Cable / Telecom News

ANALYSIS: Four ways to address the “inappropriate profits” of the telecom incumbents and foster real competition

By Matt Stein

THERE’S NO LONGER ANY question that telecommunications is an essential service. Turn off the Wi-Fi in your house and you’ll see what happens!

The pandemic, as we all know from personal experience and from our daily lives, our interactions with our customers and our employees, really underscore just how vital affordable, high-quality communications is.

Everybody says this. But think about whether or not the Canadian communications sector as a whole is delivering on that. Are Canadians getting what they need? The services, the speeds, the packages, the pricing, they demand? Are they being treated fairly?

Fair pricing, fair service, and options that suit all needs – that’s table stakes in all industries – cars, beer – and it’s just as true, if not more, in telecom

Canadians want to be treated well, not taken for granted or taken advantage of. That’s why the industry has always been regulated, and always will be: To ensure Canadians are treated fairly; have options, are treated as they want to be treated, and pay an appropriate price – and this isn’t just my opinion, it’s the law.

And yet even with the regulatory framework we have, Canadians distrust the incumbents, distrust the service they promise to provide. They are being treated unfairly at every turn, and they know it, and this is what a recent CRTC report on misleading and aggressive sales practices found – and this is what the complaint volumes to the CCTS – the industry ombudsman – bear out, year after year.

Canadians run the risk of running out of options. For higher speeds – as a result of regulatory choices – they already have. If we don’t act soon, the same problems will spread across the spectrum.

Make no mistake, the system is being threatened. But with a little work, and a few big ideas, we can make it stand up to these threats for years to come.

Before I share some ideas on how we can continue to innovate and respond to Canadians’ needs, we need to keep a few things in mind

First, there are two facts that may not seem linked. Number one, Canadians pay some of the highest rates for telecommunications services in the world; and two, Canada has three of the most profitable telecom companies in the world. These two facts are not only connected – they are the same fact – they are two sides of the same coin

Oh, I’m sure Canadians boast to their friends abroad about our profitable telecoms, like they boast about our beloved beer, maple syrup, and hockey… Probably not.

In fact, the reason we have the most profitable telecoms is that those telecoms have found a way to charge Canadians inappropriately high prices, to “compete responsibly” as they would say, and in doing so extract inappropriate profits. In other words, Canadians have been over monetized.

Look, profits are great. Everybody wants profits. Investors look across the world to find companies that generate the highest possible returns – companies that have demonstrated an ability to make a larger return than other companies like them elsewhere. That’s what we’ve let happen in Canada.

Monopolies – and that’s basically where we risk going again in Canada – make for a great investment. Imagine if we had just one national car company, and it sold just one model in one colour. Or even if there were a second company that sold it in one other colour. That would mean every dollar spent on cars in this country went into the pockets of that one or two companies, and, of course, their investors.

Brilliant! Sounds like a fantastic investment. Sign me up.

The sad truth is that nobody would be able to afford to buy a car because prices would skyrocket. With nobody to compete against, there would be nothing stopping them from jacking up the prices to whatever they felt like charging.

And since there would be no incentive to innovate or impress anyone, there’d be no power windows, or self-parking or driver-assist, or electric hybrids. Nothing. That just wouldn’t make sense. It would be bad for Canadians. No choice, no innovation, and of course, outrageous prices and terrible customer service

Sure, monopolies make for a great investment, as do duopolies and even oligopolies – actually, all the -opolies are great, if you’re looking to invest.

But what they don’t provide is consumer protection.

Our incumbent telephone and cable companies fight tooth and nail to protect their ability to continue over-monetize their service offerings

“Investment doesn’t help consumers. Investment doesn’t help innovators. Investment doesn’t help Canadians. Investment helps investors. Competition helps consumers.”

We need to shake off this myth that investment is somehow a goal. Investment doesn’t help consumers. Investment doesn’t help innovators. Investment doesn’t help Canadians. Investment helps investors.

Competition helps consumers.

Government contribution to investment, such as happens in rural broadband builds, helps investors by making the investment generate a faster or larger return, which drives the investment forward. Driving it forward does help consumers, but private investment does not help consumers. It helps investors. Look at the definition of Investment: Investment is an asset or item acquired with the goal of generating income or appreciation.

Notice anything missing there?

When Canadians do choose a competitive service provider, the incumbents make sure to treat them like second-class citizens. Canadian consumers need choices, and they need those choices to be based on a regulated infrastructure access model and regulation that ensures they’re not penalized for having chosen competition.

Do we really think investors care whether the prices Canadians pay for telecom is at all reasonable?

No! Their interest is in maximizing their return. Period.

So next time you hear someone say, “well, wait, if we set the price too low, it’ll affect our ability to invest,” remember that’s a euphemism. Do a little search-and-replace in your own mind and what you should hear when they say “ability to invest” is “ability to charge high prices.”

When you hear that competition will harm investment, what that really means is that competition drives down prices, which limits the incumbents’ ability to overcharge Canadians and makes them less profitable. When you hear that cost-based rates are somehow too low – they are cost-based after all – and that they’re bad for investment, what that really means is that they make it much harder for the incumbents to keep charging inflated prices.

Do Canadians care about making sure their big, profitable companies can generate returns larger than telecoms in other countries? No! There’s no gold medal for monetization at the Olympics. I checked. Still not a sport.

Do they want to be overcharged in order to make sure our telecoms can continue to boast 40%+ EBITDA margins? Really?

And when I say incumbent, I’m not just referring to the Big Three. I mean all the bigs. If you want proof that they all act the same, you don’t have to look very far.

But before I get to that, some quick history on the wireless market, where the dream of competition saw three new start ups make a run at the wireless space without being part of an incumbent, and therefore without the ability to rely on their entrenched base, existing network, and massive market share and deep pockets.

Two went bust and got snapped up by two of the Big Three, and the other basically had the same fate – except it got scooped up by the fourth largest incumbent, in Shaw. They weren’t already in wireless. Great news for competition, right? I mean, Shaw’s deep pockets will ultimately bring substantial competition to the market, right? Starting with a low market share will make them hungry, right?

Finally, a disruptor, right? Not so fast.

Just last week, as reported in, the Globe, and Yahoo Finance, among others, during Shaw’s Q4 investor call, the president of Shaw complained about “lost economic rent” resulting from a “disappointing lack of discipline” amongst the Big Three wireless companies in terms of their pricing, and how the Big Three have rushed toward 5G without having figured out a way to “directly monetize” it as a separate service.

He apparently further lamented that the opportunity to monetize Canadians on 5G might have passed due to other networks not charging separately for it.

He went on to reflect on the fact that Shaw’s position in the market means they aren’t the driver of such pricing strategy, but said, “So there is a real risk that if this continues, it’ll drive us to price lower.”

Do you hear that sound? That’s 33 million Canadian wireless subscribers rubbing their hands together.

So much for that disruptor.

Only service-based competition has delivered and sustains the kind of price disruption and innovation that Canadians need.

“The incumbents, through their litigation, through their marketing practices, through their M&A activity, restrict competition, stifle innovation, and maximize price – all to keep competition out, their prices high, and their shareholders happy.”

Regulation is supposed to act as the counterbalance to incumbents’ natural desire to over-monetize Canadians. The incumbents, through their litigation, through their marketing practices, through their M&A activity, restrict competition, stifle innovation, and maximize price – all to keep competition out, their prices high, and their shareholders happy.

The CRTC’s wholesale framework recognizes that incumbents – when unchecked – won’t deliver the innovation, choice and affordability that Parliament has said, for years, are the goals. The wholesale framework is designed to facilitate competition in the retail market.

It does this, as you know, by requiring the incumbents sell to competitors (at a profit!) the portions of their networks that it makes no sense for any other business to try to build. This allows competition to respond to the needs and demands of Canadians in a way that encourages innovation and drives down pricing

And it’s worked – to an extent. We have proven that if you let competitors pay the incumbents a fair and reasonable rate for access to those network elements, those competitors will offer services to consumers at fair and reasonable prices, and this acts as a huge check on the incumbents’ pricing.

But while it is ‘en vogue’ to say make it seem like price is the only thing, competitors do more than just compete on price. We certainly do that, too, but we also innovate – and innovation from the competitors have fundamentally shaped the way Canadians access telecommunication services.

The biggest example – and one that we now take for granted in many ways, is unlimited service offerings. Just over a decade ago, unlimited service offerings started disappearing as the incumbents realized there was something that they hadn’t yet over-monetized, and that was usage.

Competitors, on the other hand, continued to offer unlimited services, and even doubled down, and differentiated their offerings as such. They could do that because they had access to a cost structure that was similar to the incumbents’, based on cost-based rates and a reasonable mark-up as defined by the CRTC.

That’s right – I want to stress this point – the rates competitors pay are the costs, plus a reasonable markup. It literally builds profit into the price.

Consumers obviously really liked it, and the competitors were still able to make acceptable margins, so it made sense for everyone (as long as your MO wasn’t overcharging consumers).

Think back to when Covid hit, the incumbents immediately waived overage charges too, in response to a social need. But guess what? Those charges have all come back. (Did Covid end? Nobody told me). I am guessing too that when the CCTS issues its next report on complaint volumes, there will have been a surge in complaints about the incumbents.

So now some big ideas.

Number one. We need to counterbalance the incumbents’ ability to drag … things … out… which they do time after time. Supreme Court run after Supreme Court run, and to influence politicians behind closed doors. Remember for the incumbents, a delay is a win.

Look at the process for setting wholesale rates. The longer that process takes, the longer the incumbents can keep prices high – because competitors can’t practically use a wholesale service until the costing process is completed and so the longer they hurt us innovators – so the strategy goes – the smaller we get.

“The incumbents have every incentive to delay and drag out regulatory proceedings and make things take as long as possible. They have the resources for this; and yes, the rules even allow it.”

The incumbents have every incentive to delay and drag out regulatory proceedings and make things take as long as possible. They have the resources for this; and yes, the rules even allow it. So how can we address this? We can start by creating proper incentives. First, we need to stop letting the incumbents set the interim rates for wholesale services.

Today, incumbents can effectively name their price out of thin air, and if they have their way in the CRTC’s current review of wholesale rate-setting, they will basically cut the regulator out entirely.

Either way – you, we, the competitors – must pay that price, whatever it is, until the costing process is completed, often years after the fact, and the CRTC sets a final rate that it has found to be just and reasonable.

If you had the kind of power to name your own price for the service your competitors had to buy in order for your competitor to even exist, and a vested interest in making things harder for those competitors, why wouldn’t you name a price that’s say, $40 higher than your own retail rates so they couldn’t possibly compete with you – and then work to delay the process of reviewing that rate for as long as you could?

Instead, we should use an approach that has proven successful many times over – let’s establish interim rates using the “retail-minus” approach, which sets the wholesale rates based on the actual rates the incumbent is charging for a similar service in the retail market, minus a set percentage.

I suggest that we make it 50% as the CRTC has before – set the interim rate at half what the incumbents are charging consumers in that market. That would make it impossible for an incumbent to propose interim rates that were higher than its retail prices, and would give the competitors immediate access to a fair rate, as long as the rate setting process wore on.

Second, those interim rates should not be paid directly to the incumbents. Instead they should go into an escrow account held by the CRTC or some other neutral body, until the final rate is set.

Now you’ve created some urgency. The incumbents will want to see the wholesale rate-setting process completed as quickly as possible and it might even create an incentive for them to actually work with competitors and the industry to get a final rate approved as quickly as possible, instead of blocking everybody at every turn.

If we got this right, it would also get rid of the need for retroactivity. Today, retroactivity is the only way to rectify overpayments when the final rate set by the CRTC is lower than the interim price the incumbents chose. But, it’s not a good solution. It doesn’t compensate the competitive service providers for their lost opportunity costs or their inability to compete effectively while we wait, sometimes for a months, if not years. More importantly, it doesn’t arm competitors with the tools they need to compete, and therefore do our part to help Canadians.

Big idea number two is this: We need to stop allowing the incumbents to penalize Canadians for choosing a competitive service provider.

Today, Canadians who decide that a competitive service provider best suits their needs are treated as second-class citizens by the incumbents. Want next day or same day installation? Sorry, not available. Have to call the incumbent. Want an ETA for when your service will be fixed? Sorry, not available. Have call the incumbent.

Even just finding out if your house is serviceable can be a challenge. Incumbents only update wholesalers’ data on serviceable addresses and such once in a while, often less than annually, but their own websites are updated continuously. All of this because the incumbents are not required to treat their competitors’ customers the way they treat their own.

We need our regulatory framework to stop allowing the incumbents to penalize Canadians for taking advantage of competitive choice. Whatever the incumbents do in the retail market, must be made available – on an equitable basis – to competitive service providers.

This idea is not new or novel, and it’s a source of constant complaints to the CRTC, to this day. It’s actually called an equivalence-of-inputs, or quality of service framework, and it requires an incumbent to provide wholesale services on, the same time scales… by means of the same systems and processes… with the same service levels as the incumbents use when the provide their own retail services.

“If we can’t get this right, then the next step is to go further, to explore separating the incumbents’ retail operations from their infrastructure operations – that’s called ‘structural separation.’”

And if that doesn’t work, the next step isn’t to say “oh, well.” The next step is not “competition clearly won’t work in Canada.” If we can’t get this right, then the next step is to go further, to explore separating the incumbents’ retail operations from their infrastructure operations – that’s called “structural separation.”

It was only four years ago that the then-CRTC chairman Jean-Pierre Blais referred to structural separation when he said: “If the winds of change blow too hard and (the incumbents) refuse to bend in the wind, the tree may break at the trunk rather than lose a few leaves.” I couldn’t agree more. If this doesn’t work – maybe it is time to break the tree at the trunk.

It’s been done in the U.K. and in Australia. In Australia, in fact, they went even a step beyond that, going so far as to nationalize the whole infrastructure system.

Structural separation would result in the ultimate even playing field, and it just might end up being our only option here, too. From time to time you hear people wonder if all this cost setting and regulation is too hard, and that maybe we shouldn’t bother. No, that’s not the next step. If this doesn’t work, the next step is structural separation.

But a great start would be to just go back to the actual rules and goals of telecom regulation: Just and reasonable rates, for everyone, including consumers, and for competitors who purchase wholesale inputs; Competition that is sufficient to protect the interests of users; and services and choices that respond to the needs of consumers.

My third big idea is we absolutely must address the fact there are currently too many open-ended, consequence-free avenues for appealing any old regulatory decision you don’t like.

It happens like clockwork. The CRTC comes out with a long-awaited decision, based on extensive research and consultation, vetted by a wide range of stakeholders… and immediately the incumbents leap to appeal.

The Act provides for three avenues for challenging decisions. You can appeal to the CRTC itself, you can appeal to the government, and you can appeal to the courts, and when you go to the courts, then there’s a few layers to that, too. The three avenues were meant to provide a balanced set of options that could be called upon in a carefully considered way in the case of some major concern or oversight.

Oversight of the CRTC, legally and politically, is fair and appropriate, but the current set of options just doesn’t work, because it takes years to gain certainty on even the smallest of things, and it detracts from the whole point of having an expert regulator in the first place. Nowadays, it almost seems routine that the incumbents, if they don’t like a decision, will go off in all three directions at once, and guess who that costs? Canadians. All so that the incumbents can delay decisions they don’t like.

We all know that that that’s exactly how they use them, but the worst part is, there’s no time limit on appeals, no limit on the number of appeals, and no consequences for appealing again and again – even if your first appeals are rejected for being baseless.

Let me say it again: The incumbents aren’t appealing decisions because of their passion for doing what’s right. Nobody believes that. They are appealing in order to delay. It’s absolutely, 100% deliberate. They intentionally aim to drag things out as long as they can.

That way they avoid having to implement changes that might affect their bottom line and their investors’ returns, all while waiting out the smaller players, hoping we’ll all just die off. They don’t expect to win, but they have deep enough pockets that they can keep appealing and appealing forever, rather than actually take some ownership for serving Canadians fairly.

These delays are the enemy of progress, and a boon to the incumbents. So that’s the next obvious change we need to see: A clear and limited process for appealing decisions that would include consequences for acting in bad faith and bringing repeated “claims of dubious merit” (which, by the way, is the exact term the Federal Court of Appeal used in its dismissal of the incumbents’ most recent appeal effort. The one that would have instantaneously lowered what Canadians spend for home Internet every single day in every place in Canada.).

Big idea number four is about the fact that somehow, we have reached a point where the incumbents have seized all the power in our regulatory environment. They don’t respect the scope of proceedings, they create massive delays without batting an eye, they just simply ignore the CRTC when they don’t agree, and they take advantage of everything they can.

From leveraging information during regulatory proceedings that only they hold, to seeking to ensure that the information is shielded from scrutiny by filing it to the Commission in confidence, and unlike even a few years ago, they are getting away scot-free.

What I envision is a world in which the CRTC is recognized for its authority. In the wake of the most recent series of appeals on lowering the wholesale rates, we worked with Leger to survey Canadians about what they thought and 89% of Canadians agreed or strongly agreed that the incumbents should comply with the CRTC decision.

Canadians believe in the system. They want it to work. But they’ve sadly also grown to expect big telco’s behavior: 69% of them said they were “not surprised” the incumbents had taken the decision to court. Is that how we want Canadians to feel about our largest companies, the companies that are supposed to be stitching us all together?

The Commission’s powers need to be respected and acknowledged by all players. Its rulings need to have more teeth. And it needs teeth beyond the ability to impose monetary penalties. This isn’t to suggest that monetary penalties don’t serve a purpose, but they aren’t a deterrent to the incumbents. Penalties of $1 million means nothing to incumbents that revenues in the double-digit billions.

“Our current system is stacked in favour of a small number of very powerful players, who benefit from historical advantages that no longer suit the goals of Canadians.”

If they won’t play ball, then it’s time – in fact it’s way past time – for the Commission to use its powers to make sure that they do.

So, those are my four ideas. That’s how I see us finding our way back to what we’ve lost: an innovative, competitive telecom industry that Canadians can be proud of. Proud of finally having choices, better prices, and better service.

Our current system is stacked in favour of a small number of very powerful players, who benefit from historical advantages that no longer suit the goals of Canadians.

This doesn’t lend itself to the level of competition we’re seeking and we need to restore balance.

The adjustments I’ve discussed are obvious. No-brainers! Anybody can see that these changes will be a huge benefit to the entire industry, to Canadians and to our future.

These changes will cascade throughout the industry, creating more fairness and innovation across wireline and wireless, bringing Canada back to a place of telecom leadership. If we get this right, no matter what service someone uses, they will benefit from increased competition, no matter what service they choose.

I believe we can get this right. It’s time to change the system for the better

I call on the CRTC to make this happen for all Canadians whether they live in Canada’s north, south, east or west – in urban, rural or remote areas.

Let’s build on the framework we have, to ensure that Canadians can benefit from more choices, better prices, and better services. And let’s implement that framework Canada-wide.

And on that point, I applaud the CRTC for initiating a proceeding just this Monday to consider whether the regulatory framework that applies everywhere but Northern Canada should be implemented there in order to increase affordability, foster competition and improve wholesale services.

Finally, I also call on you, as entrepreneurs and innovators, to keep doing what you’re doing. CNOC will be here every step of the way with you.

Matt Stein is CEO of Distributel and president and chairman of the Competitive Network Operators Consortium. The above is a lightly edited text of his Wednesday keynote speech to CNOC’s 10th annual ISP Summit.