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There's no left or right in telecom, only pragmatism

Here, through the lens of a centrist, are the steps that could be taken to achieve a telecom equilibrium that everyone can be happy with.

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On the surface of it, it seems the debate over various telecommunications issues often boils down to a case of right versus left—the market purists versus regulation aficionados. People seem to either fall on one side of an issue or the other and therefore into one of these two camps, and never the twain shall meet.

That’s too bad because, as with all idealism, sticking to one possible solution is unrealistic. It’s especially true in telecom because a) it’s a very expensive game to play, b) it’s an industry that is still transitioning from its days as a government-controlled beast, and c) it’s therefore next to impossible to have an ideal situation. There simply has to be a middle ground.

That’s why in the past I’ve argued to allow pure market forces to do their job on some issues and suggested stronger regulation on others. This sort of centrism, I believe, is part of what defines the Canadian identity—despite what idealogues on both sides say, the majority of Canadians fall somewhere between the hard-line free marketeering of the U.S. and the nanny state socialism of Europe.

Of course, that doesn’t preclude us from dreaming of the proverbial ideal situation. Perhaps some day, we’ll achieve a level of telecom equilibrium that everyone can be happy with. For months, I’ve written about various possible moves that could get us closer to such a day. Here then, through the lens of a centrist, are the steps that could be taken to achieve it.

1. Ditch usage-based billing. The CRTC launches its “back-to-drawing-board” hearings on usage-based internet billing on July 11. The hearings to revisit the issue, the result of a very public government spanking, are expected to last a week, with the regulators making a final decision some time by the end of November. As a quick reminder, the CRTC’s jurisdiction over this issue is limited to the terms that big ISPs such as Bell Canada are able to set on their smaller wholesale customers, such as TekSavvy. So, even if the regulator reverses itself and disallows Bell’s UBB proposals, only about 5% of Canadians will continue to get effectively unlimited internet usage. The government clearly wants UBB scrapped and has indicated to big ISPs that they may want to do the same for the other 95%. Shaw and Telus have already taken action out west and boosted usage limits dramatically. Other Canadian ISPs are likely going to have to follow or risk government action.

Getting rid of UBB, both at a wholesale and retail level, is key for competition. If Canadians can use the internet as much as they like, they are free to adopt so-called over-the-top services that compete with those offered by telecom companies, such as Netflix and Skype.

Right or Left? This is a tough one to call. The internet wholesale regime at the centre of this issue is pretty clearly leftist, as is support for government intervention. On the other hand, removing one particular regulation and not replacing it with another is rightist. Let’s call it a tie.

2. Refrain from regulating new media. Another matter the CRTC is currently deliberating is whether the over-the-top services mentioned above should be regulated. The answer is an emphatic “no.” Subjecting Netflix, YouTube and the rest to Canadian-content rules would be the height of insanity. As I’ve written before, this would open up a giant morass from which Canada would never escape. While it may be possible to enforce regulations on companies that willfully do business here, such as Netflix and YouTube (Google), how would such rules be enforced on, say, internet radio stations broadcasting out of the Czech Republic? Looked at another way, what if YouTube chose to ignore the regulations? Would the CRTC block Canadians from accessing it? Yeah, good luck with that.

The irony is that the CRTC is only considering regulating Netflix et al after whining from the same telecom companies who incessantly talk about how the free market should be left to its own devices. But when the free market delivers a new player that they simply can’t compete with, all of sudden they want Ma Regulator to do some cracking down. There is, of course, the fairness issue, where traditional telecom/broadcast companies must contribute millions of dollars to propping up Canadian content while the over-the-top guys don’t have to, but that’s a separate issue.

Right or Left? Opposing regulation of new media is about as right as it gets. Hail Milton Friedman!

3. Strengthen net neutrality rules. A few years back, the term “net neutrality” made headlines. The issue arose from Bell Canada slowing down certain uses of the internet and eventually prompted a CRTC hearing, which resulted in an internet traffic management framework being issued. For the most part, people of all stripes were happy with the rules—which prohibit undue discrimination against certain internet applications—but some gripes remain. For one, Bell’s internet throttling continues even though the company has not proven the need for it. Other abuses, such as Rogers’ failure to comply with disclosure rules, have happened, followed only by a slap on the wrist from the regulator. As the old joke about toothless British police goes, the CRTC is basically yelling “Stop! Or I’ll yell stop again!”

To fix this, the regulator should move from a reactive role—where it only looks at complaints when they are submitted—to a proactive one, where it regularly and randomly monitors ISPs for compliance. Yes, such a move would probably require more staff, but they could be paid for by introducing another measure that the CRTC has been asking the government for: the ability to issue large fines, also known as Administrative Monetary Penalties.

Strong net neutrality would combine with the first two steps above to create a truly level and vibrant playing field on the internet, where services that compete with those offered by telecom companies could flourish and thereby make a whole bunch of other regulations unnecessary.

Right or Left? Calling for more powers, staff and resources for the regulator? Obviously left (but with a right-wing goal in mind).

4. Ditch foreign ownership restrictions on telecom. With telecom being an expensive game to play, it’s inexcusable that Canadian companiesparticularly new ones—are denied access to big foreign dollars, which usually carry ownership stakes with them. The problems this has created are well documented; foreign players have stayed away for the most part, making it hard for new local companies to start up and compete, thereby creating a captive market for the likes of Bell, Rogers et al. While there is debate over whether Canada is behind in things like cellphone prices and internet speeds, there certainly is no question that it is behind in liberating its foreign ownership rules.

Successive Liberal and Conservative governments have waffled on the issue because it could potentially get thorny. It would have been easy for opposition parties to raise the spectre of the selling out of national interests and the potential job losses that might incur, despite the fact that the parties themselves might actually secretly support the move. Now, with a majority Conservative government, there are no excuses.

For what an opened up Canada might look like, check out the analysis I wrote a while back. Some of that might be different now because many of the large telecom companies now also own broadcasters, but so what? If we still want to maintain ownership restrictions on broadcasters, it’s not rocket science—anyone who want wanted to buy Bell/CTV, for example, would have to split off and sell CTV. Simple. But, as mentioned above, the real reason to remove the ownership limits isn’t to facilitate the buyouts of big companies but to ease the start-up or survival prospects of new ones.

Right of Left? Since foreign ownership restrictions represent the biggest regulation inhibiting competition in Canada, removing them is most definitely right.

5. Create set-asides in the next spectrum auction. There’s been a lot of bluster from Rogers and the rest about the next upcoming auction of spectrum, which are the airwaves that cellphones need to work. In the last auction, the government reserved 40% of the licenses exclusively for new companies, which of course netted the likes of Wind, Mobilicity, Videotron, etc., in order to spur more wireless competition. (That was, of course, a very interventionist move for a Conservative government.) This time around, the old guard are saying they need more spectrum to roll out 4G services, so there should be no similar set-aside.

To anyone with a brain, those arguments are complete bull. The only reason incumbent companies don’t want set-asides is so they can reach into their deep pockets to buy up all the spectrum and thereby shut out and cripple newer competitors. Think about it: if Wind has to bid against Rogers for spectrum, who’s going to win that auction?

The proof, ultimately, is in the pudding. New carriers are most definitely wringing every bit of usage they can out of the spectrum they got in the last sale. The incumbents? Not so much. If wireless airwaves were tangible objects, they’d be sitting and collecting dust in the closets of Bell, Rogers and Telus.

Removing foreign ownership limits would likely help in this regard. Big, deep-pocketed foreign players could buy the likes of Wind and Mobilicity and then compete in a no-holds-barred auction against the incumbents, but there is no guarantee of such acquisitions happening, and certainly not in time. As such, the pragmatic move is to give the new carriers another chance to build their businesses. Setting the big guys loose on them in the auction will surely kill them.

Right or Left? Providing special benefits to some companies but not others is most definitely left.

6. Refrain from regulating vertical integration. The first three steps above will cement internet-based services as real and legitimate competitors for “bricks-n-mortar” telecom/broadcast companies. The fourth step could make things even more interesting as some of the vertically integrated companies could be broken up. If Comcast wanted to buy Rogers, for example, it would have to sell off its CityTV stations. Either way, all of those steps would enact effective counters to the potential negatives of vertical integration. For more on that, check out a post from a few weeks back.

I’m pretty convinced that vertical integration is an overall bad idea for the companies involved. Nobody has really made it work yet—Time Warner and AOL are perhaps the best example of an integration that did nothing for no one—and it generally takes the company’s eyes off what it does well in the first place. In business, expanding outside of one’s so-called core competency only rarely pays off.

Right or Left? This is an easy right.

7. Start planning shared networks. What?!?! Shared networks? We might as well start waving little red books and saluting statues of Mao, that’s how far left that idea is, right? Well, no. Shared networks, whether they’re wired or wireless, make all kinds of sense, so much so that they transcend ideology. In the U.K., big-time broadband competition has been the norm since regulators firmly suggested years ago that BT spin off its network as a separate company. The result is that tons of ISPs compete on equal terms against each other, providing customers with lots of choice and low prices. Australia and New Zealand liked the results so much, they followed suit—and then took it a step further with each respective government building its own shared network, to be run as separate companies from the incumbent ISPs.

I know, I know, that sounds like a whole lot of leftist government/regulator interference, doesn’t it? But, as I’ve pointed out many times before, Bell and Telus obviously saw the benefits of a shared network when they decided to jointly build their new wireless network. Shareholders loved it because each company saved a ton of cash and both can now compete on the same level as Rogers.

Canada currently ranks near the very bottom of the OECD in terms of fibre broadband (see table 1l here), which means Canadian telecom companies are simply not spending the big bucks and rolling out next-generation networks like their peers in other countries. Unless some of them decide to do otherwise—which is something shareholders really won’t like—Canada is likely to fall further behind. A shared network looks very much like a pragmatic way to keep the country’s infrastructure up to snuff, ensure good competition and keep shareholders from hyperventilating over massive capital expenditures. Everybody wins.

Left or Right? Alas, the desired competition would only happen if all comers had access to the shared networks, which would only happen through government or regulatory action. Still, a shared network is an economically efficient idea. On this one, as the post title says, there’s no right or left, only pragmatism.