Why Internet access is likely to get more expensive

Shifting consumer habits are changing the revenue bases of large telcos, and prices will follow

 
A giant node of organized network cables

(Iconica/Getty)

Here’s an interesting trend, as illuminated by headlines from the past three months:

Yes indeed, the cost of internet services is steadily going up across much of Canada. The culprit: television.

See Shaw’s latest quarterly results, reported on Tuesday. The cable and internet provider attributed a drop in second-quarter profit to more TV customers cutting the cord than expected. More specifically, the company blamed a recent ruling by the Canadian Radio-television and Telecommunications Commission that now lets TV subscribers cancel without giving 30 days notice.

It’s no secret more people are getting more of their entertainment online. An increasing number of subscribers are re-evaluating their expensive cable packages as a result.

Indeed, a report from Convergence Consulting Group, also issued Tuesday, suggests the cord-cutting trend is going to accelerate dramatically in 2015.

That acceleration could turn into a veritable bloodbath next year, when the CRTC’s new “skinny basic” and a la carte channel rules take effect. TV providers are set to lose big bucks over the next two years and beyond as they are forced to offer smaller, more affordable packages.

Naturally, they’re going to look to recoup that lost revenue somewhere. Internet price hikes so far might seem quaint a few years from now.

Financial analysts are saying as much. As the Globe and Mail reports:

[Shaw’s] losses in the quarter “reflect a growing industry concern that cable and satellite services are quickly losing pricing power and may now be reflecting cord-cutting,” said Macquarie Capital Markets Canada’s Greg MacDonald. He added that his view is that Shaw is implementing the “right strategy” by increasing prices on high-speed internet to address those losses.

This is all happening against the backdrop of two big regulatory events. The first is a wholesale review initiated by the CRTC back in 2013, which wrapped up this past December. At issue is how big network owners such as Shaw, Rogers and Bell sell broadband access to independent service providers such as Teksavvy and Distributel.

The smaller companies have argued in favour of getting access to newer, faster network components owned by the bigger players, including fibre. They also want the cost of such wholesale service reformed. Both, they say, are integral to providing competitive internet services.

It’s also vital for new TV providers to spring up, which the CRTC looks to be encouraging with a new wholesale regime it’s in the process of establishing. Wholesale TV providers will need cheaper wholesale internet rates in order to get IPTV services off the ground.

The big companies, in turn, would like wholesale ISPs to go away entirely because the internet market is already supposedly competitive.

That’s a tough pill to swallow since Canada isn’t exactly cheap when it comes to internet service. Ookla’s Net Index ranks Canada 20th in relative cost of broadband – or the price of a subscription divided by a nation’s gross domestic product per capita. That’s second-worst among G7 countries, with only Japan faring worse.

The Organization for Economic Co-operation and Development also ranks Canada as among the most expensive across its various measures.

There was also the report recently issued by the Public Interest Advocacy Centre that found internet and other telecommunications services are unaffordable for a large number of Canadians. The CRTC seems cognizant of the problem, having recently launched a large-scale review of telecommunications services—the second event that will doubtlessly deal with internet price hikes.

The regulator will spend the next year finding out whether internet service should be made essential, what speeds should be considered as minimal, and what pricing looks like overall. If it goes the same way as the recently concluded Let’s Talk TV review, there could be radical changes in store for internet service in Canada.

In the meantime, Canadians will likely have to endure some big increases to their internet bills. With the main network owners all being huge, vertically integrated companies with many businesses, hitting them with revenue-killing rules in one area only shifts the costs to consumers to another.

In this case, it’s TV over to the internet. The game of whack-a-mole continues.

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