Search Results for: incentives to invest

At some point, we’re going to emerge from isolation and begin the normalization process for our lives and livelihoods.

When will that be?

When can that be? What kinds of key indicators will let us know that it is safe to relax certain restrictions?

What kinds of principles should guide us in understanding how to manage risks of viral transmissions? How (and when) do we begin to have government and industry collaborate to develop workplace standards and protocols to mitigate transmission risks?

Last Friday, the Crisis Working Group of the C.D. Howe Institute released an important report, “Canada Needs “Playbook” For Restarting Economy” [pdf, 167KB]. The Institute’s Working Group on Business Continuity and Trade (co-chaired by former Ontario Minister of Finance Dwight Duncan, and GE Canada VP Government Affairs and Policy Jeanette Patell) “discussed the need for a “playbook” to restart Canada’s economy, the implementation of supports for businesses to “bridge” the present shutdown, and the importance of continued investment in robust telecommunications infrastructure to meet the current surge in demand.”

While the focus of the discussion was an examination of the general economy, nearly a quarter of the report is dedicated to the telecommunications sector, recognizing “the important enabling role of Canada’s resilient telecommunications services during this crisis.”

The working group acknowledged the challenges facing telecommunications providers to maintain network reliability amid record usage levels when “every day is Superbowl Sunday.” Looking ahead, the roll-out of next generation networks will be essential for helping Canadians to adjust in a “new normal” (e.g., sustained “work from home”) for Canada’s economy post-crisis.
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Members particularly emphasized that Canada’s telecommunications services have sustained economic activity as many Canadians switch to working by remote connection at home. The resilience of telecommunications networks today is a result of past investments and current efforts in the field to maintain infrastructure. Network providers are also rapidly building new facilities where these are needed – for example, to service remote learning for students and temporary medical facilities.

The report contains suggestions for measures governments could undertake to encourage further network resilience post-crisis, by providing incentives to accelerating capital investment by service providers. Referencing an report from a month ago [discussed in my blog post: “Could political interference create ‘sovereign risk’ for Canada’s digital infrastructure?”], the working group observed “government policies directed at reducing prices for telecommunications services (such as low rates for mandated access by resellers to telecommunications facilities) may discourage future investment.”

Looking ahead, the roll-out of next generation networks will likely be necessary in a “new normal” for Canada’s economy post-crisis. “Work from home” is likely to be sustained until the COVID-19 virus is fully contained. Fast and reliable telecommunications services will be essential for helping Canadians to adjust.

Recall, the group had previously stated, “If government pursues short-run political objectives at the expense of returns on long-lived infrastructure investments, certain Council members believe confidence in Canada’s regulatory regime for telecommunications will be difficult to win back.”

As a recent Intelligence Memo observed, “Recent experience demonstrates that, whatever discontents the federal government may be channeling, the quality and coverage of Canada’s networks, the cost of services, and the variety of platforms and carriers available, is impressive. Our telecommunications infrastructure is a vital asset. Good public policy should strengthen it.”

A new report released this morning warns “Mandated access could impair Canada’s next generation of digital infrastructure.” The report, “Mandated Competition or Free Ride?” [pdf, 329KB], expresses “concern” that the CRTC would act on political directions to reduce wireless prices and warns of the potential impact of the Minister’s mandate letter on the perception of independence of Canadian regulatory institutions.

In the context of the CRTC’s recent Wireless Review proceeding, as well as the ongoing Cabinet appeal of last year’s wholesale broadband decision [Telecom Order CRTC 2019-288], the Competition Policy Council of the CD Howe Institute held an ”ad hoc” meeting in February to discuss the issue of mandating access to telecommunications facilities. Members of the Council highlighted a lack of clarity for what consumer price level the federal government views as “economically efficient”. The report says certain members of the Council “doubted that the federal government has an empirical basis for its [25%] price reduction target. These members believed that the federal government has established its target arbitrarily and for political aims.”

The report notes the significant risk of setting wholesale rates ‘wrong’ and says that most members of the Council were “skeptical of the institutional competence of the CRTC to consistently identify the ‘right’ regulated rates for mandating access.”

The consensus of Council members present was that competition in telecommunications services involves fast-paced technological change, long lead-time investment in facilities, multiple and highly differentiated service offerings, consumer demand for high-quality services, and rapidly evolving cost structures. All Council members were cognizant of the “enabling” impact of high-quality infrastructure for digital services on Canada’s overall competitiveness. While certain Council members contended that mandated access would provide downward pressure on consumer prices, other members were concerned that short-run price reductions would come at the expense of long-term investment incentives for next-generation facilities. Council members agreed that setting rates for access at too low a level below facilities providers’ required return on infrastructure investments would discourage future investments.

Members of the Competition Policy Council said “Setting rates for access at too low a level below facilities providers’ required return on infrastructure investments would discourage future investments.”

Council members agreed that facilities to transmit information – whether by signals over wireline infrastructure or using radio spectrum – are essential for providing communications services. The question at the core of the discussion was whether competitors ought to build their own facilities, or whether mandating access by some competitors to other competitors’ facilities is preferable.

Recording the divergent views of some members of the Council, the report takes on the tone of ‘meeting minutes’ of the debate among council members:

One group of Council members argued that the CRTC should increase mandated access – particularly by allowing MVNO access to wireless transmission facilities at regulated wholesale rates. These members contended that the CRTC should not assume that the only way to compete is to build alternative transmission systems and operate them more efficiently. In these members’ opinion, such “facilities-based competition” is an out-dated concept in the current technological setting, in which they contend great efficiencies can be generated by superior computer power and algorithms without the need of owning and running hardware transmission facilities. While acknowledging that mandated access requires close attention to appropriate access prices, this group of Council members contended that facilities-based providers would continue to have an efficient incentive for new infrastructure if the CRTC adopts a “cost plus” framework for setting rates for mandated access. That is, these members argue that rates can be calibrated to provide sufficiently high risk-adjusted returns on capital to preserve incentive for new investment at the margin.

In contrast, as discussed further below, a second group of Council members expressed scepticism that the CRTC would have the capacity to set appropriate prices for access that provide the appropriate risk-adjusted rate of return to investment in facilities.

These sceptical members contended that mandating access has failed empirically to foster durable competition. For example, certain members pointed to the CRTC’s arguably unsuccessful earlier approach to compelling unbundling of local loops for telephones in order to foster competition in voice services. Nonetheless it was the development of voice services provided through cable and fiberoptic facilities (e.g., VoIP) that ultimately produced new competitors for telephone facilities.

In this way, these members observed that regulators tend to be “backwards-looking.” That is, regulators arguably focus on static sources of competition. By assuming that existing infrastructure will be the only technology for delivering a given service, certain Council members believe that regulators run the risk of interfering in the dynamic that drives entry of durable new facilities-based competition.

The report concludes with a discussion warning of political interference in the independence of Canada’s telecommunications regulator. “If government pursues short-run political objectives at the expense of returns on long-lived infrastructure investments, certain Council members believe confidence in Canada’s regulatory regime for telecommunications will be difficult to win back.”

According to members of the Council, politically driven policy shifts that result in reduced returns on past investments will be viewed by the investment community as a form of sovereign risk “unless political decision-makers make credible commitments to an independent regulatory process grounded in consistent principles.”

With the COVID-19 pandemic leading more Canadians to work from home, some people are asking if this will put too much stress on the networks or on consumer service plans.

The good news is that Canada’s networks are ready for working from home, even with kids streaming videos while home for March break or closed schools, and very few types of work should put undue strain on typical residential subscriptions.

Popular Science recently published “Here’s how much internet bandwidth you actually need to work from home” which provided the types of bandwidth needed by many of the more popular business conferencing services.

Contrast these relatively low speed requirements to Netflix, which Popular Science says needs 25 Mbps for its highest quality content, or 3 Mbps for its standard definition streams.

We know that the greatest consumption of residential internet bandwidth is high definition streaming video. Very few work-at-home applications would come close; hardly any would involve sustained levels of streaming data that rival delivery of 4K video streams.

According to the CRTC’s Communications Monitoring Report, in 2018 (almost a year and a half ago), more than half of Canadian home had already subscribed to residential internet packages with more than 50 Mbps download speeds. The average residential download speed in 2018 was 126 Mbps, double the speeds experienced in the United States. A third of Canadian households subscribed to speeds faster than 100 Mbps.

According to the CRTC, “The average amount of data downloaded by residential Internet service subscribers increased by 25.4% between 2017 and 2018 to 192.9 GB per month, and by an average of 30.5% annually from 2014 to 2018.”

As temperatures begin to reflect the annual Spring thaw, it marks the beginning of outside plant construction season for wireline and wireless carriers in Canada seeking to invest in capacity upgrades and service expansion to underserved regions.

The government is launching a billion dollar economic assistance package, “to help Canadians cope with the COVID-19 outbreak, with half of the money going to the provinces and territories.”

I mused yesterday on Twitter

A number of regulatory and federal policy actions over the past year have contributed to a “hostile political environment” that inhibits private sector investment.

How much more broadband and wireless investment could be taking place?

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.”

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.