It is has been about 5 years since I last wrote about regulatory arbitrage. When I have written about the subject in the past, it was in the context of telecom, with arbitragers exploiting loopholes in certain mandated rates.

However, regulatory arbitrage also applies on the broadcast side of the CRTC and it isn’t just a Canadian problem.

A recent article on the Truth on the Markets blog was written about FCC regulations in the US, but most of the article applies equally in Canada.

The article talks about differences in regulating traditional broadcasters as contrasted with unregulated streaming services. “While consumers increasingly access video content through streaming platforms subject to minimal oversight, legacy media providers continue to operate under restrictive regulatory frameworks designed for a bygone era. This regulatory asymmetry creates economic inefficiencies and distorts competition.”

Sounds familiar, right? Canadians wouldn’t know that the author, Eric Fruits of the International Center for Law and Economics, was talking about FCC regulations in this article, rather than the CRTC.

“The inefficiencies of regulatory arbitrage multiply when different services that serve similar functions—such as broadcast, cable, and streaming—are regulated under different frameworks. As technologies converge, disparities among the regimes erected to regulate those technologies become increasingly problematic.”

There are two ways to address the regulatory imbalance: one could lessen the regulatory burden on legacy broadcasters now that streaming services are in a position to discipline the market; or, one could increase the level of regulation on the streaming services. Canada has been moving toward option two – adding fees and content regulations to streaming services.

Of course, increased regulation of streaming services is bound to have a deleterious impact on innovation.

Dr. Fruits writes that regulatory arbitrage won’t improve economic welfare if it shifts investments based on regulatory considerations, rather than marketplace conditions. As an example, he cites the migration of certain premium content from broadcast and cable to streaming services being driven only partly by consumer preferences. He says it’s being influenced by the advantages of operating in the less-regulated online space.

ICLE is participating in the CRTC’s public notice, “The Path Forward – Working towards a sustainable Canadian broadcasting system” [2025-2], with a public hearing scheduled for May 12. Its submission sets out a belief that a framework emphasizing “market efficiency, competition, and regulatory proportionality supports the need for deregulation and light-touch solutions.”

As an example, ICLE looks at the 1:1 rule, which requires BDUs to distribute an independent programming service for each affiliated service carried.

With near-guaranteed carriage, independent services have less incentive to invest in marketing, production quality, or audience analytics—factors critical to organic growth. Furthermore, BDUs often pass the costs of mandatory carriage on to consumers through bundled pricing. This results in cross-subsidization, whereby popular services indirectly fund niche offerings that might otherwise fail in a competitive market.

ICLE’s “Strategic Recommendations for the CRTC” within its submission in the 2025-2 proceeding ties back to the theme of regulatory arbitrage. “The history of video-market regulation suggests that static regulatory frameworks often struggle to keep pace with dynamic markets, leading to unintended consequences. Regulations that might be appropriate given current technology and market conditions can quickly become obsolete or counterproductive as markets evolve.”

The submission concludes: “As the CRTC works toward a sustainable Canadian broadcasting system, it should take a light-touch and modest approach that acknowledges the existing dynamic and competitive video-distribution environment, and the nearly impossible task of predicting and responding to ongoing rapid technological and market advancements.”

The Truth on the Market article talks about technology bringing the end of “scarcity” in the video services business. “Policymakers and regulators evaluating competition in video markets face a seeming paradox: so many monopolies, or near-monopolies, but so much competition.” From a consumer perspective, the video services market is no longer limited to TV channels. This will clearly confound simplistic analysis by those seeking government intervention to disrupt so-called monopoly or duopoly service providers.

So many monopolies, or near-monopolies, yet so much competition.

Will the CRTC exhibit the kind of confidence required to let the system and the marketplace work with a lighter regulatory touch?

Last May, I discussed an interesting CRTC proceeding looking at high cost serving areas.

At the time, I described an interesting CRTC proceeding underway to examine the future of voice telephone service to a total of 110 households and 5 businesses located in 8 communities served by 3 telephone exchanges located off the beaten track in British Columbia. The communities are connected to the TELUS backbone network using microwave radio links using the 3500MHz band. The radio systems used in these communities are outdated, manufacturer discontinued, so the equipment is no longer supported. Indeed, the manufacturer (SR Telecom) went bankrupt more than 15 years ago. As if that wasn’t enough, the 3500MHz band is being reallocated by ISED.

ISED told TELUS that it could no longer guarantee its use of the spectrum beyond the end of March, 2025.

So a year ago, TELUS told their remaining subscribers that it would be sending each one $1400, enough to pay to get connected to a satellite-based voice-over-IP service. That amount would cover the costs of the equipment, installation and the service fees for a full year. TELUS filed its plan with the CRTC in May, 2024, which is what stimulated my high cost blog post last year.

The CRTC decision on the matter was released two weeks ago, which is what brings us to today’s story.

Basically, the CRTC agreed with TELUS that it is not viable to modify (and maintain) the SR Telecom equipment operating on another frequency. The CRTC agreed that satellite-based VoIP was a reasonable substitute, but was concerned with the monthly price differential after the initial gift of $1400 runs out. So, the CRTC awarded residents an additional $4,428. That amount represents 3 years of the price differential between current rates of $32 per month, compared to a total of $155 per month for a satellite-based VoIP service. Never mind the fact that these households will effectively be getting residential broadband for free as part of the deal.

The CRTC basically waved its hands over the contentious issue of whether the “Obligation to Serve” continues to exist for these communities. The Commission acknowledged that TELUS tariffs contain an explicit exception “when it cannot acquire or maintain the equipment or rights of access that are necessary to provide service.” And the decision itself agrees that the status quo is not viable.

15. While the Commission agrees with TELUS that there are limits to the obligation to serve, the Commission considers that the obligation continues to apply when there is a loss of access to spectrum or other existing facilities. All facilities will eventually require replacement due to technological advancements and regular wear and tear. If the obligation to serve no longer applied when a provider was unable to maintain its facilities, this would effectively time-limit the obligation to serve. This would be particularly problematic in high-cost serving areas. Instead, the Commission considers that ILECs are obligated to serve where they can reasonably replace those facilities or find alternative methods to serve customers.

The Commission seems to have forgotten that the Obligation to Serve comes from an era that included a subsidy for high cost serving areas. Expenditures to build and maintain infrastructure were recovered from a kind of regulatory tax on other service and other regions – the national contribution fund in later years.

Once again, the CRTC is demonstrating that it lacks appropriate tools to deal with high monthly costs on an ongoing basis for certain remote communities. For a number of years, I have written about what the CRTC itself recognized as a consequence of its 2016 Broadband Decision.

As I wrote in 2020:

Many people didn’t give much thought to what the CRTC termed a consequence of that decision, “As a result, the Commission will begin to phase out the subsidy that supports local telephone service.” In other words, the Commission swapped out a program for ongoing support for all high cost serving areas, in favour of awarding one-time payments to specific winning projects.

I wrote about the CRTC’s former high cost serving area subsidy regime in my post about wealth redistribution last month. In today’s case, the CRTC decided that TELUS should cover the shortfall, now that the Commission’s own subsidy regime has collapsed.

The decision’s analysis of the Obligation to Serve strikes me as overly simplistic. The Decision says “the Commission considers that ILECs are obligated to serve where they can reasonably replace those facilities or find alternative methods to serve customers”. Then, the CRTC agrees that TELUS cannot reasonably replace those facilities, but still maintain that TELUS has an ongoing obligation to serve. The alternative is another facilities-based service provider: Starlink. Why is TELUS still involved?

To its credit, the CRTC found that a third-party satellite-based VoIP service was a satisfactory solution for service continuity for these communities, similar to a finding 2 years ago when Bell withdrew its exchange radio service.

The total amount we are talking about here is just half a million dollars (115 households at $4,428 each). A court challenge could easily cost that and more. Is this a precedent that TELUS will allow to stand? How many other communities will be left in a similar situation across the country because of the CRTC’s decision in 2016 “to phase out the subsidy that supports local telephone service”? Why is Starlink considered to be an appropriate solution for these communities, but not for the 3 communities I described a month ago in “Fifteen million of other people’s money”?

That particular decision really needs to be revisited.

The CRTC is continuing to be quite comfortable spending other people’s money. Are Canadians getting value?

What is the right amount of competition in the telecom market place? Is it possible to have too much?

Those are some of the questions being assessed by Cabinet and the CRTC right now in the context of mandated wholesale access to fibre to the premises (FTTP) facilities.

Long time readers will know that I don’t think such mandates are appropriate in a competitive environment. A fundamental issue is getting the wholesale pricing right in order to maintain appropriate incentives to invest.

However, if a wholesale FTTP mandate is going to exist, I am having trouble understanding the justification for limiting the kinds of service providers who can make use of those facilities.

TELUS wants to be able to bundle residential internet and TV with its mobile services in Eastern Canada. Bell, Rogers and the association of independent internet providers (CNOC) are arguing against it. They want mandated wholesale access to be limited to just smaller service providers. CNOC said:

TELUS would like the CRTC to give it regulated access to networks of large and small providers instead of building its own networks.

If the CRTC does not close this loophole, the future of smaller players, and of competition, will be in jeopardy.

TELUS isn’t telling the whole story. Regulated wholesale access is meant to remove barriers for local and regional carriers so they can bring additional competition to Canada’s broadband market. It was not intended to help Canada’s Big Three dominant telecom companies from growing even larger.

CNOC itself isn’t really telling the whole story. For residential internet, Bell and TELUS are really no different from Sasktel; they are regional service providers. These so-called “dominant” companies may have been former incumbents in their home regions, but they have no residential broadband customers, and virtually no residential last mile facilities, outside those geographies. Keep in mind that Teksavvy Solutions told Cabinet, “wireline communications networks are natural monopoly facilities — precisely the challenge that wholesale was introduced to address”. So which is it? Are wireline networks natural monopolies, or should competitors be building their own networks? This contradiction strikes me as a fundamental breakdown in logic.

Rogers, Bell and TELUS are national mobile service providers, but CRTC data shows that TELUS enjoys more than double the market share in BC and Alberta compared to what it has in Ontario. The CRTC shows TELUS as the market leader in its home territory, but it is a distant third in Ontario where, at 21.3%, it has less than half the share of Rogers (45.4%). In BC, CRTC figures show Bell with just 17.6% share, compared to TELUS and Rogers with over 40% each. In Alberta, Bell has just 23.3% share compared to TELUS with 50%.

Why are there such significant regional fluctuations in market share? These kinds of figures seem to point to customers choosing to bundle.

The point is, it is misleading to view Canada’s telecom market as being dominated by a monolithic “Big Three”. In most areas, bundling is available from two, not three.

In each region, there are two large competitors: one was the incumbent phone company; the other was the incumbent cable TV provider. Each has transformed to be integrated communications service providers. [I would argue that for internet, no industry participant should be considered to be the “incumbent”, but that discussion is for another day.] There are a lot of other competitors operating, some facilities-based and some based on wholesale access, some using wireline and some using wireless (fixed, mobile, and satellite).

The arguments against regional phone companies having access to wholesale FTTP seem to come down to saying “we don’t mind a little bit of wholesale-based competition, but we don’t want too much of it.” The seems to be that wholesale-based internet is good (that’s why it is mandated), as long as it doesn’t take a serious amount of customers. That was the argument put forward to Cabinet by a coalition or smaller regional companies in their appeal last December [pdf, 221KB]. The petitioners complained that large service providers could use wholesale access to fibre to sell bundles of internet, TV and wireless services, leveraging their brand recognition and existing wireless services.

“This would create immediate challenges to the long-term sustainability of regional and independent providers.” The petitioners are actually arguing that since they aren’t able to offer bundles to consumers – and they don’t have brand recognition – a third choice for consumers could wipe them out.

As I wrote in November 2023, it is a mistake to measure competitive intensity by simply counting the number of smaller wholesale service resellers. Isn’t pricing an important measure of competitive intensity? Despite rampant inflation, prices for internet services declined nearly 8% in 2023 and a further 4% last year according to data from Statistics Canada’s Consumer Price Index. Internet speeds have increased dramatically For wireless services, prices have fallen nearly 60% since 2019, while the overall CPI has risen nearly 20% in that time period.

What about levels of investment as a measure of competitive intensity? A PwC report found “the Canadian telecom sector has invested an annual average of $12.1 billion in capital on network infrastructure. This represents approximately 18.6% of average revenues, which is higher than the 14.2% average across the peer telecoms in the U.S.A., Japan, Australia, and Europe.” CRTC data shows availability of gigabit speeds to nearly 90% of Canadian households by year-end 2023, up from 65% in 2019.

Falling prices and high levels of capital investment strike me as inconsistent with declining levels of competitive intensity. For more than 10 years, I have been writing about the impact on investment created by mandated wholesale access, such as this piece. Still, we have already made the decision that wholesale access is going to be mandated, and that the CRTC would set wholesale rates that appropriately consider the incentives to invest.

So, what is the right amount of competition? It seems to be a confusing message for the government or for the independent regulator to say that wholesale access is good, as long as those wholesale-based service providers aren’t too successful.

Consumers want more choice. If consumers want more options, including integrated services bundles, why would we preclude access to out-of-region integrated service providers? Wouldn’t these service providers significantly increase the level of competitive intensity?

Governments should be concerned about protecting competition, not protecting competitors. What should be the right amount of competition? Is there really such a thing as too much? Should regulators or policy makers be imposing limits on who can compete?

Last July, I wrote about Canada taking pride in being among the first countries to develop AI regulations with its Artificial Intelligence and Data Act (AIDA). I commented that being first isn’t necessarily the best, especially when Canadians might lose out on access to innovative technologies. If the choice is between getting AI regulation right, or getting regulation right now, was there really a need for AI regulations right now, at the expense of regulating AI right?

The July post included a reference to where I argued against technology specific legislation.

I noticed that last week, Canada signed the Council of Europe Framework Convention on Artificial Intelligence and Human Rights, Democracy and the Rule of Law.

Recently, Lazar Radic of the International Center for Law & Economics had an interesting piece, writing that “DeepSeek Shows Why Regulators May be Getting AI Wrong”.

He argues that AI is evolving faster than regulation. In December, a number of international competition agencies issued a joint statement warning “that firms with existing market power in digital markets could entrench or extend that power in adjacent AI markets or across ecosystems”. The agencies, representing the US, the EU and the UK, said: “Given the speed and dynamism of AI developments, and learning from our experience with digital markets, we are committed to using our available powers to address any such risks before they become entrenched or irreversible harms.”

The regulators are concerned that only the richest, best funded giants could afford to train AI models. However, we are seeing numerous alternatives emerge, including China’s DeepSeek, and Mistral AI from France. DeepSeek’s simple origins shook the global equity markets in late January, but Tim Shufelt of the Globe and Mail saw a bright side. “This [DeepSeek] could prove to be a technological breakthrough that makes AI more accessible, with the benefits spreading to companies beyond the Magnificent Seven group of tech giants.” He believes more affordable AI technology would be beneficial to a wide range of businesses, large and small.

Radic says that DeepSeek shows that AI development isn’t limited to a few deep-pocketed American firms. It “may be possible with far lower levels of investment than previously imagined.” Further, he writes that “the open-source AI movement more generally is thriving, with thousands of developers collaborating on decentralized AI projects that challenge the idea that only a handful of companies can drive innovation.”

His concern is that aggressive regulatory intervention could freeze a market that is still taking shape, serving to discourage new entrants rather than fostering them. Radic argues this risk “is compounded when intervention is pursued via regulation, rather than the more flexible case-by-case approach of traditional competition law.” Radic warns, “Premature interventions risk locking in artificial monopolies instead of preventing them—turning “monopolistic AI” into a self-fulfilling prophecy.”

DeepSeek demonstrates that AI may emerge to be one of the more competitive fields in technology. With the pace of AI development moving so quickly, regulators may want to consider exercising greater humility before trying to craft solutions for a problem that does not yet exist.

A few weeks ago, in “Telecom professional development”, I described a series of upcoming webinars, including one coming up next week that looks at the issue of regulating space.

On February 18, 2025 [at 9:30 am Eastern], the International Telecommunications Society is hosting Satellite Technology and the Future of Space Regulation. This webinar is free and will feature Professor Rob Frieden of Penn State University Law.

Last year, I wrote about cellular and satellite convergence, as low earth orbit companies like AST-Space Mobile and SpaceX Starlink began offering direct-to-cellular device connectivity, bridging gaps in coverage in remote and rural areas.

What is the legal framework to govern activities beyond traditional national borders?

How do we navigate complex, and sometimes conflicting, international treaties and national space regulations? Are there jurisdictional gaps and inconsistent space policies across countries that demand resolution?

Space-based technologies involve billions of dollars of capital investment. As operations expand around the globe, the private sector is already taking significant technology risks. With an opportunity to offer connectivity with satellite and other non-terrestrial communications technologies in rural and remote areas, operators of these systems need more regulatory certainty. What standards should guide behavior in space? What agency (and under what authority) will enforce these standards? How should the global community respond to non-compliant states or rogue actors in the private sector?

The February 18 webinar will attempt to address these questions. Professor Frieden will discuss the major international treaties shaping space law: from space safety and debris management to liability in space, along with other jurisdictional issues. The session aims to explore the interaction between these treaties and domestic policies, looking at the challenges for private sector entities and governments in the satellite communications space.

The objective is to identify strategies for regulating space, driving increased certainty, as we technology ventures toward the stars.

I look forward to seeing you online February 18, at 9:30am (Eastern).