Do we need to limit the amortization period for devices in the Wireless Code? The subject was raised by Bell in its intervention on Telecom Notice of Consultation CRTC 2017-259 [Reconsideration of WiFi Roaming]:
Instead of mandating access for Wi-Fi-first mobile virtual network operators (MVNOs), a far more effective measure to address the affordability concerns of low- and middle-income Canadians would be for the Commission to extend the maximum contract length under the Wireless Code from two years to four years, allowing Canadians who wish to do so to reduce the upfront cost of a wireless device with less of an impact on their monthly bill.
We can argue all you want about whether this proceeding was the right place to introduce the subject, but the fact remains that the Wireless Code has raised consumer costs significantly by virtue of the simple mathematics of amortization. Amortizing a device over 2 years instead of 3 means monthly payments are 50% higher. Last year I wrote about a number of regulatory factors that increase consumer bills.
Now Apple has introduced the iPhone X with a Canadian price point in the order of $1300 [the 256 GB version will sell for an additional $220]. Most Canadian phone subsidies have been in the order of $35 per month, which results in $840 over two years. That implies an up-front price of about $450 for consumers. That could lead to more sticker shock than anyone would want to see, inhibiting adoption of these new high-end devices. Alternatively, carriers may raise the subsidy by $15 per month to $50 per month to enable a more reasonable $100 down-payment.
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?
Perhaps more faith could be placed in the marketplace to create more competitive offers. In the alternative, Canadians may find the price of new devices is just too high.
FCC Chairman Ajit Pai was unable to make it to Toronto for The 2017 Canadian Telecom Summit, but he sent a special video message, addressing the conference’s themes of Competition, Innovation and Investment and what the FCC is doing to promote each.
Greetings from Washington, DC, and thank you for this opportunity to address The 2017 Canadian Telecom Summit.
I’m sorry that I cannot be there in person. Mark Goldberg feels like a kindred spirit to me. He’s from Parsons, Kansas and moved to Toronto; I lived in Toronto and eventually moved to Parsons. And the last time I attended, I had the pleasure of listening to and learning from my good friend, former CRTC Commissioner Raj Shoan.
Let me begin by thanking our Canadian counterparts for your long standing friendship and collaboration on telecom issues. Our recent incentive auction is just the latest example. We jointly developed a uniform North American band plan for UHF TV signals and the new 600 MHz wireless band, paving the way for cross-border inter-operability of devices and networks. I look forward to continuing to work together to craft solutions that benefit Americans and Canadians alike.
Now, I see that the theme for this year’s Summit is Competition, Innovation and Investment, so I will take the radical step of talking about Competition, Innovation and Investment and what the FCC is doing to promote each.
Let me start with innovation. We begin with the premise that breakthrough advances are going to come from private sector entrepreneurs, not government policy makers. We want to empower inventors to bring their ideas to life. Now often that just means getting government out of the way. That also means promoting competitive markets and providing key inputs, like spectrum, that aid the incentives to create.
So, what exactly are we doing? For starters, we are reviewing the FCC’s rules across the board, from media to wireline, and deciding which ones still make sense in the digital age. As part of this review we are asking whether the costs of a rule outweigh the benefits. When the facts warrant, we won’t hesitate to revise overly burdensome rules or repeal them altogether. We’ve also put in place a process to ensure that, if an innovator seeks FCC approval of a new technology or service, we’ll make a decision within one year. That’s light-speed in our world.
We also began the process of allowing television broadcasters to use the next generation TV standard, ATSC 3.0, on a voluntary market-driven basis. This standard, which marries the best features of broadcasting and the internet, would allow broadcasters to fully enter the digital era.
On the spectrum front, we moved quickly to open up nearly 11 GHz of spectrum in the bands above 24 GHz for mobile use. This gives operators a clear path to launching 5G and other innovative millimeter wave services in the United States. And we’re currently considering opening up even more of this spectrum.
Now, as we move to 5G, regulators also must recognize something many people often don’t. Innovation isn’t limited to the so-called edge of networks. Innovation within networks is also critical, especially in the mobile space. To realize the digital future, we need smart infrastructure, not dumb pipes.
And that brings me to investment. For almost two decades, the FCC pursued a light touch approach to regulation, one that produced tremendous investment and innovation throughout our entire internet ecosystem, from the core of our networks to providers at the edge. But two years ago, the US Government’s approach suddenly changed. The FCC, on a party-line vote, decided to slap an old regulatory framework, called Title II (after the section of our statute where the rules are found) originally designed in the 1930’s for the Ma Bell telephone monopoly, upon thousands of internet service providers, big and small.
We’ve already begun to see the harms from this shift to more heavy-handed regulation. From 2014 to 2016, the broadband infrastructure investment in the United States dropped, the first decline ever, outside of a recession. Last month, the FCC voted to initiate a process to reverse the Title II decision and seek public input on how to secure the Open Internet that we all favour. I enter this process with an open mind, and we will go where the facts lead us, but I’m confident that this move puts us on the path to more broadband infrastructure investment, which would mean more Americans with high-speed internet access, more jobs building those networks, and more competition, the third topic that I wanted to discuss.
When it comes to competition, small ISPs are critical to meeting consumers hope for a more vibrant broadband marketplace and closing the digital divide. But the simple reality is that the smallest providers simply don’t have the means or the margins to withstand the Title II regulatory onslaught. Now, since we launched our proceeding, 22 small ISPs, each of which has about 1,000 broadband customers or fewer, told the FCC that the Title II order and utility-style regulation had affected their ability to obtain financing. They said that it had slowed, if not halted, the development and deployment of innovative new offerings, which would benefit our customers. And they said that Title II hung like a black cloud over their businesses.
In my first week as Chairman of the FCC, I proposed to relieve small ISPs from costly and overly burdensome reporting requirements associated with the Title II order. Reversing that Title II order altogether would encourage smaller competitors to enter the broadband marketplace or expand their networks. This would mean more competitive choices for the American people.
In short, America’s approach to broadband policy will be practical, not ideological. We’ll embrace what works, and dispense with what doesn’t. That means removing barriers to innovation and investment, instead of creating new ones. That means taking targeted action to address real problems in the marketplace, instead of imposing broad preemptive regulations. And that means respecting principles of economics, physics and law, and acting with humility as we regulate one of the most dynamic marketplaces history has ever known. This vision will unleash the massive investments that the digital world demands.
I am proud to reaffirm my nation’s commitment to promoting more competition, innovation and investment.
And I look forward to working with all of you to bring the benefits of the digital revolution to the people of Canada and the United States.
It is almost a defining characteristic for Canadians to distinguish ourselves from our neighbours to the south. The untrained ear may think we speak English somewhat similarly, but Canadians emphatically define ourselves as “not American” while we roll-up-the-rim-to-win.
That doesn’t keep us from wishing we had American-style prices for gasoline, milk, eggs, airfares, clothing and alcohol. It is springtime, and it is natural for us to look wistfully at greener grass growing on the other side of the border. And we can add to the list, unlimited mobile data plans.
So the City Council for Toronto recently passed a motion calling for the CRTC to mandate “reasonably priced unlimited data packages” as an option:
City Council direct the City Manager to convey to the Commissioner of the Canadian Radio-television Telecommunications Commission the request that major telecommunications providers across Canada be required, as part of their licensing arrangements, to provide consumers with options for reasonably priced unlimited data packages that would be part of the cellular packages they offer.
This motion was passed just a few weeks after that same city council was unable to balance its own budget without increasing taxes and adding additional user fees. Leaving aside the issue of CRTC “licensing arrangements” (and retail pricing forbearance), we might consider whether increased regulation is the best way to increase price competition.
I have frequently written about looking at greener grass elsewhere. We seem to lose sight of how many of these outcomes emerge. US unlimited data plans were not introduced due to regulation, but rather in response to signals of loosening regulation from the new FCC chair, Ajit Pai.
I have written before about the cost of regulation in Canada [such as here and here]. Is it really reasonable for Toronto’s City Council to think we can regulate our way to “reasonably priced unlimited data packages”?
Denmark has been praised as a broadband utopia, but observers often fail to understand the concrete decisions that helped create Danish telecommunications policy.
There is an official telecom policy direction requiring the CRTC to “rely on market forces to the maximum extent feasible” and “when relying on regulation, use measures that are efficient and proportionate to their purpose and that interfere with the operation of competitive market forces to the minimum extent necessary.”
Still, a growing number of CRTC regulations (including regulating the internet) have served to reduce differentiation between service providers, such as with mobile video services (such as NFL Mobile).
Has increased regulation limited choice and reduced incentives for pricing as a competitive response? Is there another approach that could lead to improved outcomes – greener grass?
Yesterday’s approvals of Bell’s acquisition of MTS came with a plot twist that few anticipated. As a condition of government approval of the deal, 40 MHz of spectrum (in the AWS-1, 700 MHZ and 2500 MHz bands) is being transfered to Xplornet, Canada’s largest rural internet service provider, giving birth to a new entrant in the Manitoba market. Xplornet is also getting certain other incentives (under the terms of a consent agreement with the Competition Tribunal) to help it launch, including nearly 25,000 customers, retail stores, discounted advertising rates and expedited access to network infrastructure. Additional Bell/MTS customers will be able to switch to Xplornet without any termination fee (including not having to pay off the remaining device subsidy), serving as an incentive for Xplornet to launch quickly in the province.
The structure of the overall deal includes other measures that help ensure Manitoba will continue to have multiple carriers investing in building and upgrading networks and consumers will continue to have access to multiple brands.
The other interesting twist is found by looking at which network network infrastructure will carry each service provider’s traffic. Up until not, Bell and TELUS have shared use of TELUS infrastructure; going forward, Bell’s 90,000 subscribers in Manitoba will migrate to the MTS network which is also being shared with Rogers under the terms of a long term Network Operating Agreement. The TELUS network utilization is being restored through the transfer of 110,000 customers under the terms of the deal.
The deal brings a change in market dynamics as Bell moves from 4th to first place in Manitoba along with a commitment to maintain current pricing offers for at least one year. Perhaps with an eye toward Manitoba’s western neighbour, statements from the Competition Bureau also signal how similar deals might need to be structured to gain regulatory approval.
With all of its focus on wireless, it is disappointing that the government didn’t get a commitment from the companies to launch a broadband service to target low-income households in the province – or even to impose the condition across Bell’s entire service footprint. Low income services have been launched by TELUS and Rogers in their respective wireline serving areas. Unfortunately, neither the CRTC nor Innovation, Science & Economic Development used their approval process to get such an important service to be offered by Bell in Manitoba, Quebec or those parts of Atlantic Canada not already being served by Rogers.
As I said on Monday, “Set clear objectives. Align activities with the achievement of those objectives. Stop doing things that are contrary to the objectives. That takes leadership, not money.”
Unfortunately, this was another missed leadership opportunity for the government to bridge a gap in digital adoption, without spending any additional taxpayer money.
It’s been a while since we have seen traffic pumping, a kind of regulatory arbitrage.
When phone companies exchange traffic, the company that receives the call (the “terminating carrier”) gets paid by the “originating carrier” to route the call to the final destination. In most cases, the traffic is somewhat balanced; there are around as many calls in each direction. To handle any imbalance, a termination rate is established and on a regular basis, such as monthly, an accounting is done to compensate the carrier that received more traffic than its customers originated. The originating carrier got paid by the customer, so termination rates are a way for the terminating carrier to be compensated for handling their portion of the call.
In general, termination rates have fallen dramatically which has removed incentives for major “traffic pumping” scams that were popular 20 years ago. Today, it generally costs less than a tenth of a cent for carriers to terminate traffic inside Bell Canada territory.
On the other hand, there are still some areas that have unusually high termination rates. In Canada, area code 867 for the Northwest Territories has a termination rate of 3.8 cents, about 40 times the rate for Ontario and Quebec. Iowa has been home to a number of complaints because of exceptionally high termination rates.
There is an arbitrage opportunity created if the termination rate exceeds the cost of actually handling the calls. A carrier can try to stimulate the number of inbound calls in order to receive more traffic. Traffic can be stimulated by attracting a disproportionate number of inbound call centres (think pizza places) or interactive voice systems, such as tele-banking or listening to audio programming. In the old days, dial-up internet modem pools were a major source of inbound termination imbalances.
Here is how the scam worked: an “entrepreneur” found an area that has an unusually high termination rate. Twenty years ago, international destinations were a popular choice – my personal favourite was Moldova – but there were also some domestic opportunities created by higher than average local terminating rates. The entrepreneur works out a deal with the carrier that receives the traffic and shares the proceeds of the stimulated inbound calls. In the olden days, some companies would offer free meet-me conference calling services using Iowa phone numbers, covering their costs completely from their share of the exceptionally high Iowa inbound settlement. Consumers who had nationwide calling plans were indifferent to where they called since those calls were all part of their plan. The originating carrier was stuck paying millions of dollars to the arbitrager.
In at least one case, calls for one of those late night lonely people chat lines were being promoted with a Moldova international phone number, but the calls never left North America; the seductive sounding operators were located here. So international terminating rates were being charged for calls that never went overseas. In that case, it wasn’t just traffic pumping, but fraudulently charging overseas rates for calls that were handled locally. Another Moldova scam in days of dial-up internet had a trojan-horse application connect people’s computers to a destination charging overseas rates. It is not clear that those calls actually left North America either.
But, there is now a new case in front of the CRTC. Rogers has filed a complaint against Iristel [zip] claiming that Iristel has entered into an deal to stimulate traffic to certain exchanges in the Northwest Territories. Rogers claims that in 2016, the scheme has increased traffic destined for area code 867 nearly 500 times the levels a year earlier (2015), and the increase was isolated to 3 of the 6 exchanges belonging to Iristel. Rogers believes the traffic is being stimulated by a “call-to-listen” service from Audio Now, said to be “a “traffic pumping” or “traffic stimulation” scheme designed to take advantage of Rogers and other IXC’s offers to their customers of Canada-wide calling plans for a flat fee, in concert with the high traffic termination charges in Iristel’s Northwest Territories exchange.”
A Toronto area multicultural radio station is promoting access to an AudioNow phone number to listen to its radio programming live, as can be seen on CJMR’s home page. Listeners are instructed to dial a Northwest Territories area code 867 number or an Iowa area code 712 number.
What is the harm? Ultimately, these arbitrage schemes put nationwide flat rate calling plans at risk. For example, carriers may have to exclude calls to the Northwest Territories from their flat rate plans, similar to the way some US carriers exclude Hawaii from their otherwise nationwide calling plans.
Rogers has asked the CRTC to intervene, saying:
The current proceeding is not just an issue between Iristel and Rogers, it will affect all of Rogers’ customers that call the Northwest Territories for legitimate reasons such as to call a business, friends or family. These customers of Rogers and legitimate customers of Iristel may end up losing the benefit of Canada-wide fixed priced calls – whether they place or receive such calls.
This would not be a just outcome of this proceeding. The wrong parties would be hurt.
Rogers has asked the CRTC for expedited relief to immediately set the termination rates as “interim,” enabling the rates to be retrospectively adjusted at the end of the proceeding.
It has been a while since we’ve seen one of these arbitrage arrangements. The history of traffic stimulation programs is not a good one.
Rogers has proposed interrogatories to the CRTC to determine if the stimulated traffic is in fact being routed to the Northwest Territories. Among the issues the CRTC may choose to consider is whether it makes a difference where the traffic is actually routed. For example, if a pizza ordering call centre is physically located in the North, stimulating new traffic and new employment, would that make a difference to its determination? With portability enabled by mobile services and voice over IP services, is it possible to know where calls are being routed? How do we ensure that termination rates are being used to fairly cover the costs of providing service in higher cost areas, and not being abused through regulatory arbitrage?
Not all Canadians have unlimited nationwide calling plans. If calls are being routed to a location other than the Northwest Territories, are consumers’ calls being rated correctly?
How quickly will the CRTC move to review the impact of this 500 fold traffic increase to area code 867?
[Update: December 13, 2016] Iristel has filed its answer to the CRTC, as found below. Iristel concludes:
The most important takeaway from this submission is that the problem that Rogers faces, excessive calling by a group of customers leading to correspondingly high call termination charges, is the result of a business decision by Rogers to provide a Canada wide unlimited calling plan. The onus is on Rogers to now apply a business solution to resolve its predicament. Fortunately, Rogers, being a sophisticated telecommunications carrier with a long history of experience with unlimited use plans foresaw the very risk that has now materialized and even created a contractual tool to address such problems: the Rogers acceptable use policy. Other carriers, including Iristel’s affiliate, Sugar Mobile, routinely apply similar contractual tools with success. In these circumstances, Rogers should not be allowed to escape the consequences of its own business decisions and worse, impose those consequences on other innocent carriers.
