August 30, 2019 2 months 2 weeks ago

COMMENTARY: Big telecom must be made to work for the underserved

OF ALL OF THE REACTIONS from last week’s final wholesale rates for broadband internet announced by the CRTC, Bell’s cancellation of plans to improve Wireless Home Internet for 200,000 households stood out.

It’s probably the most revealing statement about how the established big telecoms think, why they won’t stray from the same old way of doing business, and why they continue to ignore the needs of underserved Canadians.

What warranted dropping so many Canadians from Bell’s initial plan to improve connectivity for rural Canadians? Did the broadband business case for rural Canadians look similar to those on the wireless side of the business who can’t afford the top options and have different wireless needs?

A better question might be: How do we solve connectivity needs for all Canadians without prohibitive costs or unnecessary duplication of infrastructure? Should we, as Canadian taxpayers, collectively chip in more to bridge the digital divide in our country, and perhaps have publicly owned infrastructure?

Or, should telecommunications operators be required to deliver these services as a condition of their licensing? Maybe it’s a matter of correcting profit margin expectations for certain consumer groups (defined by geography or wallet size), though that’s likely impossible in our sheltered telecom industry.

It’s not a small matter. We are talking about 3 million Canadians, close to 8% of the country’s population, who are currently underserved. Wireless Home Internet (WHI) was rightfully identified as the best choice to deliver on the needs of 1.2 million households, and now 200,000 of them are being held hostage by a company which has secured the spectrum licenses required to deliver on this promise.

Capable and more affordable technology. Finally. Can it do more?

CURRENTLY, BELL’S WIRELESS Home Internet services are delivered using 3500 MHz licensed spectrum via LTE technology. In the case of Bell, spectrum to deliver the service was acquired through a 2004 spectrum auction, which was specifically for Fixed Wireless Access (FWA). Licenses were extended year to year after the initial 10 year period expired. The spectrum is growing in value as it heads towards better utilization (and cost reduction) thanks to flexible fixed and mobile use.

Customer Premise Equipment (CPE) for WHI includes a home hub (wireless modem and Wi-Fi router) with an external antenna. It is a lot easier to install compared to alternatives like satellite and does not require line of site to a tower. Once plugged in, the household can connect to the internet with any Wi-Fi capable device.

“With 5G-capable CPE, this could be the first real consumer benefit from 5G – and also the first time when wireless surpasses the last-mile wired runs in both economics and performance.”

So that’s today. What’s more important is that the WHI technology being deployed (backbone and radio access) is 5G-capable. With 5G-capable CPE, this could be the first real consumer benefit from 5G – and also the first time when wireless surpasses the last-mile wired runs in both economics and performance.

An upgrade to 5G WHI should deliver anywhere from 10 to 100 times faster speeds, better reception at the edges of the cell, and backwards/forwards compatibility to serve the whole suite of telecommunication services – including fixed telephony using VoIP, traditional mobile, OTT video, home security and more.

Investments which guarantee stable returns, improve the lives of rural Canadians, and open up short- and long-term opportunities beyond Wireless Home Internet. What better place for 5G to shine first? All thanks to investments that will immediately improve service even before 5G is a reality.

Large investments do not automatically translate into poor business cases

BIG TELECOMS LIKE to mention that they have invested billions in their networks. They boast about that despite the fact building infrastructure in order to provide telecommunication services is the literal ‘job description’ of a network operator, which goes as follows:

Step 1. Build a network/connectivity

Step 2. Sell telecommunication services (retail or wholesale)

Step 3. Profit (be reasonable)

Step 4. Keep on investing

Despite claims of huge investment, however, rural expansions are almost never done without assistance or taxpayer subsidy (this chipping-in solution has been happening for decades). The Canadian government co-invests in developing connectivity for rural areas through various incentives like the Connect To Innovate (CTI) fund. It helps the various telecommunication providers pay for the network backbone, with the operators building the last mile and most of the direct costs associated with rural deployments. 

It might not line up with the big telecom’s investment narrative, but the fact is that CTI and provincial programs pay for 50-75% of rural deployments. Plus, the combined government investment from leveraging different funds can reach up to 100% of the approved infrastructure costs. Typical projects have the majority of their costs – pretty much everything including labour right up until they sell to a customer, so exclude customer acquisition costs and the CPE – financed at about 1:3 ratio (network operator:Canadian taxpayer).

“So this begs the question – if the government will pay for 75% of your capital investment some of the time… why not try to get them to do it all of the time?”

Accountant’s note: Investments become a cost through depreciation over the time, and are subject to accelerated investment incentive – recognizing the investment as a cost faster and as a result lowering profit taxes. It is also your call if you want to include the wireless spectrum costs in your version of business case. I classify it as an asset, it extends pretty much indefinitely it is transferable and sellable, and never degrades or gets used up.

So this begs the question – if the government will pay for 75% of your capital investment some of the time… why not try to get them to do it all of the time?

Given the way Bell is now holding rural Canadian’s hostage, it seems they asked themselves the same question.

Investments improving service provide stable and long-term return

CALCULATING THE REVENUE arguably is less complicated than figuring out the investment costs. Starting with opportunity, CRTC data reveals each Canadian household spends an average of $233 per month for telecommunication services (landline, home internet, mobile and TV). Spending for telecommunications services in rural areas ($248) was 9% higher than in urban ($228) providing even more reasons to invest in rural.

No matter how large the investment, if in the end you are generating an overall profit, the business case is positive. Last quarter BCE Inc. declared 51.9% gross profit margin.

Few people think that this kind of profit margin (which turns the head of any telecom executive in the world) is entirely the outcome of how well Bell runs their business. Rather, their success is thanks to a sheltered market, the (lack of) competitive environment, and the government’s favourable regulation.

It’s also a profit margin which they don’t want to disrupt in any way, so even an 18 month return on investments (according to Ericsson’s Fixed Wireless Handbook) could cause a dip in their numbers. No CEO wants that for their next investors call, so they sign off on continuing to underserve Canadians.

Given all this, big telecoms that do not recognize their role as a dominant connectivity infrastructure providers, continue to benefit from unreasonable profits and turn a blind eye to underserved, marginalized consumers (fixed and wireless) will get more and more backlash from consumers, regulator and the government.

Perhaps they should try these ideas instead:

  • Embrace differentiated business models and efficient operating models (subsidized CPE is another upfront cost, why is this not used to pass some cost to consumers eager to upgrade?).
  • Deploy 5G in rural first for Wireless Home Internet and become the gateway to all the household services.
  • Actually invest in marginalized consumers. It is corporate social responsibility at its best.
  • Do not count on ‘endless summer’. Don’t wait for regulation or public backlash. Be there first.

Algis Akstinas is a founder and CEO of dotmobile a new company focused on bringing affordable and awesome wireless service to underserved Canadians with moderate, transient or changing needs – seniors, youth, newcomers, small businesses, and anyone on a budget.

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