Utilizing Canada's Digital Infrastructure to Improve Canada's Productivity, International Competitiveness and Consumer Welfare
Submitted by TekSavvy Solutions Inc. 2010–07–12 18:16:57 EDT
Theme(s): Digital Infrastructure
TekSavvy Solutions Inc. ("TSI") offers high–speed Internet access services, as well as local and long distance services.
Industry concentration limits competition. In almost every geographic area of Canada, a fairly symmetric duopoly operates at the upstream wholesale level, providing DSL and cable internet access service to end–use customers. Further, in some regions the cable carriers do not offer third party Internet access and in much of the market for business end–users, there is a DSL monopoly due to lack of a cable footprint. In a duopoly (or monopoly) market structure, the suppliers will exercise market power. This is a very robust principle in industrial organization economics, and it applies in the upstream market for high–speed broadband services.
Even if it can be said that some sub–markets of the retail High Speed Internet Service ("HSIS") broadband market are marginally competitive in the residential market, such as those for retail HSIS service speeds up to 2Mbps the retail markets for faster broadband services and especially those for speeds above 2Mbps are duopolistic in the residential market. In the case of the business market, most sub–segments at all speeds are largely monopolistic. As speeds requirements increase further, and especially above 10Mbps, retail markets are very clearly at best duopolistic in the case of residential markets and mostly monopolistic in the case of business markets. The one exception is the ultra speed requirements in large urban areas where competitors have built fibre networks to concentrations of multiple–dwelling units or office buildings.
Contrary to some claims, wireless platforms, even the new HSPA+ platforms, are not a substitute for wireline platforms, especially at the higher speeds that can be used as platforms for advanced high–speed services, such as IPTV, and service bundles.
The net result of these types of constraint is a leveraging of the market power that the incumbent local exchange carriers and broadcasting distribution undertakings enjoy by virtue of their control over their broadband networks so as to marginalize competition for services enabled by broadband technology. Accordingly, effective competition through service differentiation, higher speeds and bundling is lacking and the existing market concentration hurts Canada's performance in the global digital economy.
Competition will thrive when a ladder of investment is enabled, which is not presently the case in Canada. The pursuit of open access policies is required to remedy the situation.
Telecommunications infrastructure in rural and remote areas should be funded from general government revenues and not industry cross–subsidies.
Based on the foregoing, TSI makes the following recommendations:
- The Government of Canada should explicitly endorse and pursue open access policies on a consistent manner and require the CRTC to do likewise with respect to telecommunications infrastructure as a means of sustaining or improving competition in the telecommunications sector; and
- The Government of Canada should use revenues from the consolidated revenue fund and/or proceeds from spectrum auctions to provide high–speed Internet (broadband) access for rural and remote areas, and internal industry cross subsidies should not be employed for this purpose.
TekSavvy Solutions Inc. ("TSI") is pleased to provide these comments in response to the Government of Canada's Digital Economy Consultation. TSI's comments are focused on the Digital Infrastructure theme of the Consultation.
Background on TSI
Before proceeding with its comments, TSI will provide some background information.
TSI was founded in 1998 and its initial business activities focused on database and web development, web hosting, as well as providing software training for customers. In 2002, the company started providing high–speed Internet access services ("HSIS") over the aggregated ADSL platforms of certain incumbent local exchange carriers ("ILECs") that were mandated by the Canadian Radio–television and Telecommunications Commission ("CRTC"). In 2008 TSI started providing local phone and long distance services. More recently, TSI started providing HSIS over CRTC–mandated third party Internet access ("TPIA") arrangements made available via the facilities of major Canadian cable broadcasting distribution undertakings ("BDUs").
TSI has a tradition of reinvesting a significant portion of its revenues into its core business and that tradition continues today. For example, TSI is actively involved in the design of an IPTV offering. The timely availability of unbundled ADSL and cable services without artificial restrictions is critical to TSI's business plans.
TSI also has a good understanding of the needs of small communities. The company's operations are centered in Chatham, Ontario, which is one such community. TSI is also deploying fibre to the premises ("FTTP") in certain portions of Perth, Ontario and is investigating the possible rollout of FTTP in another small community.
The TSI business model is built on a strong foundation that includes superior customer service, building a reliable high–capacity network (at least with respect to those portions of its network that are under TSI's own control), efficient operations through the appropriate use of automation and process design, a commitment to its employees, and adapting to changes in the marketplaces that it serves. This business model has proven to be successful to date for TSI, which both directly and through its affiliates, continues to reinvest a significant portion of its operating revenues in new infrastructure and service development.
Industry concentration limits competition
TSI now finds itself severely constrained in its ability to differentiate its services from the retail services of the ILECs and BDUs (collectively "Dominant Carriers") or to offer triple–play and above broadband bundles. The main reason for this is the concentrated market structure associated with broadband facilities and the reluctance of the Dominant Carriers to provide access to those facilities on just and reasonable terms.
In almost every geographic area of Canada, a fairly symmetric duopoly operates at the upstream wholesale level, providing DSL and cable internet access service to end–use customers. Further, in some regions the cable carriers do not offer TPIA and in much of the market for business end–users, there is a DSL monopoly due to lack of a cable footprint. In a duopoly (or monopoly) market structure, the suppliers will exercise market power. This is a very robust principle in industrial organization economics, and it applies in the upstream market for high–speed broadband services.
Even if it can be said that some sub–markets of the retail HSIS broadband market are marginally competitive in the residential market, such as those for retail HSIS service speeds up to 2Mbps1 the retail markets for faster broadband services and especially those for speeds above 2Mbps are duopolistic in the residential market.2 In the case of the business market, most sub–segments at all speeds are largely monopolistic.3 As speeds requirements increase further, and especially above 10Mbps, retail markets are very clearly at best duopolistic in the case of residential markets and mostly monopolistic in the case of business markets. The one exception is the ultra–speed requirements in large urban areas where competitors have built fibre networks to concentrations of multiple–dwelling units or office buildings.4
Contrary to some claims, wireless platforms, even the new HSPA+ platforms, are not a substitute for wireline platforms, especially at the higher speeds that can be used as platforms for advanced high–speed services, such as IPTV, and service bundles. This was admitted by Telus Communications Company ("Telus") as follows:
"In TELUS' view, customers realize that a mobile broadband Internet service has speed and capacity differences from a wireline broadband Internet service, but might find benefits from the mobile capability. Customers who routinely require 5Mbps or greater bandwidth for their everyday Internet usage will not, at least today, use a wireless Internet connection as their sole access, but can use it as a complementary service when they want a mobile service. However, there are many other broadband Internet customers that do not require a constant 5Mbps service. These are customers who use the Internet for general surfing, sending photos, downloading music and other files and occasional video streaming. These customers would find a wireless Internet access service as comparable to a wireline Internet service, and therefore, might use a wireless access as a substitute. Finally, customers that require constant mobile Internet connectivity, such as business persons who travel with their laptop computers, might determine to use mobile Internet access as their primary access tool, regardless of any bandwidth differences with a wireline access service."5 (Emphasis added.)
Bell Canada, Bell Aliant Regional Communications, Limited Partnership and Télébec, société en commandite ("Télébec") (collectively, "The Companies") confirmed the speed limitations of their HSPA+ network:
"The Companies' HSPA+ network can support download speeds of up to 21 Megabits per second under ideal conditions. Actual speeds experienced by subscribers will be affected by RF conditions, with subscribers close to the cell site obtaining higher speeds and subscribers on the cell edge experiencing lower speeds. The average downlink capacity is approximately per user 5Mbps. The average uplink capacity is approximately 1Mbps. Since HSPA+ uses a shared pipe, end–user access speeds in the busy hour will also average 5Mbps on the downlink and 1Mbps on the uplink."6 (Emphasis added.)
This is consistent with the economics imposed by the technological limitations of wireless platforms.7
This reality explains the remarks that Mr. George Cope, the President and CEO of BCE Inc. recently made to the effect that "[u]ltimately with LTE you'll have — with speeds you'll start to see it, but the reality at that higher end we've always continued to see wire line [sic]stay ahead just because of spectrum constraints and technology development."8
This is also why the Companies are spending in excess of $1 billion to roll out FTTN networks.9 They would not be doing this if wireless services were substitutable with wireline services at the broadband speeds required to provide high–speed services, including IPTV, and related bundles, demanded by customers.
The effect of the resulting upstream (i.e., wholesale) broadband duopoly (and in some cases monopoly) at the retail level is that a competitive 'fringe' of ISPs makes up a small percentage of total supply, amounting to less than 6% of the national market, with the ILECs and cable carriers splitting the rest of the market among them.
Effective competition through service differentiation, higher speeds and bundling is lacking
In order to properly differentiate their services, competitors need to be able to access the underlying functionalities of speed, throughput, as well as quality and type of service of the wholesale platforms that they employ in order to fashion their own retail services. In fact, without this type of access that promotes service differentiation, the degree of innovation that a competitor can bring to the market by merely acquiring from a Dominant Carrier wholesale inputs whose attributes the wholesale customer cannot control, the wholesale customer cannot control will be severely reduced.
Currently available wholesale services available from the Dominant Carriers do not permit the level of functional access to Dominant Carrier facilities required to promote service differentiation and greater corresponding innovation and competition.
In addition, broadband markets are evolving toward ever higher speeds and the main focus of competition between ILECs and cable BDUs is for the retail triple–play and above broadband bundle, which is currently provided on a duopoly basis. Broadband connections of 20Mbps or more are required to support the provision of such bundles.
Due to a variety of restrictions associated with Dominant Carrier wholesale services, including the lack of availability of ILEC wholesale broadband services with speeds higher than 5 or 6 Mbps, it is not possible for other competitors to provide their own similar broadband–enabled triple–play bundles.
In sum, there are a number of other ways in which the Dominant Carriers can exercise market power in order to limit competition. These methods include designing the broadband access wholesale inputs on which their competitors at the retail level are reliant so as to prevent the competitors from: (1) differentiating their retail services significantly from the retail services offered by the Dominant Carriers along functional attributes such as speed, throughput, as well as quality and type of service; (2) providing the same level of ubiquitous geographic coverage that the Dominant Carriers can provide to their own retail end–users; or (3) bundling a variety of retail services (such as HSIS, telephony and video).
The existing market concentration hurts Canada's performance in the global digital economy
The net result of these types of constraint is a leveraging of the market power that the Dominant Carriers enjoy by virtue of their control over their broadband networks so as to marginalize competition for all retail level service enabled by broadband technology. This market power can only be disciplined through regulatory action, which is critical if Canada's performance in the global digital economy is to improve.
The CRTC's Navigating Convergence Report10 has confirmed that "[a]s Canadian consumers respond positively to bundled offerings, competitor inability to offer triple– and quad–play services has the potential to entrench the dominant position held by incumbent facilities–based providers".
The effect of this market concentration is reduced productivity, competition, innovation, efficiency and consumer welfare. This reality of this effect is borne out by Canada's poor performance across a number of broadband indicators.
As the Navigating Convergence Report states:11
"Observers have asserted that the concentration of broadband revenues accruing to ILECs and cable providers has the effect of keeping consumer prices higher than they might otherwise be. This is borne out in cross–OECD comparisons of broadband pricing. Among the most dramatic of the various comparisons is that of average broadband monthly price per advertisedMbps as measured in U.S. dollars, adjusted to purchasing power parity…"
Canada ranked 28th out of 30 in the specific cross–OECD comparison just cited.
The Final Berkman Report12 is the most comprehensive study of the state of broadband markets and trends from around the world. That report confirms Canada's poor performance across a number of broadband indicators:
"Though it was among the first nations in the world to provide widespread, retail broadband service, Canada's recent broadband development has lagged behind other developed nations. Canada's broadband penetration rates are often lauded, but the country is a poor performer on price and speed and a declining performer in penetration…13
Despite its early broadband leadership, Canada has most recently lagged peer nations in broadband penetration, speed, and price. Though it was in the top OECD quintile in penetration in 2002, it is no longer. … Possible explanations for Canada's weakening performance include lack of competition. … In speed, Canada is a weak to mid–pack performer. By advertised speeds and actual measurements of the highest speeds, Canada is in the fourth or fifth quintile. By measured average speeds, according to both Akamai and Speedtest, Canada is in the third quintile of performers. On prices, the OECD shows Canada as a fourth or fifth tier performer, while our own study observed better prices, locating Canada in the third or fourth tier of prices."14 (Footnote omitted.)
Competition will thrive when the ladder of investment is enabled, which is not presently the case in Canada
In order for the full benefits of competition to accrue to end users, competitors must be able to climb a ladder of investment. That is to say, entrants will initially enter the market using resale or aggregated wholesale access and later move into more unbundled access, initially leasing those aspects that are hardest for them to replicate. Then, over time, as entrants are able to build a brand and customer base, they can shift over to compete on their own facilities to a greater extent to free themselves of dependence where it becomes technically and economically feasible to do so.
The authors of the Final Berkman Report found that their own case studies lent some support to this theory and they suggested that more theoretical development of the theory should be pursued:15
"The ladder of investment has also been adopted by the European Regulators Group, as articulated at page 48 of ERG (07)16rev2:16 "The ladder of infrastructure investment is a regulatory model developed amongst others by Prof. Martin Cave. It assumes that investments are made in a step by step way by new entrants. In order to allow new entrants to gradually (incrementally) invest in own infrastructure they need a chain of (complementary) access products to acquire a customer base by offering their own services to end users based on (mandated) wholesale access. Once they have gained a critical mass generating revenues to finance the investment, they will deploy their own infrastructure taking them "progressively closer to the customer and increasingly able to differentiate their service from that of the incumbent", also making them less dependent of the incumbent's infrastructure. This involves migration from one access product (or access point) to another (moving to the next rung). Thus, the entrant passes progressively through several stages of infrastructure competition, as it ascends a "ladder of infrastructure", the initial phase being service competition, which can therefore be seen as a vehicle to infrastructure competition, which is the ultimate aim as it ensures sustainable competition in the long run. Once the process gets started and provided the right regulatory measures are taken (see next paragraph), the process will get its own dynamic and with the different elements reinforcing each other will become self–propelling." (The footnote number is not the same as in the original text.)
In the Canadian context, it should not be expected that competitors will ever be in a position to deploy a ubiquitous third wire to the premises on such a large scale that it would free them of the need to obtain any facilities from an incumbent (i.e., Dominant Carrier) everywhere. That is not a realistic end state. This has already been acknowledged by both the Commission and Cabinet in Amended Telecom Decision CRTC 2006–1517 by defining a facilities–based telecommunications service provider as one that either owns all of its facilities or owns one part and leases the other. Climbing the investment ladder is a continuous process and should be facilitated on an ongoing basis. There is no nirvana end state, but the relentless and ongoing climb of competitors up the ladder, on as wide a geographic area over time as is economically viable, is the key ingredient required to create and sustain a more dynamic and vibrant competitive market for telecommunications services.
Another important point to be made is that the ladder of investment is a coherent and dynamic construct. If any of the lower rungs are pulled out through premature forbearance, competitors will not be able to get to the higher rungs that provide the biggest service differentiation for consumers. Therefore, all of the services that comprise the ladder must be available all of the time, particularly since new competitors are constantly entering the market.
Presently, in Canada there is no workable ladder of investment. There are simply too many rungs missing. If a series of services along the ladder of investment are all necessary to overcome the significant market power of the Dominant Carriers, then all of those services should be provided so long as that continues to be the case. To do otherwise will be tragic for competition as it would deprive end users of the full benefits of competition enabled by the unfettered ladder of investment.
The pursuit of open access policies is required
In order to achieve this objective and ensure that the CRTC does as well, the Government of Canada must follow policies that more explicitly and consistently endorse open access to the facilities of the Dominant Carriers on an ongoing basis.
The Final Berkman Report arrives at the following significant conclusions that are relevant for improving Canada's performance:
… We find that the econometrics literature is basically divided on whether open access works or not, is surprisingly sparse and weak overall, and is heavily influenced by industry–sponsored work. We explain the severe limitations of many of the econometric studies, whether sponsored by interested parties or not. The existing qualitative work, which is capable of offering more nuanced analysis, tends more clearly to support the beneficial effects of open access, and is less influenced by industry–sponsored work.
In this study, we follow the qualitative work of others by offering new, up–to–date case studies of half of the OECD countries. The evidence suggests that transposing the experience of open access policy from the first generation transition to the next generation is playing a central role in current planning exercises throughout the highest performing countries….19
Because the near–universal adoption of open access is such a surprising result, because this kind of regulation goes to the very structure of the market in broadband and the very nature of competition in next generation connectivity markets, and because the policies adopted by other countries are so at odds with American policies during this decade, we dedicate the bulk of our discussion of policies in other countries to assessing the international experience on open access regulation. Our approach is primarily qualitative. We undertake detailed country by– country and company–level analyses of the effects of open access and the political economy of regulation on broadband performance. We find that in countries where an engaged regulator enforced open access obligations, competitors that entered using these open access facilities provided an important catalyst for the development of robust competition which, in most cases, contributed to strong broadband performance across a range of metrics. Today these competitors continue to play, directly or through successor companies, a central role in the competitiveness of the markets they inhabit. Incumbents almost always resist this regulation, and the degree to which a regulator is professional, engaged, and effective appears to play a role in the extent to which open access is successfully implemented with positive effects. In some places where incumbent recalcitrance has prevented effective implementation of open access, regulators have implemented functional separation to eliminate the incentives of the incumbent to discriminate among consumer broadband market providers in access to basic infrastructure. We supplement these case studies with a study of pricing at the company level of 78 companies that offer high speed access. Our pricing study (Figure 4.4) shows that prices and speeds at the highest tiers of service follow a clear pattern. The highest prices for the lowest speeds are mostly offered by firms in the United States and Canada, all of which inhabit markets structured around "inter–modal" competition — that is, competition between one incumbent owning a telephone system, and one incumbent owning a cable system, where the price of entry into the market is the ability to build your own infrastructure. The lowest prices and highest speeds are almost all offered by firms in markets where, in addition to an incumbent telephone company and a cable company, there are also competitors who entered the market, and built their presence, through use of open access facilities. Companies that occupy the mid–range along these two dimensions mostly operate either in countries with middling levels of enforcement of open access policies, or in countries that only effectively implemented open access more recently."20 (Emphasis added and footnote omitted.)
Evidence from Europe demonstrates that open access policies constitute the best means of fostering more competition and investment.21
A report recently released by the Senate Standing Committee on Transport and Communications22 also recommends that the Government of Canada follow the European example and implement pro–competitive, open access policies.23 More specifically, Recommendation 14 of the report is:
"The government should pursue open access policies with respect to telecommunications infrastructure as a means of sustaining or improving competition in the telecommunications sector."
TSI heartily endorses this recommendation and urges the Government of Canada to pursue it as well. Canada's current circumstances feature very limited competition, the prospect of further market concentration and significant reduction in competition, and mediocre to poor international performance. In this climate a coherent and comprehensive open access policy framework that endorses and enforces mandated and open access to wholesale inputs that competitors require from the Dominant Carriers is urgently needed.
Although there is nothing in Canadian law or policy that would prevent the CRTC from adopting such an approach more proactively in discharging its statutory obligations, the CRTC's performance to date in this area has been greatly hampered by enormous resistance from the Dominant Carriers. That resistance, in the form of lobbying efforts and appeals has caused significant obstacles and delays as the CRTC has attempted to implement policies that promote greater competition. These obstacles and delays are valuable to the incumbents, but are inimical to competition, and the price that Canada is paying is poor and deteriorating performance in the global digital economy.
A clearer articulation of an open access policy framework by the Government would assist it and the CRTC to reverse this trend, so that Canada can improve its international competitiveness and productivity and regain the leadership that it once enjoyed in the global digital economy.
Accordingly, TSI makes the following recommendation:
The Government of Canada should explicitly endorse and pursue open access policies on a consistent manner and require the CRTC to do likewise with respect to telecommunications infrastructure as a means of sustaining or improving competition in the telecommunications sector.
Telecommunications infrastructure in rural and remote areas should be funded from general government revenues and not industry cross–subsidies
A second critical issue relates to the development of broadband infrastructure in rural and remote areas. Although the Government of Canada has been providing funding for a variety of broadband infrastructure construction projects, much more is required to ensure that no one is left behind. From and economic and public policy perspective, the most efficient manner of funding such projects is from general revenues raised by the Government, such as tax revenues or revenues raised through the spectrum auction process.24 A system of funding such infrastructure through internal industry cross–subsidies, such as the telecommunications contribution fund is not sustainable as it will introduce significant market distortions that will blunt competition and ultimately harm Canada's international competitiveness and productivity.
Accordingly, TSI makes the following additional recommendation:
The Government of Canada should use revenues from the consolidated revenue fund and/or proceeds from spectrum auctions to provide high–speed Internet (broadband) access for rural and remote areas, and internal industry cross subsidies should not be employed for this purpose.
TSI thanks the Government of Canada for the opportunity to participate in this critical consultation process.
Web Link: Home page for TekSavvy Solutions Inc.
1 See, e.g., the comments of Mr. Stevens in the Transcript, volume 5, paragraph 8403, Expansion of proceeding initiated by Telecom Notice of Consultation 2009–261, Telecom Notice of Consultation CRTC 2009–261–7, 23 December 2009 ("TNC 2009–261–7 Proceeding").
2 Id., at paragraph 8405.
3 Id., at paragraph 8404.
4 Id., at paragraph 8407.
5 TELUS(CRTC)01Mar10–204 a) and b) Abridged Revised, at page 2, TNC 2009–261–7 Proceeding.
6 The Companies(CRTC)1Mar10–204 a) and b) Abridged Revised, at page 2, TNC 2009–261–7 Proceeding.
7 See Appendix "C" to the Final Submission of TSI dated 21 June 2010 in the TNC 2009–261–7 Proceeding, prepared by Mr. Hay of Pacomm Consulting Group Ltd. ("Pacomm") which discusses this issue in greater depth.
8 Transcript, volume 1, paragraph 671, per Mr. Cope for the Companies, TNC 2009–261–7 Proceeding.
9 Id., at paragraph 105, per Mr. Cope for the Companies.
10 Navigating Convergence: Charting Canadian Communications Change and Regulatory Implications, Convergence Policy, Policy Development and Research, Canadian Telecommunications and Radio–television Commission, February 2010, at paragraph 122.
11 Id., at paragraph 129.
12 "Next Generation Connectivity: A Review of broadband Internet transitions and policy from around the world" The Berkman Centre for Internet and Society at Harvard University, February 2010 Final Report.
13 Id., at page 247.
14 Id., at page 248.
15 Final Berkman Report, at page 92.
17 Forbearance from the regulation of retail local exchange services, Telecom Decision CRTC 2006–15, 6 April 2006 ("Decision 2006–15"), as varied by Order Varying Telecom Decision CRTC 2006–15, P.C. 2007–532, 4 April 2007.
18 Final Berkman Report, at page 13.
20 Id., at pages 14 and 15.
21 Some of this evidence was recently canvassed in the Final Submissions of TSI (and especially Appendices "B" and "E") dated 21 June 2010 in the TNC 209–261–7 Proceeding.
22 Plan for a Digital Canada, June 2010
23 At page 51.
24 Recommendation 6 of the Plan for a Digital Canada of the Senate Standing Committee on Transport and Communications is: "The government should use all the proceeds from spectrum auctions to provide high–speed Internet (broadband) access for rural and remote areas."