A Breath of Fresh Air: New Policy Directions in Canadian Telecom

Oxygen was in the news recently. Allstream’s President, Dean Prevost, made an allusion to the life-giving properties of the light-blue gas element, atomic number 8, in an address to telecom conference attendees in Toronto. In today’s economy, he suggested, telecommunications networks perform a similar function.

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We agree with Mr. Prevost.  The telecommunications network is a fundamental ingredient in the global economic mix – communications networks are key to the transfer of information, the key to leverage of intelligence, the key to overcoming challenges of geography, and the key to the effective functioning of the value-transfer mechanism that underpins the financial system.

Mr. Prevost also talked about the role of Government and how Government can use its power to stimulate, to foster and to encourage development of networks through new policies.  Specifically, he was referring to the recently announced change to Canada’s foreign investment rules as they pertain to telecommunications companies.  The Harper Government has committed to lifting the restrictions to non-Canadian investors such that companies like Allstream can seek the funds they need outside of Canada.

This is good news.  In SeaBoard’s view, the Harper Government has done the right thing; we think that Canada’s telecom industry will be stronger because of this measure.  How so?  And why is this important to Canada and to consumers and businesses?

The industry will be stronger because more money will flow into building, into infrastructure, and into the systems and facilities that form the core of today’s network infrastructure.  This is important because the country needs to remain competitive with its key trading partners.  Without the investment, without the new network infrastructure, Canada’s economy would be starved of its needed oxygen, and Canada’s international competitiveness would wane.  This change to foreign investment rules is important to consumers and businesses in that a stronger industry will also be a more competitive industry – an industry that will respond to marketplace challenges with innovation, keener pricing, better service, and more customer focus.

Access to foreign capital is not a panacea – it does not, in itself, address the gamut of things that Government can do to drive Canada’s information economy and to foster telecommunications competitiveness.

An infusion of oxygen is vital, but to be a truly successful nation, we need a breath of fresh air in another sense.  That is why we were encouraged by the announcement, also last week, of the appointment of a new Chairman for the CRTC, Jean-Pierre Blais.  This, too, indicates that the Government is serious about moving forward.  Mr. Blais will provide insight and balance to a tired institution that badly needs both.  He has a wealth of relevant experience, and he has already done a great deal of thinking about cultural issues and key questions of intellectual property that underlie much of the new economy.

The new Chairman, who takes up his duties next week, will obviously have a host of issues to look at on the Broadcasting side of the Commission, but we would suggest that he pay heed to the Telecom side as well.  One area we believe needs to be revisited is the Commission’s 2009 decision on mandated wholesale services; as we said at the time in our report, A Giant Step Backwards:  Canada’s CRTC Moves to Re-Monopolize Canada’s Communications Marketplace,[1] restricting competitor access to broadband facilities was an ill-advised move that has had the effect of increasing costs to Canadians and constraining innovation and choice for communications services consumers.

In arriving at its decision three years ago, the Commission agreed with the incumbent telephone companies that mandated wholesale access wasn’t a true solution to Canada’s network challenge.  It is not surprising that incumbent telecom companies jealously guard their “last mile” network – a network built with a century of monopoly profits – and think that they should be the exclusive beneficiaries of the investments they made with their risk capital.  Of course, in a monopoly environment, where both one’s business and one’s rate of return are guaranteed, there is no risk.  Consequently, the investors in the incumbent telephone companies have never felt the chill of failure, except in those business areas that were not telecom.  (See our 2006 report, Not With A Bang, But a Whimper:  Goodbye BCE,[2] for a discussion of BCE’s many failures outside of the comfortable world of telecom monopoly.)

Our advice to the new Commissioner would be to look at the principles that the telecoms part of the CRTC was established to sustain – a competitive marketplace is a fundamental part of that – and re-examine the Essential Services decision through that lens.  The wrongheadedness of the decision is obvious:  it re-created monopoly conditions.  Access to broadband facilities – i.e., basically any service offering throughputs higher than DS1 (or 1.544 Mbps, a rate that most consumers would find unacceptably slow) – was denied.  Competitors, the Commission’s logic dictated, would build facilities where they needed them, as they needed them.  If only the world worked that way!  If only it were so simple!  Sadly, there is no way that any competitor, no matter how richly funded, has the means to duplicate every facility owned by incumbent providers.  Canada’s marketplace cannot afford the cost,  and no company can afford the investment.  This is not just a Canadian problem; incumbent structural advantages are well known and understood in other jurisdictions, and steps have been taken in those jurisdictions to mitigate such advantages and to support competitive access.  These range from strategies of structural separation (where incumbents are compelled to restructure and hold their backbone and connectivity elements separate from their retail arms) to compulsory sale of network assets to the state.

This is neither the time nor the place to enter into a lengthy debate about what should happen, or what could happen.  However, to return to Mr. Prevost’s allusion to the life-giving properties of the network, fresh air at the Commission is a good thing.  Canadians may well see some benefit from a new Chairman and a new perspective on what the CRTC can do.  We think we could be in for exciting times – a new era in which the Harper Government’s modernized foreign direct investment rules and a more open-minded CRTC can work in tandem to enhance competition in the marketplace to the benefit of all Canadians.

[1] A Giant Step Backwards:  Canada’s CRTC Moves to Re-Monopolize Canada’s Communications Marketplace, SeaBoard Group, April 2009.

[2] Not With A Bang, But a Whimper:  Goodbye BCE, Seaboard Group, October 2006.

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