Search Results for: incentives

Regulators regulate. It is just what they do.

Consider it to be a corollary to Maslow’s Hammer: “If the only tool you have is a hammer, it is tempting to treat everything as if it were a nail.”

Why does Canada’s current government seem to believe that regulation should be the primary approach for achieving its communications policy objectives? Indeed, it might help if the government could clearly state what those objectives are and how they are being measured.

A week ago, I wrote about regulating misinformation. Digging way back into the archives, I found this excerpt that appeared as well in a National Post OpEd [ pdf, 330KB] in 2005.

In Canada, as in most countries around the world, we have a regulator that oversees the market for telecom. But what sets the CRTC apart from regulators in nations that are also some of our most important trading partners is the Commission’s presumption that new technologies and services should be regulated. It isn’t surprising. Regulators regulate. It is just what they do.

That article (from more than 18 years ago) spoke of “major changes” in Canada’s communications industry being at hand, as phone services based on internet protocol technology began to move into the mainstream, offering more service capabilities, lower prices and a wider variety of choices for consumers. I identified potential roadblocks, “perhaps the biggest is the possibility of unnecessary regulatory intervention.”

We understand why the CRTC would want to ensure that basic consumer safeguards – including access to emergency safeguards, general protections related to privacy and service level disclosure – are guaranteed. We also recognize that this will likely entail a degree of regulation that, by necessity, should apply equally to all companies offering communications services.

But to go beyond that – to deny certain companies the freedom to offer innovative new services, new capabilities and lower prices without first receiving approval from the Commission – goes too far.

Unfortunately, empowered by recent legislation, the CRTC is extending its regulatory reach beyond the communications facilities and into the content carried over those facilities. In the old broadcast world, this was understandable. Radio waves – spectrum – is a limited resource, so there was only space for a limited number of voices to be carried over the public airwaves. No such limit exists in an internet world. Consumers have the ability to access every program offered anywhere.

That means our ears and eyeballs are no longer fixated on legacy media: newspapers, radio, television. In the case of radio and television, these are regulated by the CRTC under the Broadcasting Act. New media, whether it is streaming alternatives for TV, such as Netflix or Amazon Prime or Apple Plus or other subsciption services, or podcasts and other audio services, or short form content such as TikTok or YouTube, have typically been unregulated, subject only to the terms of service of the platforms.

There were two ways the government could have gone in order to provide regulatory parity for legacy media and new media: relax the regulations on the traditional services; or, regulate the new services. In Canada, the government has chosen to impose regulatory obligations on new media.

It is a consistent approach for Canada. As I wrote earlier this year, “Canada’s policy framework for net neutrality is among the most prescriptive and restrictive.”

Regulators regulate.

Intellectually, I understand the underlying motivation behind the approach that imposes regulation on all content providers. Unfortunately, the legislation has not benefited from meaningful committee review, with the government putting egos and partisanship ahead of genuine improvements to flawed sections of the various Online Acts. We were told that the CRTC will take care of concerns as it works through the details and regulations.

The first details emerged late in the day on the last Friday of September, setting out registration requirements in an 85-page Broadcasting Policy and Order [ pdf, 521KB]. While the CRTC is targeting platforms with more than $10M in Canadian revenue, there are real concerns that smaller content creators will be caught by indirect regulation – the CRTC imposing conditions on a platform, leading the platform to control hosted content produced by smaller independent creators.

Regulators regulate. I get that.

How do we avoid regulatory over-reach to avoid disincentives for Canadians to benefit from investment in content, infrastructure, and leadership in a next generation economy?

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?

Can connectivity play a role in fighting climate change digitally, contributing to Canada’s sustainability goals?

That is the theme of a new report from Accenture, released earlier this week by Canadian Telecommunications Association. “Canada’s next sustainability frontier: Powering digital transformation with connectivity” [ pdf, 12.4MB] explores the environmental impact of connected technology and industrial reinvention.

The new report expands on Accelerating 5G in Canada: The Role of 5G in the Fight Against Climate Change discussed a few months ago in “Broadband’s broader benefits”.

Digital transformation includes the deployment of industrial Internet of Things technology, artificial intelligence, cloud computing, and other technologies to drive increased productivity. Technology enables re-engineered processes and automated operations, powered by data and analytics. “By leveraging technology to produce the same or increased outputs with fewer inputs and waste, this improved productivity, in turn, reduces resource and energy consumption and greenhouse gas emissions. With access to better data on their operations, businesses can further improve their processes over time, driving continuous improvement in both efficiency and sustainability.”

The report examines three specific use cases in key Canadian sectors: oil and gas, mining, and agriculture. Accenture says predictive maintenance of oil rig equipment can significantly reduce downtime and energy consumption, leading to 20% reductions in wasted fuel. Connectivity improves management of mining tailing ponds, leading to a 90% reduction in incidents, and improved worker safety. Precision agriculture, with connected sensors and drones, reduce water and fertilizer use by 20-40%. Each of these sectors are described in greater detail in the report.

Most sustainability initiatives focus on renewables and alternative energy. Digital transformation of key industrial sectors can play a significant role in Canada’s sustainable future. “Canada’s next sustainability frontier” makes the case for digital transformation as part of the solution space.

How do we get there?

The report identifies levers for Canada’s sustainability acceleration.

1. Expansion of the Next Generation of Network. CSPs need to continue to deploy and upgrade wireless and wireline network infrastructure so businesses have the connectivity they need to transform and power use cases
2. Use Case and Device Availability. Solution providers need to build and provide market-ready, proven use cases for businesses that can allow them to digitally transform and meet their industrial needs, accelerating adoption & benefits
3. Industry Verticals Transformation. Businesses need to undergo total enterprise reinvention by investing in their infrastructure and enterprise architecture, use cases and solutions, and talent & services to support digital integration
4. Incentives, Programs, and Impact Measurement. Government programs & incentives need to include digital transformation, supported by a strong end-to-end sustainability measurement strategy to measure and verify emissions more precisely, and drive continuous improvement

Continued investment in advanced telecommunications infrastructure is a key enabler for reimagined business processes. Connectivity, driving digital transformation, work together as important catalyts for fighting climate change digitally.

Canada’s future depends on connectivity.

The following opinion piece, by Canadian Telecommunications Association President and CEO Robert Ghiz, first appeared on July 14 in Wire Report, as “OPINION: Declining prices and record levels of investment show competition is increasing in Canada’s telecom market”.

With the dust having settled on Rogers Communications’ acquisition of Shaw Communications and Quebecor’s related acquisition of Freedom Mobile, now is a good time to take an early look at the impact the acquisitions have had on Canada’s telecommunications market.

When the transactions were first announced, some questioned whether it would result in a lessening of competition in Canada’s telecommunications market and if Canadians would end up paying more. Based on what Canadians have seen so far, the answer to both questions is a resounding “no”.

Just weeks after these transactions closed, prices for entry-level 5G wireless plans offered by Canada’s three largest wireless providers dropped by as much as 35 per cent and the price per gigabyte (GB) of data fell by as much as 50 per cent.

Other brands introduced new plans that offer more data at lower prices than their previous plans. Under its new ownership, Freedom introduced its first truly national wireless plan – with data that can be used in both Canada and the United States.

Simply put, since the Rogers-Shaw-Quebecor transactions were completed, Canadian mobile wireless users are getting more for less.

These recent price reductions are just the latest in a multi-year trend of declining prices in Canada’s wireless market. In fact, while Statistics Canada’s All-items Price Index has increased by 15 per cent during the last four years, its Cellular Services Price Index declined by over 36 per cent during the same period. And according to the government’s own price study, Canadians pay less per month for wireless services than customers in the United States.

Price declines of this magnitude are a clear sign of the vigorous competition that is occurring in Canada’s wireless market. And it should come as no surprise. According to Bank of America, the Canadian wireless market has long been one of the least concentrated in the world. With Videotron’s acquisition of Freedom, Canada now has four national service providers, along with strong regional providers that have brought additional competition to the regions they serve.

But assessing the performance of a telecom market is not one-dimensional. While price is usually top-of-mind, quality and coverage are also important factors. Canada’s mobile wireless networks cover more than 99 per cent of the population, and, according to PwC, are the best-quality networks of all G20 countries. This is truly remarkable when you consider the distances that our networks must cover compared to those in other countries.

This level of performance and coverage extends beyond the mobile wireless market. Canada also has among the best performing and farthest reaching high-speed fixed internet networks in the world with median download speeds that are more than 60 per cent faster than the G20 average, according to Ookla’s Speedtest Global Index.

Canadian networks provide access to speeds of one gigabit per second to a greater percentage of households than those in countries like Australia, the U.K., Italy, France, and Germany, based on a comparison of Australia’s Broadband Performance report, the CRTC’s Communications Market Report, and the European Commission broadband coverage report.

Meanwhile, internet service prices have remained relatively flat, defying the overall inflationary pressures that have resulted in significant increases in the price of most other goods and services.

These positive outcomes did not happen by chance. They occurred only because successive federal governments and the CRTC, have long recognized that facilities-based competition – or competition among network operators – is the preferred form of competition, as it determines Canada’s network quality, coverage, and reliability.

In its 2019 study of competition in Canada’s broadband industry, the Competition Bureau observed that while wholesale-based (or resellers) and facilities-based competitors compete against each other every day, “facilities-based competitors engage in a dynamic form of competition to successfully introduce better networks over time through investments in new technologies.”

The Competition Bureau further described the benefits of facilities-based competition as follows:

This type of dynamic competition benefits competition in at least two ways. First, it is logical that better networks provide better results for consumers: faster, less congested connections that grow and change more or less in tune with consumer demand. Second, once the investment in new networking equipment and physical lines has been made, companies have a strong incentive to compete hard and win customers in order to generate revenues sufficient to recoup those investments.

This race to provide the most robust networks is an important source of dynamic competition. It results in consumers having access to the fastest speeds and best connections while, at the same time, driving substantial investment in the Canadian economy. And, at least over the past 20 years, it has been a self-sustaining form of competition, as both telephone and cable companies jockey to establish themselves as market leaders.

In recent years, Canada’s national and regional facilities-based providers have combined to invest an average of more than $9.2 billion per year in capital expenditures to expand and enhance wireline broadband networks in Canada. Facilities-based providers have also invested close to $3 billion per year over the same period in wireless infrastructure, and more than $12 billion in acquiring additional spectrum licenses.

The benefits of facilities-based competition cannot be matched by mandated service-based competition, which relies on providing reseller companies with access to the networks built by facilities-based network operators at mandated wholesale rates. Because they do not invest in building their own networks, resellers do not contribute to Canada’s network quality, coverage, and reliability. They do not contribute to closing the rural/urban digital divide, nor do they help Canada keep pace with the technical advances that are crucial to Canadian businesses remaining competitive with their international peers.

It is within this context that the CRTC is currently reviewing its wholesale framework that provides resellers with mandated wholesale access to high-speed internet services. The potential negative impact of wholesale regulation on investment is well-established. As the Competition Bureau stated in its 2019 broadband study:

…wholesale access regulation diminishes the expected profits of the investment, as some of the profits from the investments are instead earned by wholesale-based competitors using that network to serve consumers.

In other words, mandated wholesale access can lessen a network operator’s incentive and capacity to invest in expanding and enhancing its network facilities. Without such incentives and investment capacity, Canada risks falling short of the investments necessary to bridge the digital divide, stimulate research and innovation, maintain network security and resiliency, and provide the connectivity needed for Canada to remain competitive in an increasingly digital economy.

As the evidence shows, following the Rogers-Shaw and Freedom-Quebecor transactions, facilities-based competition is not only continuing to deliver ever-improving quality, coverage, and resiliency, it is also delivering lower prices and more value for money. To the extent the CRTC keeps mandated wholesale internet access as part of its telecom policy framework, it is crucial that it balances its wholesale objectives with the need to maintain the benefits of facilities-based competition and the incentives for private sector investment in high quality and resilient infrastructure and innovative services. Specifically, wholesale prices must be set at levels that ensure that investment incentives are maintained.

As I wrote last week, “Canadian carriers have spent billions of dollars investing in telecom infrastructure, but the job is not yet complete. This is not the right time for regulation to discourage carriers from investing in telecom infrastructure.”

Is there ever a right time?

Canada’s policy environment is leading to the wrong climate for investment.

That is one of the key take-aways from a recent survey of leading business leaders published by the Globe and Mail. The survey [pdf, 5.2MB] included chief executives from a wide range of companies and business sectors, representing businesses with annual revenues ranging from $10M to more than $10B. Two thirds of the respondents represented companies with annual revenues over $1B.

The survey’s headline highlights nine out of ten participating CEOs in Canada see cybersecurity as a threat for their business; 70% say it’s a major threat. Still, Canada being on the wrong track for investment is one of the 4 key findings. “Over six in ten participating CEOs in Canada see Canada as being on the wrong track when it comes to being a place for businesses to invest (62%). When asked the reason for their views, participating CEOs most often said taxes and high costs (22%), poor leadership, regulators, and red tape or lack of clarity (22%), and incentives for business being weaker than other countries which does not create appealing environment for investment (17%).”

Further, when asked an open ended question “What are the biggest threats, if any, when it comes to your company conducting business in Canada in 2023”, 38% replied poor policy / regulation. It was the number one threat identified, by a nine point margin.

The regulatory and policy impact on the climate for investment is a key theme in the CRTC’s review of mandated wholesale access to fibre facilities. In its notice of consultation, the CRTC appears to trivialize the risk to further fibre investment by carriers, since fibre access networks “now cover most of their serving territories”. That stands in stark contrast to a recent statement by Bell Canada’s CEO that “There are still 4-5 million locations within our footprint without access to fibre.”

The regulator should know that broadband expansion business cases are examined on a project-by-project basis. After all, the CRTC administers its own subsidy fund to top up the shortfall in a limited number of rural broadband expansion projects. Policy makers must recognize that existing fibre is somewhat irrelevant to the millions of Canadian households that currently don’t have fibre access.

The economics associated with fibre expansion projects should be pretty simple to understand. I have written about broadband business cases numerous times. The incremental cashflows over time have to offset the upfront and ongoing costs associated with the project. If there is a shortfall, the project doesn’t get approved. If the economics don’t work, the private sector won’t invest in the project.

Cutting investment and cutting jobs aren’t threats; these are logical (and predictable) consequences of regulatory and government policy.

This week, we have seen stories about such consequences at TELUS and at Bell.

Will CRTC’s continued intervention in the marketplace drive an increased requirement for government funding for fibre in areas that would have otherwise had a business case for private sector investment?