Search Results for: incentives

Ofcom, the telecom regulator in the UK, issued an important policy statement last week promoting investment and competition in fibre networks.

In its story about the policy statement, Computer Weekly said that infrastructure in the UK’s was recognized to be in “urgent need of an upgrade, especially as demand for data continues to accelerate, an issue made even more pressing by the need for mass remote working.”

Computer Weekly reported “To address these needs will require significant private investment in full-fibre broadband, said Ofcom, which noted that network competition had helped full-fibre coverage increase at its fastest ever rate over the past year – and that momentum had continued throughout the pandemic.”

when it comes to ultra-high-speed fibre services, Ofcom confirmed these would continue to be free from pricing regulation. The rationale for this decision is that people can choose the entry-level service as an alternative. Moreover, Ofcom added that Openreach could also “charge a bit more” for regulated products delivered over full-fibre instead of copper, because it regards full-fibre as consistently faster and much more reliable.

This echoes the policy set forward in Canada last summer, when Industry Minister Navdeep Bains pronounced “Canada’s future depends on connectivity”.

Ofcom wrote:

Our approach to supporting investment in gigabit-capable networks is focused on encouraging competition between different networks where viable, which will provide high quality services, choice and affordable broadband for consumers throughout the UK. We recognise that it will require significant investment from private companies to upgrade the UK’s networks, so they are fit for the future. Our decisions incentivise that investment – giving regulatory certainty and allowing companies to make a fair return whilst ensuring consumers continue to have access to affordable broadband as new networks are rolled out.

As I think back to an exchange between the Conservative Industry critic and a TELUS executive at Canada’s parliamentary industry committee last year, we can now see a clear statement from the UK regulator favouring competitive private sector investment in infrastructure, and creating regulatory incentives for facilities-based competition.

Favouring facilities-based competition has been Canada’s telecom policy approach for nearly 30 years. And other regulators are seeing the light.

“Wholesale telecom services are a lot like selling the big guys’ hand-me-downs.”

That’s how a then-independent telecom journalist described the non-facilities based service providers a few years ago.

On paper, the wholesale scheme seems to make sense: Big network owners are forced to provide airtime to any and all commercial interests at regulated terms and rates, which other companies then resell to consumers at whatever prices they see fit.
…
But in the grand scheme of things, it’s worth asking whether the whole wholesale regime has really accomplished anything.

He concluded with “If the government is going to consider regulated wholesale wireless access, it would have to ensure that it doesn’t just enable hand-me-down services. Realistically, though, that hasn’t happened elsewhere so there’s no reason to expect it would in this situation.”

The 2013 article speaks of the ineffectiveness of a 10% market share for US mobile resellers (Mobile Virtual Network Operators, or MVNOs) as “the best reason for why the Canadian government shouldn’t be – and probably isn’t – thinking of wholesale service as a solution to what ails the country’s wireless market.” [CRTC figures show that Canada’s wholesale-based internet service providers still have less than 10 percent market share [xlsx] after well over a decade of regulated access to wholesale highspeed internet service.]

In the years subsequent to this article, we have seen the capital intensive nature of telecommunications globally drive consolidation in the MVNO marketplace. The two largest US MVNOs, Tracfone and Cricket, have been acquired by Verizon and AT&T, effectively turning these two MVNOs into flanker brands of the mobile giants.

MVNOs continue to exist in Canada on a non-mandated basis and Telegeography data (filed by CWTA in its Wireless Review intervention [pdf]) shows that the market shares of Canada’s flanker brands (own-brand MVNOs) combined with MVNOs is among the highest in the OECD.

Last summer, Cabinet told us “Canada’s future depends on connectivity”, signalling quite strongly that the CRTC’s August 2019 rates “do not, in all instances, appropriately balance the policy objectives of the wholesale services framework and is concerned that these rates may undermine investment in high-quality networks, particularly in rural and remote areas.” Throughout its statement, Cabinet was clear in stating that preserving incentives for network investment was missing from the August 2019 wholesale framework.

A great body of economic evidence and observations from markets around the world has been provided to the CRTC to assist in its deliberations on varying its wholesale internet rates decision and its review of wireless services.

As reported here a couple weeks ago, a recent communiqué from the Telecommunications Working Group of the C. D. Howe Institute (chaired by the Dean of McMaster University’s DeGroote School of Business) concluded “Investment in the telecommunications sector is vital for ensuring Canada’s next generation digital infrastructure.”

Balancing Quality, Coverage and Price. It takes investment, massive levels of private sector investment, to drive quality and increase coverage. Prices have been coming down thanks to facilities-based competition.

MVNOs can continue to exist without regulatory intervention (like in most countries), where carriers and operators are able to identify business opportunities that make sense.

As that former journalist wrote, wholesale telecom services aren’t the solution.

For the past couple years, I have frequently referred to the tension between the government’s telecom policy objectives, balancing quality, coverage and price. Think of it as a three legged stool. All three legs – Quality, Coverage, and Price – must be maintained in some form of balance to achieve stability in the marketplace.

Last September, in “Yes, it’s time to reboot Canada’s digital agenda”, I wrote that Cabinet’s determination in its review of the CRTC’s August 2019 Wholesale Internet rates was consistent with its stated policy priorities when it expressed concern “that these rates may undermine investment in high-quality networks, particularly in rural and remote areas.” I wrote:

as should be evident to most Canadians over the past 6 months, the pandemic has helped elevate awareness in the importance of Quality and Coverage, the other two legs of the Minister’s priorities. The government called for improving the balance to preserve incentives for investment, the key input to ensure Canadians have access to world leading network quality, covering urban and rural areas.

Cabinet was right to be concerned.

Last August, I prepared a bried tutorial on “The economics of broadband expansion”. There exists a boundary that defines the digital divide: where the total expected revenues from wholesale and retail services are unable to support traditional investment in infrastructure. On one side of the boundary, usually the more urban side, the private sector can line up investors willing to support broadband expansion. On the other side of the boundary, the more rural side, a different approach is required. The households on the other side of the line are candidates for government rural subsidy programs.

What happens if wholesale rates are lowered by a regulatory decision? The total expected revenues for the project logically drop and the result is that more homes end up on the wrong side of the digital divide. More homes are left having to wait for government rural broadband funding; total government funding would have to increase.

Cabinet understood this logical progression. Cabinet told the industry – and the regulator – “Incentives for ongoing investment, particularly to foster enhanced connectivity for those who are unserved or underserved, are a critical objective of the overall policies governing telecommunications, including these wholesale rates.”

As we saw in the C.D. Howe communique last week, “the federal government must provide facilities-based providers will a clear and predictable regulatory framework that coherently balances vigorous price competition with incentives for ongoing investment to improve network and service quality.”

CRTC figures show that the major facilities-based carriers in Canada invest nearly $10B per year in wireline capital, contrasted with just $50M (0.5%) invested by the wholesale services based ISPs.

Simply put, extending the reach of broadband networks (the Coverage leg) requires massive levels of investment, as does the need to maintain Canada’s leadership in the Quality of our networks (Canada’s wireless and wireline networks are consistently rated among the world’s fastest). Government rural broadband funds are simply unable to replicate the investment capacity of the private sector.

The Court appeals looked at very narrow issues of law and jurisdiction, as stated by the Court at paragraph 23:

[23] Significantly, neither section 62 nor subsection 12(1) circumscribe the types of questions that may be raised before the CRTC or the Governor in Council. This stands in contradistinction to the prescription in subsection 64(1) that limits this Court to reviewing questions of law or jurisdiction.

For that reason, no one should expect the Courts’ rulings to be harbingers of the outcome of the CRTC’s review of wholesale rates. The CRTC’s scope is much more broad than that undertaken by the Courts, and must carefully consider the policy considerations set out by Cabinet and the legislative framework under which it operates. The message from Cabinet was very clear: “Canada’s future depends on connectivity.”

If Canada’s future depends on connectivity, the corollary is certainly that Canada’s connectivity future depends on billions of dollars of continued private sector investment. We can expect CRTC to keep this in focus in how it makes determinations in both of the key proceedings under review at this time: wireless services and wholesale internet rates.

Canada’s future depends on connectivity.

Investment in the telecommunications sector is vital for ensuring Canada’s next generation digital infrastructure. Reliable and leading-edge infrastructure has been seen as essential, thanks to a pandemic-driven shift to remote work and digital services. These are just two of the conclusions drawn from a new report [pdf, 331KB] released last week by the Telecommunications Working Group of the C.D. Howe Institute.

The Telecommunications Working Group identifies policy challenges facing Canada’s telecommunications sector. The group is composed of experts from the private sector and academia. It is co-chaired by Len Waverman, Dean of DeGroote School of Business at McMaster University and Steve Orsini, Adjunct Professor, Public Policy & Administration, Carleton University and President and CEO of the Council of Ontario Universities.

The Telecommunications Policy Working Group was established by C. D. Howe Institute to identify and distill policy directions on strategic questions facing Canadian telecommunications concerning: vigorous competition for competitive pricing and high-quality telecommunications services; investment in next generation infrastructure; and inclusive access to telecommunications services and participation in the digital economy. “Broadly, the Working Group believes governments must focus on regulatory clarity, timeliness, and stability to ensure greater investments in critically needed infrastructure.”

The report leads with 4 key conclusions:

• Action by governments is urgently needed to ensure that public policy and the regulatory framework encourage deployment of the next generation of telecommunications infrastructure for Canada to remain competitive in an increasingly digitally mediated global economy.
• Government policy should support sustainable competition that will ensure that Canadians and Canadian businesses have choice with respect to their telecommunication services in all regions of the country.
• Infrastructure investment by Canadian telecommunications providers outpaces that of their peers internationally. Return on capital is in line with global peers when adjusting for capital intensity.
• Facilities-based providers build the essential infrastructure necessary to deliver telecommunications services. Regulatory certainty, jurisdictional disentanglement and predictable policy is essential for long-term investments and sustainable competition in such a capital-intensive sector.

The report highlights the need for telecom sector investment as a key takeaway: “The current cross-roads for Canada’s telecommunications sector and the economic imperative for expedient deployment of next generation digital infrastructure requires decisive government action to resolve pressing policy challenges. In particular, the federal government must provide facilities-based providers will a clear and predictable regulatory framework that coherently balances vigorous price competition with incentives for ongoing investment to improve network and service quality.”

The communiqué highlights CRTC data that shows the lopsided nature of investment by industry participants. “Resellers make comparably negligible aggregate investments in telecommunications infrastructure: for example, resellers invested $50 million in capital expenditures in 2018, compared with $5.7 billion spent by incumbents and $3.9 billion spent by facilities-based providers.” Fifty million is just 0.5% of the total investment. No wonder some executives in the reseller community have trouble understanding the need for higher EBITDA margins to support the higher levels of investment by Canada’s facilities-based industry participants. Substantial EBITDA margins are needed for businesses with substantial levels of investment.

Analysis by Boston Consulting Group’s Centre for Canada’s Future found that, over the 2005-to-2015 period, Canadian telecommunications infrastructure investment was US$255 per capita compared to an average of US$156 across the OECD, with Canadian per capita investment exceeding all other members of the G7. BCG also observes that, while Canadian telecommunications providers achieve higher earned margins relative to revenue, return on capital is in line with global peers when adjusting for their greater capital intensity. Specifically, while Canadian providers generated higher EBITDA/revenue than those in other OECD countries over 2016-18, their return on capital invested (ROCE) was equivalent with their peers.

According to the report, future communiqués from the Telecommunications Working Group will address specific policy recommendations regarding rate-setting for mandated access and for MVNOs, the framework and timeliness for allocating spectrum, and how to streamline federal and provincial programs and clarify jurisdiction.

In the early days of the COVID-19 pandemic, I wrote about a few of the reports related to telecommunications that emerged from the C. D. Howe Institute:

• Could Political Interference Create ‘Sovereign Risk’ For Canada’s Digital Infrastructure? [March 19, 2020]
• Developing Good Public Policy For Telecom [March 30, 2020]
• A Playbook For Restarting Canada’s Economy [April 20, 2020]

We’ll be watching for further communiqués as they are released.

In an earlier part of my consulting career, I would frequently fly into Washington, DC on little commuter planes known as Beechcraft 1900. (Remember the good old days, when we could freely travel between countries?)

There were 19 seats on those planes, 9 on one side, 10 on the other. It was a twin engine turbo prop plane and I would joke that it pretty much followed the highways on its way back and forth between Toronto and DC. Truth be told, I was never really happy about flying in a plane that would have the pilot move people around in order to balance the load. I prefer to fly in aircraft that can handle us ‘fuller figure’ fellows moving around a little without it causing some self-induced turbulence, if you understand what I am saying.

Sometimes, there just isn’t an alternative. The pilot relies on people being anchored in certain seats and handles the plane accordingly.

I told you that story to talk about the importance of anchors in the design of broadband networks in remote and rural communities. In some areas, the economics of broadband service is tied to the presence of ‘anchor institutions’, such as schools, civic offices, medical facilities and libraries.

Indeed, in last week’s CRTC announcement of 5 projects awarded under its Broadband Fund, the Commission noted that 26 anchor institutions would be connected.

As most people realize, the broadband requirements for an institution are usually more substantial than those for an average residential user. Faster speeds, higher capacity and usually an increased ability to pay for those differences. The term “anchor” is appropriate for these clients because they can provide economic stability, a key determinant for the economic viability of offering service in some areas. In the absence of those anchor clients, a larger subsidy might be required.

These are important considerations to keep in mind when you hear some folks advocate for municipalities to connect anchor institutions to a separate municipal network. Pulling anchor clients off the market can have the effect of reducing the economic incentives or viability for a service provider to upgrade facilities in an area. Municipal governments need to consider more than their own corporate broadband requirements and understand how their buying power can influence the quality of services that can be offered to the entire community.

A counter-intuitive approach, perhaps even offering a premium to usual retail rates, may serve the community’s interests even more, accelerating private sector investments and reducing the requirements for federal funding.

Those anchor institutions can provide the economic stability necessary to make a broadband business case go positive.