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A Plain Language Guide to the CRTC Rulings Part 1

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I've been gathering reactions to last week's CRTC decisions on wholesale rates for Internet access. My takeaway is a lot of people are having trouble understanding what the hell it all means. For example, calling the new billing model "straightforward" is hardly how I'd describe the CRTC's capacity- and access-based wholesale tariff structure, whose potential effects on retail pricing is murky to say the least.

So in this series of posts I'm going to provide some plain-language context.

Today, I'm covering broadband competition, and the unusual structure of Canada's wholesale and retail Internet access market. In the next post, I'll look at how the CRTC arrives at wholesale costs and what that will mean for your residential bill. Finally, I'm going to focus in the third post on the UBB controversy of two years ago and how that relates to the recent rulings on pricing.

A pig in a poke

Communications services play an increasingly important role in our lives. Yet the evidence is that awareness among consumers about what they're getting when they buy broadband is stunningly low.

A couple of years ago, the FCC conducted a national survey of broadband households and found 80 per cent of respondents had no idea what broadband speed they were paying their ISP for. More recently, Canada's Public Interest Advocacy Centre (PIAC) commissioned an online survey that asked respondents this question: "Do you happen to know what the speed of your home Internet service is according to the company that provides your service?" (pdf).

Three-quarters (75 per cent) of respondents said I dunno, and I'll wager many of the remaining 25 per cent were lying to save face.

These figures, and many others in the PIAC study, point to a disturbing reluctance on the part of Canadian consumers to tackle basic product research on their communications services, which together rank as our sixth largest household expenditure. Canadian households now spend $181 a month on communications services, equal to their monthly spending on healthcare.

How exactly did this now-vital service get so murky and complicated?

Competition in broadband

Everybody likes competition, or says they do. It disciplines prices, encourages good service, promotes innovation. The CRTC says our retail broadband market is plenty competitive. The federal regulator has been convinced of this since the late 1990s, when it announced it would not be necessary to regulate broadband thanks to all the competition out there.

There's plenty of evidence that wasn't true then and is even less true today. So the CRTC decided to have it both ways. Yes, we have competition, but more wouldn't hurt. Successive CRTC chairs -- and governments -- have never quite managed to decide how vigorously to push for measures that would promote competition.

We can blame much of this on the wiring.

Most homes in Canada have two vital communications links to the outside world. One is the old twisted copper pair that Bell and its fellow travelers put into the ground many decades ago to carry telephone service. The other is the only slightly less pervasive coaxial cable that Rogers, Shaw and other cable companies put in place to carry TV service. These are the incumbents, the guys with the wires in the ground.

Non-facilities-based competition

Keep in mind that as territorial monopolies, the incumbents never had to worry about anybody else running a wire alongside theirs. Those two wires snaking into your living room have conferred a huge amount of market power on the companies that put them there.

Independent ISPs (IISPs) can't economically over-build the incumbent infrastructure. Therefore, the only way they can get to your living room is piggy-backing on one of those two existing wires. That policy option is called non-facilities-based competition. The new entrants have to borrow the facilities from the incumbents, especially the last-mile wire into your home.

Regulators in many developed countries accordingly devised what's known as an "open access" policy under which they oblige the incumbents to lease out parts of their network facilities to new entrants. The upside is the new entrants don't have to commit millions in capital expenditures, which they don't have and would never recover. The downside is the incumbents have to help the new entrants use their decades-old wires to take some of their own customers away, thereby creating a huge opportunity for foot-dragging, disputes, appeals and other diversions of exactly the kind that led to last week's decisions.

Wholesale vs retail

Canada's mandated open access regime created an unusual kind of market for broadband. Like many sectors of the economy, Internet access is divided into wholesale and retail segments. But with a big difference. The access wholesalers - the incumbent telcos and cablecos - are also retailers, and they have a strong and highly valued marketing and billing relationship with their end-users.

The new entrants are given a tricky row to hoe. They have to lease access to incumbent facilities at a wholesale rate low enough so they can mark up that rate high enough to cover all their costs and make some contribution to profit. At the same time, they need to keep the marked-up retail price low enough to make their offer at least as compelling as what Bell or Rogers is offering.

Ideally, the IISPs also want to be able to differentiate themselves in other ways - like offering tiers that have much higher, or no, data caps. These caps are the financial tools that implement "usage-based billing" or UBB, a service plan that punishes you financially for consuming more than a fixed monthly allowance of data transfers.

This dysfunctional but unavoidable system gives the incumbents both the opportunity and the incentive to attack anyone who tries to compete with them in either the retail access market, or the retail content market, like conventional TV or video on demand. Since the CRTC judged unsurprisingly that the incumbents would abuse their market power in selling wholesale access to tiny competitors, it elected to regulate wholesale access.

In the next post, I'll look at the wholesale picture from two different angles:

  • how the CRTC changed the way it determines tariffed wholesale rates;
  • and why it also changed the amounts of those rates arrived at for each of the incumbents.