Search Results for: incentives to invest

Let’s continue with a theme I raised on Friday.

Last week, as Videotron expanded the reach of its DOCSIS 3.0 ultra-high speed broadband [ pdf, 32KB], it also increased the download caps for its users of 30 and 50 Mbps internet services. It adds pressure to Canadian telephone companies to consider the massive investments (such as a Verizon-like FTTH approach) to compete with cable internet speeds.

In the past, I have called for all levels of government to create more favourable environments for increased broadband investment by all service providers. The most basic incentives would be for the public sector to liberalize access to public rights of way, support structures and vertical real estate such as towers.

Last week, Portugal went even further, setting up an €800M line of credit for operators to roll-out next-generation broadband networks. Governments have many levers that can help stimulate investment in next generation network equipment, including accelerated depreciation for certain classes of capital and matching funds for rural service improvements. Telecom service providers have a track record of being to move quickly to implement their infrastructure projects – much faster than roads, public transit, sewers and bridges.

As governments look for ways to stimulate various sectors of the economy, incentives for investment in digital infrastructure may be among the lowest cost, while delivering the highest returns and most sustainable benefits.

Jeffrey Fan, telecom analyst at UBS, has released a report that looks at the impact of new entrants on the Canadian wireless industry. The report is certain to generate substantial discussions, if not heated arguments in the countdown to Industry Canada’s release of the AWS spectrum auction rules.

Among the most significant findings in the report are:

• Videotron and Shaw have positive business cases for wireless, substantial opportunities for Videotron, even without any incentives from the government. In the case of Videotron, UBS estimates that it can afford to pay 3 times the cost of spectrum in the 2001 auction. Shaw could afford to pay almost double the 2001 price.
• MTS Allstream does not have a business case if it has to pay the average price for spectrum from the last auction. It has a negative NPV and very low IRR. “We fail to find the economic rationale for MTS Allstream to expand its wireless operations nationally.” The UBS model shows a negative NPV of $684M for MTS Allstream – which seems to indicate that the present value of new entrant concessions would need to be that high, just to make the business case break even.
• UBS believes foreign carriers will not find Canada’s AWS auction being sufficiently attractive for invest at a minority position.

What would it take to make the MTS Allstream business case go positive?

To make it viable, we believe MTS would want: 1) little cost incurred for the spectrum licences; and, 2) to build out less than two-thirds of the sites that would typically be required.

UBS raised its target for MTS Allstream last Wednesday, however the new paper discusses a number of factors that could impair MTS Allstream’s success. Among them:

• the company’s ideal customers are seen as a challenge for a wireless business plan since the business services market is already mature;
• business clients would be most demanding on roaming capabilities which would be costly until the national network is largely built;
• the success in developing domestic and international partnerships is not likely; and,
• external capital will be required, given the current dividend stream.

We can expect considerable discussion of this paper, which also quantifies changes in stock market valuations taking into account the potential impact of additional wireless players.

The Canadian Telecommunications Association released a new report from PwC, “Driving Canada’s productivity: The impact of the telecom sector and its role in improving productivity” [pdf, 5.6MB]. The report is the latest edition of a regular series examining the economic impact of the telecom sector in Canada.

As we have been reading in the news over the past year, Canada’s gross domestic product (GDP) per capita lags other advanced economies and this is part of a decades-long trend. For example, per capita GDP cumulatively grew just 6.8% between 2007 and 2023, compared with 21.4% in the US, 19.6% in Australia and 11.8% in Europe.

Last week, the former governor of the Bank of Canada, David Dodge said “The overriding objective of federal and provincial governments going forward has got to be to raise the productivity of workers.”

Against this backdrop, PwC’s new report predicts that Canada’s telecom sector will play an important role to enable productivity improvements in the economy, increasing Canada’s global competitiveness.

The telecommunications sector is an important part of the Canadian economy; in 2023, the sector contributed almost $81B in direct GDP and supported up to 782K jobs across industries. As the digital transformation of the Canadian economy progresses, the sector’s delivery of enhanced connectivity has the potential to contribute an additional $112B to Canada’s overall GDP by 2035.

In 2023, the Canadian telecom sector invested $11.4B in infrastructure. Capital intensity measures the proportion of revenues reinvested in capital spending. The Canadian telecom sector’s capital intensity (17.9%) is more than 20% higher than the United States average (14.6%), and 70% higher than Australia (11.7%).

PwC notes that the investments by Canada’s facilities-based service providers has led to 99.7% mobile wireless network coverage and 93.5% high-speed internet coverage.

A Bank of Canada discussion paper [pdf, 0.8MB] refers to a positive correlation between increased investment in digital infrastructure, the adoption of information and communications technologies, and productivity growth. As a corollary, PwC says “To realize productivity gains through increased digital infrastructure investment, Canada needs its telecom sector to continue investing capital.”

The report notes that the telecom sector is facing declining prices, high costs of borrowing, increased competition from foreign players (multinationals), increased operating costs and growing risks related to climate change. These challenges are not unique to Canada. PwC observed that worldwide telecom capital expenditures declined in 2023, for the first time since 2017.

Despite these headwinds, the telecom sector remains a key contributor to Canada’s prosperity through its impact on GDP, job creation and investments in digital infrastructure that drive productivity improvement. To sustain these contributions, Canada needs to maintain a regulatory environment that is predictable, transparent and equitable, with sufficient incentives to encourage investment in innovation, technology and infrastructure. This will ensure that network operators can continue to make the investments necessary for deploying advanced connectivity in digital infrastructure to support Canadian productivity and prosperity.

Maintaining incentives to invest is a common refrain on these pages.

Canada’s per capita GDP will benefit from continued investment in digital infrastructure. But, a healthy Canadian telecom industry is necessary in order to continue making those network investments, to provide connectivity through deployment of advanced digital infrastructure.

Investment in infrastructure will be key to driving Canada’s productivity gains, providing a catalyst for the economic recovery Canada so desperately needs.

Many of the headlines last week talked about the CRTC’s 10% interim reduction on wholesale internet rates as part of the Commission’s Notice of Consultation for its latest review of the wholesale internet access framework. The bigger impact story may be in the CRTC’s preliminary view that access to FTTP (fibre to the premises) over aggregated wholesale HSA (high speed access) should be mandated on a temporary and expedited basis, “until the Commission reaches a decision as to whether such access is to be provided indefinitely.”

This was a significant reversal of long standing CRTC policy.

The temporary and expedited nature is noteworthy. After all, let’s say the CRTC, following an evidentiary-based proceeding, reverses its “preliminary view” and decides that its long standing policy was indeed correct, that aggregated access to the FTTP networks could harm incentives to invest in extending FTTP to additional communities. How will the CRTC reverse this temporary and expedited order? Does anyone think the CRTC would actually order companies to reverse these customer connections?

How does that genie go back in the bottle?

In a note to investors about last week’s Decisions and Notice of Consultation, Bank of America wrote:

This wholesale HSA review was anticipated. The outcome could take over a year to complete. We believe it is likely to result in lower wholesale rates and increased access to fiber-to-the-home (FTTH) through an aggregated HSA model where independent ISPs connect to a central point of interconnection to access the facilities-based provider’s entire operating territory (transport and last mile). We think the key will be at what rates. Any incremental reduction to the existing rates helps wholesales. Small changes should help wholesales and have a minimal impact on investment. The risk for the CRTC is overshooting. If rates are set too low, incremental network investment will suffer and consumers’ long-term interest will be harmed. After an impressive multi-year industry investment in fiber, the industry’s ROIC is down materially from five years ago. In our opinion thoughtful regulation will consider the returns such a substantial investment requires (above the cost of capital) to avoid destroying value while encouraging ongoing investment. The industry has a good track record of balancing the demand of shareholders, subscribers, the regulator, and policy makers.

With last week’s Telecom Decision CRTC 2023-53, the CRTC flip-flopped once again on its policies regarding aggregated versus disaggregated wholesale internet access.

Let’s start by defining those terms. Wholesale-based internet service providers (ISPs) resell a portion of a facilities-based telecom service provider’s network. As the CRTC described them in 2015:

56. Aggregated wholesale HSA service provides competitors with high-speed paths to end-customers’ premises throughout an incumbent carrier’s entire operating territory from a limited number of interfaces (e.g. one interface per province). This path includes an access component, a transport component, and the interface component. The inclusion of the transport component enables competitors to provide their retail services with minimal investment in transmission facilities.
57. Disaggregated wholesale HSA service would provide competitors with high-speed paths to end-customers’ premises served by an ILEC central office or a cable company head-end through a local interface at the ILEC central office or cable company head-end. These paths include an access component and the interface component.

Obviously, it is a lot easier for an ISP to get up and running with just one connection to the telecom service providers. On the other hand, the wholesale-based ISPs have said they can add more value and product differentiation by connecting closer to their customer. However, in its October 2020 intervention in the CRTC’s consultation examining network configurations for disaggregated wholesale internet access, CNOC complained about the cost of connecting to all of the central offices or head-ends.

Since at least 2010, ISPs have promised to climb the ladder of investment. The CRTC and Competition Bureau have each endorsed policies that maintain incentives to promote investment in telecommunications facilities.

Unfortunately, the preliminary view of the CRTC in its Notice of Consultation will see ISPs climbing down that ladder, heading in the wrong direction.

Let’s look at the history of moving back and forth between aggregated and disaggregated wholesale internet access.

• On – Requested by Teksavvy in 2009/2010 CRTC Wholesale Consultation 2009-261: “The problem with the current aggregated services of both the ILECs and the cable carriers is that it forces a lot of the characteristics of those services to be flowed through to the wholesale customers of the ILECs and cable carriers, which really limits the ability of competitors to innovate and offer new differentiated services.” (Counsel for Teksavvy in response to question from CRTC Chair)
• Off – Request for disaggregated denied by CRTC Policy 2010-632: “The Commission is not persuaded that the ILECs and cable carriers should provide new wholesale access services – in the case of the ILECs, an ADSL access service located at the central office, and in the case of the cable carriers, a local head-end-based cable access service. In the Commission’s view, there is no convincing evidence to indicate that there would be a substantial lessening of competition in the absence of these services.” Notably, there is a dissent appended to that CRTC determination, where Commissioner Denton describes disaggregated access as “a technical arrangement permitting significant service innovation, by allowing specialist carriers to differentiate significantly their service offerings from the underlying carrier.”
• On – July 22, 2015 CRTC Policy (2015-326): “the provision of aggregated services will no longer be mandated and will be phased out in conjunction with the implementation of a disaggregated service. Incumbent carriers are directed to begin implementing disaggregated wholesale high-speed access services, in phases.”
• On – May 27, 2021 CRTC Press release: “The existing model, which is an aggregated high-speed access service, is in the process of transitioning to a disaggregated high-speed access service. This will enable competitors to access the fibre-to-the-home networks of the large companies and offer their customers faster Internet speeds and more services for all Canadians… Since 2016, the CRTC’s objective has been to complete the transition to a disaggregated wholesale model for access to the large companies’ high-speed broadband networks. This model will foster greater competition and further investments, so that the industry can better serve the needs of Canadians.”
• Off – March 8, 2023: CRTC Decision (2023-53): “The Commission finds that the disaggregated wholesale high-speed access (HSA) service framework has not fulfilled its mandate and requires reconsideration. The Commission determines that the network configuration for disaggregated wholesale HSA services will remain in Ontario and Quebec pursuant to existing tariffs and will not be introduced in other markets at this time.”

A lot of engineering and regulatory resources were invested developing these wholesale internet access schemes. The importance of consistency and predictability in CRTC determinations cannot be stressed enough, especially in consideration of the capital intensive nature of telecommunications. The new Policy Direction speaks in terms of predictability: “The Commission should ensure that its proceedings and decisions are transparent, predictable and coherent.”

As the CRTC moves forward with its wholesale services consultation, Bank of America said, “the key will be at what rates.”

Last week, I wrote about the difficult tension in seeking increased investment while maintaining, if not improving, affordability. We should measure success in telecommunications competitiveness by how we approach and achieve these often competing objectives: quality, coverage and price.

There is still much work to be done to extend the reach of broadband networks and to upgrade existing facilities. That will require billions of dollars of additional capital investment. That investment is being made by Canada’s facilities-based operators.

For that to move forward, government policies and regulation have to preserve that delicate balance between lowering consumer prices, while preserving incentives for investment to extend and enhance Canada’s high quality networks.

I’d like to follow up on the passing reference I made recently to structural separation in my post about Australia’s broadband quagmire, the $50B government sinkhole known as NBN.

Structural separation is the regulatory theory that posits better consumer outcomes will be achieved if regulations require a separation between the builders of telecom network infrastructure and the retailers of telecom services. The theory is that the infrastructure company will have incentives to invest all of its energy in building better networks, and the various retail service providers will compete on an equal footing to deliver service excellence.

Two and a half years ago, at a meeting of Parliament’s Industry Committee (INDU), the British model was identified by Canadian Conservative MP Michelle Rempel Garner as an potential example for Canadian telecom policy. Tony Geheran, Chief Operations Officer at TELUS told the Committee, “I haven’t seen that work anywhere globally, to sustainable effect.”

At the time (May 19, 2020), I noted “Ofcom is showing that broadband speeds in the UK increased 18% between 2017 and 2018 to reach 54.2 Mbps. According to the CRTC, average speeds in Canada reached 126.0 Mbps by the end of 2018, an 89% increase over 2017.”

A year later (May 19, 2021), I provided an update: “According to Ofcom, “the average download speed of UK residential broadband services increased by 25% since 2019, from 64 Mbit/s to 80.2 Mbit/s.” According to the CRTC, at year-end 2019, 18 months ago, the average download speed in Canada was already 176.9 Mbps, more than double the current speed in the UK.”

Some recent articles show that the situation hasn’t improved for those in the UK. A recent article in the Financial Times says “almost a hundred smaller alternative networks — or “altnets” — have emerged with the goal of laying fibre as quickly as possible to attract customers frustrated by their existing service”. As it turns out, these “altnets”, such as Virgin Media O2 and the UK’s largest altnet, CityFibre, have argued against BT OpenReach lowering its wholesale prices, claiming the move would be uncompetitive.

The CRTC is reporting Canada’s average download speed was 220.4 Mbps by year end 2020, two and a half times what the UK regulator has observed.

Structural separation isn’t a solution. As Tony Geheren told INDU in May of 2020, “if you look at the UK, they are wholesale moaning about the quality of their infrastructure, their lack of fibre coverage. across what is a very small geography. I know. I originated from there. And quite frankly, the Canadian networks are far superior in coverage and quality and performance through COVID has demonstrated that.”

The Canadian model, creating a policy environment that encourages private sector investment in competitive infrastructures, means that most Canadians can choose from multiple suppliers of broadband access. It is a framework that has delivered better broadband for more Canadians than the structurally separated policies in the UK and (as discussed a few weeks ago) in Australia.

Canada’s future depends on connectivity.