By Tim Denton
CHRIS MACDONALD, UNTIL RECENTLY a commissioner of the CRTC, and Peter Menzies, former vice-chairman of telecom at the same agency, recently published a paper called Building Internet Access is Job 1. We think it is a useful contribution to public discussion of matters of national importance. There is much that the Internet Society likes. Before we get on to the subject of mobile virtual network operators (MVNOs) – where we differ – we want to set forth our agreements of several large issues.
Its central thesis is regulation involves bargains where various conflicting objectives must be balanced.
Decision-makers today face a balancing act. Fostering infrastructure investment and reducing prices for consumers are competing objectives. Telecoms is a capital-intensive industry, and the cost of connectivity and service in rural and remote Canada is exorbitant. Therefore, a decision adding significant cost to industry may negatively affect investment in new infrastructure, particularly in rural areas. But the people who live and work in those remote areas are citizens too, and must have quality service at an affordable price to be able to participate in the economy and digital society.
The paper has the great merit of seeing the subject of broadcasting as a topic of narrow concern, relative to access to and the affordability of the Internet. Indeed it uses the word “distraction” in relation to the BTLR Report and its special pleading for journalists and broadcasters. Second, MacDonald and Menzies are firm in support of net neutrality, which is the obligation of carriers, within reasonable limits imposed by the needs for appropriate network management, to carry traffic without undue discriminations.
Our main concern is the subject of MVNOs. The MacDonald-Menzies paper sees the issue in terms of the balance between the need for investment, which the authors take to be the paramount concern, and the need for lower consumer prices. Though they never explicitly say so, the desirability of lower consumer prices is sacrificed on the altar of funds in the hands of carriers which are to be dedicated to infrastructure investments.
We think this opposition is mistaken in fact and the desired outcome bound to be frustrated.
The authors are trying to tell us you can have lower consumer prices or greater investment in rural broadband deployment, but not both. Implicitly they argue the big carriers will be efficient transfer mechanisms of revenues from consumers into rural and remote investments. Allowing MVNOs will generate costs for the industry, in the form of foregone profits, so by reducing the profits available to the larger carriers, Canada could end up depriving people of the investments they need to gain adequate internet access.
This argument has powerful force and powerful backers. Nevertheless, we are unpersuaded, for several reasons.
The authors make four recommendations regarding mandated MVNO access. To minimize the potential risk, any decision to mandate MVNO access should:
- Be a decision of the CRTC, not the federal government.
- Be limited in scope to minimize the potential negative impacts on continued investment by facilities-based carriers.
- Be organized in a manner that supports the rapid expansion of facilities-based carriers that own spectrum and have deployed regional wireless networks.
- Have an established end date.
These are conditions for failure. If the price of access is set appropriately, carriers ought to be fully compensated for their costs in supplying access to intermediaries such as MVNOs, resellers and the like. The MVNO must supply a customer to the underlying carrier at less cost than the carrier can do for itself, or else the MVNO goes out of business.
“MVNOs will present a constant source of competition by innovation, which can only benefit the ultimate user, the consumer.”
Second, MVNOs have every incentive to generate efficiency through innovation in computer technology and business processes. Their only way to compete with big carriers is through improved computing technology, better service or both. Such incentives do not exist for the big carriers or do not exist until they face increased competition. Thus MVNOs will present a constant source of competition by innovation, which can only benefit the ultimate user, the consumer.
The authors proceed from the premise that owning facilities is essential to be a successful carrier. This is like saying you cannot be in the car leasing business unless you make cars.
The negative impact on investment is also questionable. After all the large carriers will sell capacity to MVNOs at a price matching costs plus a profit. In effect the MVNOs constitute guaranteed customers which require no marketing or servicing and who generate a predictable profit.
The authors clearly believe competition can only come from regional carriers who own facilities and spectrum. If regional carriers have spectrum and facilities, they are not MVNOs. The repeated failures of facilities-based entrants in Canada argue strongly that this latest attempt to generate facilities-based competition will fail, as previous rounds of new licences have failed.
“Leaving supernormal profits in the hands of the larger carriers is unlikely to lead to the realization of the goals that MacDonald and Menzies ardently desire.”
Finally, if there is an end date for MVNOs one asks why anyone would get into the MVNO game at all, if the choice is either to grow into a facilities-based carrier or to sell out. Selling out under the pressure of an approaching end date clearly will have a depressing effect on the sale price. In short, the assumption of the authors that competition can only come from regional carriers who own facilities and spectrum leads them to very faulty conclusions regarding MVNOs.
In fact, their basic objection to MVNOs is that they lower the profits of the larger incumbent carriers and that this should not be done. The underlying carriers cannot be losing profit, if the access price is set right, unless they possess market power.
Market power is the condition in which you can extract more profit from an activity than would be available under effective competition.
That leads us to the core of the argument for the carrier position. If MVNOs reduce the market power of the large carriers, there will be less money for redistribution to rural broadband, say, or any other social objective. The “cost” added to the carrier industry by the existence of MVNOs turns out to be reduced profits. Their market power is reduced by an effective policy intervention.
This is apparently not enough. Hence the need to talk about “regulatory bargains”, which is a kind of euphemism for not addressing the issue of market power.
As MacDonald and Menzies explain:
“The cost of connectivity and service in rural and remote Canada is exorbitant, and the return on investment will always be such that it makes more economic sense for a shareholder value-based company to build a cell tower in Etobicoke than in Fort Providence. There will always be a better business case for launching a service-based competitor in Burlington than in Baker Lake.”
All true. But leaving supernormal profits in the hands of the larger carriers is unlikely to lead to the realization of the goals that MacDonald and Menzies ardently desire. While they speak of each decision of the CRTC being predicated on market forces as much as possible, in practice they reject the one proven effective force for increasing competition, which has been shown to be resale of underlying capacity.
Tim Denton is a lawyer and former CRTC commissioner and chairman of the Internet Society Canada Chapter.
