Ensuring Canadians Have Access to An Open Internet

Summary

Let's make Net Neutrality and the open Internet a reality in Canada by preventing Internet Service Providers from throttling traffic and limiting access to our choice of applications and services.

Unlike in the U.S. and other countries, several Internet Service Providers in Canada limit users' access to content and services: four of the dominant six providers throttle Internet use. This limits consumer choice and stifles innovation.

Last fall the CRTC developed new "traffic management" guidelines. However, under these new guidelines, the CRTC will not enforce its own framework; instead, the onus falls on the consumer to file a complaint and prove that an ISP is unjustly throttling and degrading the quality of the Internet. It is unfair to expect consumers to develop the technical and policy expertise necessary to prove discriminatory throttling before the CRTC.

The Government can and should stopISPs from controlling our use of the Internet, by asking the CRTC to conduct regular compliance audits of ISP traffic management practices. Alternatively, the Government could amend the Telecommunications Act to explicitly prohibit discriminator traffic management by ISPs. Either approach would make Net Neutrality — an open Internet — a reality in Canada.

It should be up to users, not ISPs, to decide which applications and services Canadians use on the Internet.

Canada should focus on creating a foundation for innovation across our society and economy. Net Neutrality provides a level playing field online that incents and promotes the adoption of ICT by Canadian businesses and public sectors. Ensuring Canada has enforceable Net Neutrality rules is the best way to create a favourable environment for e–commerce, as well as social and cultural innovation.

Submission

The Information and Communications Technologies (ICT) is an important industry in North America, leading economic growth and providing employment. In Canada, the service and manufacturing ICT companies generate over $155 billion CAD in revenues. The ICT services sector contributed $59.2 billion to the Canadian Gross Domestic Product (GDP) in 2008, approximately 4.8% of the total GDP. This sector helped drive national growth, and has continued to grow twice as fast as the overall economy since 2002 (Industry Canada, 2010). There are 31,500 companies in the ICT sector, most of these small businesses. Of these companies, 78.6% are software and computer services companies, most of which design computer systems. Wholesale businesses make up 10.6% of the total ICT sector (Industry Canada, 2010).

The ICT sector is responsible for 30% real GDP growth in the U.S., most of this from the content and software sub–sectors. This means there is more economic activity emerging from businesses that sell Internet services and products than exists in the network. Without net neutrality, investment in application and content sub–sectors will be affected negatively. Economic growth will decline, and with it, employment (Free Press, 2010 p.69).

Businesses Online

Businesses from different sectors and industries, both large and small, benefit by conducting business online. Businesses using the Internet in 2007 reported improved coordination with suppliers, lower costs, and reaching new customers (Stats Can, 2008 Apr).

In 2006, 27% of small and 41% of large businesses felt that they lowered costs by doing business on the Internet. As well, both small (35%) and large (43%) businesses believe that the Internet provides better coordination with suppliers. In 2006, both small (34%) and large (56%) businesses reported that an online presence was beneficial (Stats Can, 2007 October Innovation Analysis Bulletin on Survey of Electronic Commerce and Technology).

Online Sales

Since 2001, Internet sales have increased steadily in Canada. Canadian businesses and consumers are using the Internet more often to sell goods and services, and to get product information. Internet users have benefited from greater choice in services, content, and goods, independent of their ISP provider (Geist, 2008 p.84), and with a neutral internet, consumer and business information will continue to be accessible, no matter what size the business is, or which ISP provider the consumer uses.

Online sales in Canada continue to grow. In fact, from 2006 to 2007, online sales in Canada increased 26%, accounting for an estimated $62.7 billion CAD. This is a three–fold increase from 2001, when online sales only accounted for $18.9 billion CAD. However, e–commerce still only accounts for just under 2% total operating revenue (Statistics Canada, 2008 April)

Both public and private sector businesses increasingly use the Internet for selling and buying goods and services. Between 2006 and 2007, the percentage of private sector businesses selling goods and services online increased 25%, resulting in $58.2 billion in sales in 2008. Public sector e–commerce grew 30% in the same time period, accounting for $4.5 billion CAD in 2008 (Statistics Canada, 2008 April).

Although online sales increased overall, businesses were more likely to purchase goods and services online (48%) than to sell online (8%). This was more dramatic in the public sector in 2007, with 82% submitting purchases online and 16% selling online (Statistics Canada, 2008 April) (Figure 3).

Consumers rely on the Internet to window shop, and to order products and services online. From 2005 to 2007, the number of electronic orders increased by 41%. In 2007, the value of electronic order s accounted for almost $12.8 billion CAD in sales (Statistics Canada, 2008, CIUS Table). But while the number of orders rose, the proportion placed with Canadian vendors in 2007 declined slightly from 2005 (Statistics Canada, 2008 November), which might indicate that foreign vendors accrued more orders. The top 25% of online consumers in 2007 spent an average of $5000, most often by Internet users aged 25 to 34 (Statistics Canada, 2008 November).

Those that did not submit a purchase online still used the Internet for product research. In 2007, 43% of Canadians researched products online before they purchased an item at a store. A majority of those 'window shoppers' subsequently made purchases in person (Statistics Canada, 2008 November). Under a tiered internet, access to product information could be restricted, which would reduce the incentive for businesses to migrate their services online, limiting their ability to benefit from efficiencies available through an online presence.

Innovation on the Internet

A neutral Internet encourages innovation by reducing barriers of entry, and by providing an equitable online business presence for new businesses. As a general purpose technology, the Internet has the potential to increase economic growth by increasing productivity in many economic sectors. However, economic expansion depends on "co–invention", or innovative activity using general–purpose technology (van Schewick, 2007, p.384–385, 386).

A study by the Swedish Post and Telecoms Agency (PTS) on open networks concluded that openness is a prerequisite for innovation and competitiveness, but needs to be balance with incentives to invest and network security. The way to promote openness is through non–discrimination and effective competition (PTS, 2009).

Innovative businesses, such as e–commerce companies and websites, have relied on the principal of network neutrality to treat all companies equally (Geist, 2008 p.84). A network without entry barriers allows anyone with a good idea to share products (Scott, 2008). In fact, the Internet's 'end–to–end' architecture may be ideal for innovation (Hahn and Wallsten, 2006, p.3). Alternately, restricted Internet access is a significant challenge to openness and entry into the broadband market (PTS, 2009).

ICT industries propel research and development (R&D) in the private sector, accounting for 38% of total Canadian private sector R&D spending. The manufacturing sector spends 19% of total Canadian R&D funds, more than all other sectors; however the service sector experienced substantial growth, accounting for 18% of total Canadian private sector R&D expenditures (Industry Canada, 2010).

Some industry leaders claim that ISPs will have no incentive to innovate under net neutrality; however, this is still unproven. Net neutrality provisions do not limit network providers from making profit in complementary markets, it only takes away the profits that could be gained through discriminatory practices (van Schewick, 2007 p.388).

Who benefits from traffic shaping?

Economic activity has been steadily moving online. Large and small businesses are benefiting from operational efficiencies and opportunities for innovation. However, media industries are threatened by recent technological and legal developments that have dramatically changed the telecommunications industry. Content providers are increasingly uneasy about losing traditional revenue sources, and ISPs are reaching their capacity because of the increased popularity of high–bandwidth applications and websites (Shade & Barratt, 2007 p.298). To increase revenues, ISPs have pursued convergence strategies, such as bundling internet services with cable or satellite TV and conventional phone or wireless services (Geist, 2008 p.83). The creation of a two–tiered internet is just the newest strategy from ISPs to increase revenues. With a two–tiered internet, ISPs would be able to prioritize their own network traffic or content, over competitors (Geist, 2008 p.84).

Stanford Law professor Barbara van Schewick demonstrates that market competition will not eliminate network discrimination. She believes that network operators will still have the ability and incentive to discriminate against independent applications, regardless of competition (van Schewick, 2007 p.335). Hahn and Wallsten reiterate that there is incentive, and demand, for ISPs to privilege traffic to priority content providers (2006, p.3). In Canada, content providers and ISPs are often one and the same. This provides large media firms the opportunity to privilege their own content on networks that they own (Shade & Barratt, 2007).

An Industry Canada report explored the benefits and costs of methods to monitor and restrict online content. The authors warn against a tiered Internet, stating that any interference with the fast and secure exchange of information online will negatively affect the competitiveness and profitability of Canadian businesses and the Canadian economy (Sinclair, Zilber & Hargrave, 2008). Neither competition, nor market self–regulation will guarantee an open and neutral Internet. Net neutrality legislation is needed.

Impact on Economic Sectors

A tiered Internet may disproportionately affect sales for businesses in the educational, cultural, arts, entertainment, and recreational industries sectors if access to their websites is de–prioritized. But it isn't only these industries that will suffer. Retail, trade, transportation, warehousing, and manufacturing industries, who submit the majority of online sales, may also be adversely affected.

In 2007, 39% of public sector educational organizations reported selling services online. Of businesses in the information and cultural industries sector, 27% sold goods and services online, and 24% of those in the arts, entertainment, and recreational industries sectors conducted online sales (Stats Can, 2008 April). Consumers increasingly use the Internet to purchase online goods and services, with 32.5% purchasing tickets, 44.5% purchasing travel arrangements, and 22.1% buying music. Books, magazines, and online newspapers continue to be purchased by 35% of consumers (Stats Can, 2007 CIUS Table "Internet shopping, by type of product and service"). Researchers McKeowen and Brocca at Statistics Canada believe that mobile technology, connections through multiple platforms, and increasing website functionality could encourage more shopping online (McKeowen & Brocca, 2009).

Four sectors have the highest value of sales overall. Wholesale trade accounts for 17% of online sales dollars, with transportation and warehousing at 16%, manufacturing at 15%, and retail trade at 10% , together representing a significant amount of online business activity (Statistics Canada, 2008 April). A neutral internet policy could support and promote economic growth online, across sectors.

Impact on small business

Although small businesses in Canada have reported less benefit from maintaining an online presence than large businesses, there is demonstrated support for net neutrality from small business owners in North America. During a December 2009 workshop at the U.S. Federal Communications Commission (FCC), small business owners emphasized that they need fast, affordable broadband access. Revenues for small business are increasingly linked to online activity in the U.S.. FCC Chairman Julius Genachowski stated "Online retail sales will reach $334 billion by 2012, and 20 percent of consumers go online daily to find a product or service" (Eggerton, 2009 December 22). Approximately 100 small business owners in the U.S. signed a letter submitted to the FCC on preserving an open Internet. They stated that net neutrality is central to the growth of the U.S. small business sector, and emphasized that only clear and robust rules will provide a level playing field for small business in the global market (States News Service, 2010 January 14). It is likely that small, Canadian businesses would also support a neutral Internet, as they may suffer disproportionately more than large businesses from a tiered Internet policy.

Impact on Jobs

Many ISPs believe that a neutral internet will decrease investment, resulting in reduced revenues and reduced employment. However, research has shown that despite declines in investment and employment, telecommunications revenues have continued to increase.

Free Press details this disconnect in their FCC comments on net neutrality. In the U.S., investment and employment in the ISP industry is flat or declining. However, ISP industry revenues continue to increase. In 1996, ISPs in the U.S. employed over 700,000 individuals, up to over 800,000 around 2000. These ISPs also saw an increase in revenues, from just over $175 billion USD in 1996 to over $250 billion around 2000. Since that time revenues dipped, but have rebounded to $250 billion in 2009; however, employment is at an all time low, with just over 500,000 employed. This demonstrates that there is no necessary connection between investment, revenues, and employment (Free Press, 2010 p.62–64).

In Canada, the ICT sector provides employment for approximately 572,700 people. After a marked drop in employment in 2007, the sector has begun to recover (Industry Canada, 2010).

Impact on low–income Canadians

A two–tiered internet may also have implications for low–income Canadians. Dailey et al interviewed 171 community members and others in chronically underserved communities for the FCC. They found that although price for broadband service is the dominant obstacle to adoption in low–income households, it is not the only factor limiting home broadband adoption. Multiple, overlapping challenges confront users, including skill, language, problems with providers, and overburdened public access points. This is of critical importance where the internet is needed for employment, as well as other activities such as shopping, education, engaging with government and community services, and communicating with family (Dailey et al, 2010). Costs for premium Internet service may further disadvantage those who already encounter obstacles to participating online.

Conclusion

The Canadian economy continues to build online. More small and large businesses across various public and private sectors are buying and selling online, and more consumers look to the internet for product information, digital content, and e–commerce. A tiered Internet will restrict consumer choice, heighten barriers to entry for innovation, and restrict the online economy. An open and neutral internet not only provides benefits for business, but also supports innovation. Without net neutrality, ISPs will have incentives, regardless of market competition, to discriminate against Internet traffic that limits revenues. However, measures to restrict and manage Internet exchange will negatively affect the Canadian economy. Entrepreneurs may find it more difficult to start businesses, and existing small businesses may not reach consumers as easily. Broadband internet access is a public good (ITU, 2007). As a basic infrastructure and public service, market regulation seems inappropriate (Shade & Barratt, 2007 p.297). Canada needs network neutrality to support economic growth and innovation.