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Cross subsidies cost consumers real cash.

Based on a number of recent CRTC decisions, it appears the Commission wants consumers to pay inflated prices for internet and mobile services in order for the CRTC to fund other projects.

A couple months ago, in “Ending regulated cross subsidies”, I wrote about the CRTC setting wholesale fees paid by Videotron to Rogers at rates below cost, saying that the financial shortfall can be made up “through other telecommunications services,” all of which are competitive.

Let’s be clear what that means. In the eyes of the CRTC, Videotron, a multi-billion dollar vertically integrated national telecommunications company, should be subsidized by Rogers consumers paying more for their mobile and internet services.

Does that seem right?

Last week, the CRTC sent a letter proposing to grant special dispensation to Corus noting “Corus’ unique position as Canada’s largest non vertically integrated private broadcaster.” Under the proposed Order, Corus would not have to spend as much on Canadian programming. Scotiabank estimates that this could represent around $30 million in savings annually.

Let’s focus on the language in the letter that characterizes Corus as having a “unique position” as a non vertically integrated private broadcaster. There are other private broadcasters that have been seeking relief as well. Bell (CTV and Noovo), Rogers (CityTV), and Quebecor (TVA) have all sought relief, but they are integrated companies. The CRTC has decided “the that it is appropriate to give immediate consideration to Corus’ application on an exceptional basis”, presumably because it believes the integrated companies can sustain financial losses, propped up by profits in other segments.

This makes no sense from a business perspective. Effectively, the CRTC is now depending on profits from other lines of business – internet and mobile services – to prop up money losing broadcast business units. It is an unsustainable business model, punishing shareholders and consumers alike. As I have written before, “A rational business will restructure, or shut down those units that have no opportunity to climb out of the red.”

Bell has filed an application with the Federal Court of Appeal over the CRTC’s automatic broadcast license renewals, concerned the Commission will delay hearing broadcasters appeals for regulatory relief on Canadian program expenditures.

This Commission has now provided numerous instances where it indicates a belief in a system of regulated cross subsidies from unregulated business segments. At the end of the day, these cross subsidies cost consumers real cash.

As Dvai Ghose wrote in the Globe and Mail, “While the CRTC may have good intentions, it demonstrates naiveté when it comes to the private sector, and the consequences could be incredibly destructive for wireless investment and quality in Canada, risking our ability to compete globally.”

This decision helps to promote access to affordable telecommunications services for Canadians and to foster sustainable competition and continued investment.

That was how the CRTC summarized its decision last night on final offer arbitration between Bell Mobility and Quebecor for wholesale mobile virtual network operator (MVNO) access rates.

The decision was notable for a few reasons:

• A focus on creating and maintaining incentives for investment;
• Fostering “sustainable competition”, which has historically been CRTC and Competition Bureau language for “facilities-based competition”;
• Clarifying that the wholesale framework is not intended to guarantee profitability for wholesale-based service providers;
• The CRTC explicitly discounted the usefulness of comparisons to European rates;
• Recognition that average network costs don’t support investment in suburban and rural infrastructure.

The Bell – Quebecor decision should be read in the context of a similar arbitration between Rogers and Quebecor released by the CRTC nearly two months ago. In the earlier instance, the CRTC required Rogers to offer a wholesale service at rates acknowledged to be below Rogers’ costs. The CRTC said Rogers’ shortfall could be made up “through other telecommunications services”. The Rogers decision has been appealed to the courts because of the precedent-setting nature of wholesale rates being set below costs.

This week, the CRTC selected Bell Mobility’s offer.

The Commission clearly accepted the concern that wholesale rates impact the incentives for investment by both parties.

49. Nevertheless, the Commission considers that Bell Mobility has raised a valid concern regarding the long-term impact of artificially low wholesale rates on the policy objective of fostering network investments, which is particularly relevant in suburban and rural areas. While lower retail prices backed by lower wholesale rates are desirable, as discussed earlier, these different interests must be balanced with the wholesale MVNO access provider’s incentives for continued network investment. Accordingly, the Commission is of the view that Bell Mobility’s offer best strikes the balance of maintaining both parties’ incentives to invest.

The CRTC said “the MVNO access framework is not intended to guarantee a risk-free profit margin for [Quebecor’s] MVNO operations, and QMI’s ability to compete should not be assessed by looking at only the profitability of specific plans, but rather by looking at all of the wireless plans it offers.” While the CRTC wants to see lower-priced plans, it also needed to consider the potential negative consequences of lower rates on sustainable competition, and incentives for investment.

The Commission referred to the controversial cross subsidization aspect of the Rogers – Quebecor arbitration decision in this Bell – Quebecor determination, saying “that it does not necessarily have to ensure that costs are recouped over the short term for a rate to be considered just and reasonable, fair compensation for the wholesale MVNO access provider is still an important consideration in evaluating offers”.

Quebecor had asked the CRTC to compare Canadian wholesale rates to those found in Europe. The CRTC clearly stated European wholesale roaming rate structures “have very limited comparative value given the different contexts in which European and Canadian carriers operate, resulting in different cost structures.” Many Canadians have fixated on international comparisons that have such “limited comparative value” precisely because of the “different contexts in which European and Canadian carriers operate”. It was somewhat encouraging to see the CRTC explicitly discount such comparisons.

Finally, the CRTC seems to have given weight to the argument that wholesale-based service providers have uneconomic arbitrage opportunities when average rates are applied for urban, rural and suburban traffic. Such rate structures create incentives to build urban facilities but create a disincentive for investment in suburban and rural areas. “Bell Mobility submitted that, on average, a rural cell site costs more to build, while serving less data volume, than an urban one, resulting in higher costs per GB.” As Scotiabank observed in a research note this morning, Quebecor’s favourable MVNO deal with Rogers will result in Bell’s network being used only in areas where Rogers isn’t as strong. This would result in a disproportionate level of wholesale traffic running on rural and suburban while leading to disincentives for either party to invest.

Fostering sustainable competition and continued incentives for investment are clear themes of this wholesale wireless rate decision. To what extent does it provide clues for the way the CRTC will approach revisions to the wireline wholesale framework?

Last week, I looked at “The evolution of broadband services” and I thought it would be worthwhile to examine some of the implications of those trends.

As we saw in the subscriber growth figures, the overall market is maturing as broadband penetration rates approach saturation. That has important implications for industry participants. Recent investment analyst reports have highlighted the challenges for some carriers facing slowing growth, such as BMO Capital Markets February 23 report (Soft Q4 Reflects Mature Market) and Scotiabank’s February 24 report (Quebecor – Expansion Strategy Is Needed To Return To Growth). BMO wrote

Quebec market mature and competitive. Quebecor’s results over the past six quarters reflected a slowing growth profile based on two dynamics; 1) the maturation of its wireless franchise (which has reached its natural level of 25% share in a four player market); and 2) increased wireline competitive intensity as BCE is aggressively capturing share (reflecting its scale in its FTTH fibre footprint).

How can service providers grow their businesses in such an environment?

Let’s take a look at the CRTC data showing the evolution of consumer broadband services.

Consumers are choosing to subscribe to higher speed services, with three quarters of Canadians subscribing to broadband services delivering download speeds of more than 50 Mbps in the third quarter of 2022; sixty percent subscribe to speeds over 100 Mbps, up 10 percentage points from a year and a half earlier, when only half of Canadian households subscribed to broadband services over 100 Mbps.

Consumers have demonstrated a willingness to pay for faster broadband. That requires investment, but it is investment that pays off with higher revenues. Therein is one of the common sophomoric errors made by some telecom industry critics who confuse price with ARPU (Average Revenue Per User). In fact, the price of higher speed services has declined over time, which is one of the reasons that more consumers are electing to upgrade their connection to a faster service. Between third quarter of 2019 and third quarter 2022, average monthly downloads nearly doubled (from 204.8 GB to 394.4 GB). In the same three year period, average monthly uploads increased nearly 50% (from 25 GB to 34 GB).

The mix of customers at each product tier has changed for many carriers, transitioning toward higher speed premium services as consumers select a connection that delivers the best value for their steadily increasing connectivity needs. The Scotiabank report observed that Bell is spending close to $20B on its FTTH (Fibre to the Home) strategy, to bring FTTH to 9 million premises by 2025.

One way a carrier can grow its business is by investing, perhaps to be able to offer more advanced services, or to expand networks to underserved areas.

Another approach is by acquisition. As some industry participants look at the capital investment required to upgrade their services portfolio, some choose to exit, which may be a driver for many of the recent acquisition in the Canadian broadband market. Faced with the increased competitive intensity described by BMO, some ISPs have been acquired over the past year by bigger, facilities-based carriers. A Scotiabank report dated March 6 suggests that third party internet access (TPIA) and fixed wireless access (FWA) are tools that may enable mobile wireless carriers to offer bundled services beyond their traditional home territory.

Videotron is looking to expand the geographic reach of its mobile and internet services into Ontario and Western Canada by acquiring Freedom Mobile and leveraging the expertise of recent acquisition, VMedia. As BMO wrote, “The reality likely is, not only does Quebecor want the Freedom transaction, it NEEDS the Freedom transaction.”

It is a natural evolution of a maturing market.

Businesses operating in maturing markets need to find ways to differentiate themselves from their competitors, through innovation, improving customer service, or creating unique products or services that meet the evolving needs of consumers.

These continue to be interesting times in Canadian telecom.

I have had an interest in looking at demographics ever since my graduate research paper examined the impact of Quebec politics on the growth of a subset of Ontario’s population.

That may explain why I was particularly taken by a research report released by Scotiabank Global Equity Research that looked at Canada’s increased rate of immigration and the impact on the mobile services market.

I was particularly interested in these key points raised in the Scotiabank report:

Strong wireless loading in Q2 likely not a one-time event. Net wireless loading for publicly listed Canadian service providers totaled 450K in Q2, the highest level for a second quarter in the last 15 years. This level of wireless loading is usually reserved for a normal Q3 or Q4 (i.e., the back-to-school and winter holiday seasons). In “normal” times, Q2 usually saw 200K-350K net new activations.
…
Canadian immigration surge fueling recent population growth. Interestingly, the Canadian population grew by 128K in Q1 2022 (the last data set published by Statcan), the highest level for a first quarter in at least the last 15 years. Of that increase, 127K came from new international migration, of which, 114K were due to new permanent residents. The increase in new permanent residents is a proactive government directive that is expected to boost new immigrants to around 443K per year over the next 3 years from around 300K on average in the last 7 years. Just to frame the impact of immigration on population growth, the Canadian population grew by 1.3% yoy in 1Q22, excluding immigration the growth would have been 0.1%.
…
Some companies will feel the benefit more than others. Population growth was not even across Canada. Ontario and British Columbia saw an outsized increase compared to Quebec which was closer to recent levels. The reason we highlight these divergences is due to the higher market share that Rogers has in Ontario and TELUS in BC in normal times. This also could explain why Quebecor did not see a material increase in yoy net loading in Q2 vs previous years as population growth in Quebec has not increased to the same extent as Ontario or BC.

To what extent are these trends contributing to business strategies, including M&A activity, among national telecommunications companies?

The intersection of telecommunications policy and public safety has been failing Canadians.

There have been failures on two distinct fronts: public alerting and the development of a public safety broadband network.

As reported by Colin Freeze in the Globe and Mail, Canada has had a “direct-to-cellphone” alerting system (Alert Ready) operating since 2018, but the RCMP in Nova Scotia didn’t know how to use it.

The Alert Ready website describes the roles and responsibilities of various agencies in the delivery of public alert messages, which are transmitted to compatible mobile devices, TV and radio broadcasters and satellite and wireline broadcast distributors.

The system starts with a government-authorized user (provincial, territorial and federal government organizations, and emergency management officials) who:

• Specifies the type of alert [e.g. amber alert, tornado, etc.] as well as whether it is to be broadcast immediately because of imminent threat to life.
• Chooses the content of the message, including which language(s) the message will be issued in.
• Chooses the format of the message, including whether the message will be sent as text only, audio only or in both text and audio formats.
• Specifies why and when the alert is sent.
• Ensures that the alert is updated and/or cancelled.
• Specifies the geographical areas covered by the alert.

Given the amount of testing that the system has undergone, and the number of Amber Alerts or other alerts that many of us have received at all hours of the day and night, it seems inconceivable that anyone responsible for public safety communications would be unaware of the system.

How is it possible that management in an emergency services organization like the RCMP did not ensure training and procedures were in place? Where was leadership from the federal government?

The CRTC ensured that a working notification system was developed, and paid for it by an artificial tax on TV distributors, part of the government’s parallel tax scheme that I described 4 years ago in “A taxing situation”.

This was a failure in leadership by those responsible for public safety.

When the police receive a new vehicle, the car manufacturer may be responsible for training the police agency on how to activate the lights and how to activate the siren, where to find the hood release, how to accelerate and how to brake. But ultimately, it is up to the police to develop procedures on when it is appropriate to use these capabilities. Police car makers can build high performance vehicles, but it is up to the police to determine when it is appropriate for the police engage in a high speed chase. The vehicle has lights and sirens, but the manufacturer has nothing to do with deciding when it is appropriate to activate them. The builders of the Alert Ready system can train users on how to use the system, but cannot develop the procedures for when the system should be activated.

Last weekend, there were outages for 9-1-1 service in parts of the Yukon and all of the Northwest Territories. In some locations, 9-1-1 was reported to be available from mobile phones but not landlines. This is a standard Alert Ready type (“A 911 service alert happens when there is a disruption or outage of telecommunication services between the public and emergency responders”). Were alerts sent? If not, why?

From the beginning, I have called for reviews of the system, suggesting “Canada should have a multi-agency formal process to review each use of the National Public Alert System, to help develop best practices”. Tragically, in Nova Scotia, the agency charged with provincial policing had no awareness of the system, let alone an awareness of best practices, in a time of crisis and a truly urgent need for the public to receive notifications. No wireless alert was issued; no notification was sent to broadcasters for their retransmission.

On the second file, the development of a public safety broadband network, the government has again failed to provide leadership, squandering valuable spectrum and failing to deliver communications capabilities that every other sector of the economy takes for granted. For a decade, 20 MHz of valuable 700 MHz spectrum has been sitting unused, reserved for some mythical public safety broadband network to provide first responders with interoperable multi-media communications capabilities.

The general public has enjoyed these capabilities for years. We call it WhatsApp, or Facetime, or any number of competing apps. Need more security? The business community has a number of solutions, none of which require billions of dollars worth of spectrum and billions more to build out a network. Any other organization would be harshly criticised for not using spectrum. The public safety spectrum is idle and has been for more than 10 years. In March, “Public safety within the public network”, talking about a virtual network solution – an architecture that is used in the US with its FirstNet.

Last week, the FCC celebrated its first 10 years of wireless public alerts in the US. There is much we can learn from other jurisdictions for public alerts and for public safety networking. The first step requires recognizing we have a problem.

Le meglio è l’inimico del bene. Perfection is the enemy of the good. No system can be expected to be perfect, but surely some kind of solution is better than nothing.