Journal written by former FCC Chief Economist (and current professor of Economics at Clemson) Thomas Hazlett, “A Lesson for Today’s Tech Trustbusters”. In it, he writes of the angst caused by the $183B acquisition of Time Warner by AOL in 2000.

Regulators feared AOL’s acquisition of Time Warner would stifle innovation. University of Michigan economist Jeffrey MacKie-Mason, who wrote the Federal Trade Commission’s report, said that the combination “will horizontally and vertically increase AOL’s power in the market for internet online services,” which would have anticompetitive effects and harm consumers.

As Hazlett notes, executive mismanagement and clashing corporate cultures are generally cited as reasons for the failure of the merged companies, “But the episode holds lessons for politicians and antitrust regulators, who too often view market rivalry too narrowly.” His article describes the regulatory measures to force AOL to open up its instant messaging platform and how it was quickly superseded by technology. “Texting, Skype, FaceTime, WhatsApp, Facebook Messenger, Twitter and Instagram displaced AOL’s chatting program. None of these new entrants connected with Instant Messenger, or one another, and it didn’t seem to matter.”

Hazlett also notes that this example was hardly isolated. “In 2005 the Bush administration prevented Blockbuster from acquiring Hollywood Video on antitrust grounds: The merger would threaten to monopolize video rentals.”

Consider what is happening in Canada. Recall the CRTC’s interventions into how streaming services Crave TV and Shomi should be offered to consumers? Was regulatory action required or couldn’t the marketplace figure it out?

Why is the CRTC continuing to interfere with service providers seeking to lower monthly device payments for consumers? As I have written before, some aspects of the Wireless Code raised the monthly cost of mobile and removed an important choice from consumers.

What purpose is actually served by limiting device amortization to 2 years?

Customers can still switch at will anytime during the contract period. They just have to pay off the balance owing. With higher device costs, people have hefty balances owing anyway, whether it is a two or three year contract.

Eliminating the regulatory restriction on longer contracts could lead to carriers offering direct consumer incentives to switch: “Come to us and we will pay up to $600 of your remaining balance.”

Once the Commission allowed consumers the right to leave a carrier by simply paying off the remaining balance, what purpose is served by the further regulation of how long the amortization period could be?

If the CRTC gets out of the way, surely the marketplace can solve the challenge of consumers wanting to switch service providers before their payments are complete. If new entrants find it tough to lure customers away, they can always pay off the device balance for the new customer and take over the loan. Was there sufficient evidence of a failure in the marketplace to develop a solution before the CRTC intervened so dramatically to remove the choice of a longer amortization period?

Last week, I wrote “Hindsight may be 20/20, but as so many investment prospectuses warn, past performance is no guarantee of future results.”

When we develop policies, we need to resist politically expedient routes and think 3 moves ahead, playing the game more like a chess master than a novice. Communications policy issues are complex and often benefit from looking at secondary and tertiary impacts, trying to contemplate unintended consequences.

As Hazlett has written, there are lessons to be learned from looking at market rivalry or defining the market too narrowly.

“Tax it, regulate it, subsidize it.”

You don’t need to look very hard to see how so many elements of Canada’s digital economy strategy fall into one or more of these categories.

Can we consider a better approach?

Twice before, I have written posts entitled “Getting out of the way” [July 9, 2012 | April 6, 2016]. I wrote another entitled “Keeping out of the way”.

I continue to think “the future will be brighter for Canadian innovation if the government would try harder to get out of the way.”

Which of my blog posts attracted the most attention in 2019?

Looking at the analytics, these 5 articles had the most individual page views:

1. “Retooling Rewheel’s reports” [July 15th, 2019]
2. “A cautionary tale of political interference” [October 7, 2019]
3. “Where do you think the money comes from?” [August 22nd, 2019]
4. “The economics of Canadian telecom” [December 11th, 2018]
5. “Supporting junk science” [March 11th, 2019]

In fact, “Retooling Rewheel’s reports,” the post about the NERA Economic Consulting’s report saying policy makers and regulators should ignore the ‘fatally flawed’ Digital Fuel Monitor (by Finland’s Rewheel Research), was one of my most viewed pieces of all time.

I should give an honourable mention to “Maintaining incentives to invest” [March 4th, 2019] and “Better data leads to better policy making” [January 28th, 2019].

Some of my posts from the past were apparently being used as reference materials, such as “The Inside Wire: CRTC rules on telecom carrier access to buildings” [July 1, 2003] and “Unplug the digital classroom” [October 7, 2012]. I am happy to see that my archives are providing some value, in some cases more than 15 years later. Take some time to poke around through the archives found in “My back pages”.

Thank you for following me here on this blog (and on Twitter) and engaging over the past year.

Let me extend to you the very best wishes for health, happiness and peace over the holidays and in the year ahead.

Before I went on vacation, I left a few posts to whet our appetites in anticipation of today’s filing of a report by the Competition Bureau. In “Climbing the ladder of investment” [November 12, 2019], I provided a number of quotations endorsing facilities-based competition from the past quarter century of Canadian regulatory proceedings. In “Do market results rule out the need to mandate MVNOs?” [November 18, 2019], I cited a report from Scotiabank that said “regulators face a delicate act of balancing competition and investment incentives. A wrong move could have years of unintended consequences.”

In its follow-up comments to the CRTC [pdf, 2.4MB and Matrix report, 3.0MB], the Competition Bureau withholds a wholesale endorsement of mandated MVNOs, instead recommending additional measures to support regional facilities-based competitors to derive the greatest consumer benefits. Indeed, the Bureau observed that MVNOs may drive lower prices and greater choice, but also could threaten the “progress in enhancing competition in this industry to date.”

While MVNOs can have positive effects on pricing in the marketplace, they are unlikely to deliver the benefits of sustained and vigorous competition that facilities-based wireless disruptors are capable of providing. The Bureau is concerned that the introduction of MVNOs would disproportionately affect these wireless disruptors, putting at risk the positive effects that they have had on pricing, and may impact long-term incentives to invest in high-quality networks in Canada.

Instead, the Bureau recommended that the CRTC should adopt policies focused on incentivizing and accelerating facilities-based competition from disruptors.” It suggests such measures as mandated seamless handoff, more effective tower sharing and site access rules, and updated roaming rates.

The submission by the Competition Bureau appears to agree with my November 18 post, saying “there are promising signs that policies aimed at promoting facilities-based competition are paying dividends.”

Further, the Bureau wrote “All else equal, facilities-based competition is the most sustainable and effective form of competition.” Further, the Bureau observed “A broad MVNO access criteria may also deliver competition, but at a cost.”

As the Bureau concludes, “[facilities-based] competition has not yet reached its full potential and a mandated MVNO policy applied broadly risks undermining the steps taken by wireless disruptors, without much certainty that the MVNO policy will significantly decrease pricing.”

As I indicated in last week’s post, “Scotiabank believes the filing by the Competition Bureau will carry significant weight.” Rather than supporting the CRTC’s call for mandated wholesale services for MVNOs, the Bureau is endorsing measures aimed at accelerating and expanding competition from existing market participants, thereby promoting a climate that supports continued network expansion and investment. That appears to reaffirm support for a model of facilities-based competition.

A big week ahead for telecom regulatory departments.

The revised schedule for the CRTC’s review of mobile wireless services (TNC 2019-57) are due on November 22, with the oral hearing phase scheduled to begin February 18, 2020. Final submissions in that regulatory proceeding are currently scheduled for March 23, 2020.

A week and a half ago, I wrote about the net new subscriber additions in the past quarter. A few days later, in a November 11 research report, Scotiabank argues that the recent quarter’s financial results released by Canadian mobile carriers are indicators that there isn’t a need for regulators to mandate the establishment of mobile virtual network operators (MVNOs).

According to the Scotiabank Converging Networks research note “the most important part of the proceeding revolves around the question: will the CRTC mandate Mobile Virtual Network Operators (MVNO) access?” Scotiabank believes the decision will be among the most important regulatory rulings since the new-entrant AWS-1 spectrum set-aside in 2008.

According to Scotiabank, the facilities-based competition that emerged from the 2008 decision, giving rise to mobile operators Quebecor (Videotron), Shaw (Freedom Mobile) and Eastlink, “looks sustainable.”

Quebecor has been a wireless facilities-based competitor in Quebec for a decade. Is that not sustainable enough? We estimate the company has now captured approximately 19% market share in the province, and, with its new Fizz brand, the momentum has actually accelerated. We estimate Freedom’s market share of covered population (POP) at just under 10%, and we see share gains continuing, driven by network quality improvement, and supported by network and spectrum investment.

Scotiabank’s research found that Shaw and Quebecor’s combined share of new subscribers has reached approximately 30%.

Wireless key performance indicators show that competition has been rising with a long runway. In particular, all three incumbents’ ARPUs are now in decline and postpaid churn is rising. We believe these trends have been indirectly driven by competition from Shaw and Quebecor. As we noted above, we do not foresee either slowing down until they have achieved their market share objectives, which we believe is in the 20%-30% range of covered POP. At their current market share (of POP covered) and our estimate of the pace of share gains, we believe Quebecor still has another five years before it reaches 25% share and Shaw has 10 years of market share gains ahead before it reaches 20% share.

According to the Scotiabank report, the “real sustainable competition” is expected to encourage Bell, TELUS and Rogers to push forward with investment in 5G as a differentiator. Conversely, Scotiabank warns that “heavy-handed regulation such as regulated MVNOs may drive prices down temporarily, it will likely deter the move to 5G” because of an increased uncertainty of returns on future investment and a higher cost of capital.

We believe the United States offers a good example. Competition driven by T-Mobile and Sprint Corp. has driven Verizon Communications Inc. (VZ-N) to accelerate 5G investments, and, in the case of AT&T Inc. (T-N), to invest in media. While both Verizon and AT&T pursued different strategies, their objectives were similar in that they both pursued investments in areas where they thought would help differentiate against T-Mobile. This was all driven by challengers making network investments to compete against Verizon and AT&T, particularly in the case of T-Mobile.

Scotiabank’s recognizes that regulators face a “delicate act of balancing competition and investment incentives. A wrong move could have years of unintended consequences.” The report discusses a number of these potential unintended consequences:

• Large companies with global scale that are not current telecom service providers could become MVNOs under mandated MVNO regulations.
• Large global companies entering the MVNO market selling wireless services as loss leaders would commoditize and cause a significant decline in prices in the short term, causing investments in next generation network investments to decline in the medium to long term and causing network quality to ultimately suffer
• Smaller facilities-based wireless operators like Freedom, Vidéotron and Eastlink (the same companies that have created the competition over the past decade) are more likely to be affected by MVNOs than the incumbents

But Scotiabank warns “Even if the regulators knew of these consequences, trying to establish further regulations to prevent them may just add further complexity with less regulatory certainty.” For more coverage of the Scotiabank report, see the write-up by Greg O’Brien in Cartt.ca: “Wireless results show mandated MVNO is the wrong way to go, says report“.

A few weeks ago, I discussed important data arising from Statistics Canada’s release of the Internet Use Survey. That study included important information about adoption rates of connectivity and for those who don’t have a smartphone, asking why. In the current CRTC proceeding, will affordability concerns be backed by data?

Submissions are due at the end of this week. Scotiabank believes the filing by the Competition Bureau will carry significant weight. The CRTC’s schedule set January 13, 2020 for parties to reply.

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.