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Laying pipe in Canada

It has been fascinating to watch the growing public reaction to the full-court press from Canada’s Big Pipe companies (aka, the telcos and cablecos) for usage-based billing (internet metering). The CRTC has played a corporatist role that has largely been compliant with the demands of industry. Even in the midst of the turning political tide, the CRTC seems more interested in defending the swelling profits of Big Pipe.

I say Big Pipe because these companies add little value – they just provide the pipe for the transmission of data (including voice traffic, or anything else that can be converted into digital information). They have been handsomely rewarded for doing this, to the point where astonishingly clever devices like iPads and flat screen TVs are available to consumers for super-low prices but they are totally swamped by the charges paid to pipe-keepers.

The biggest myth in the debate is that there is a shortage of pipe, due to the unconscionable downloading of a handful of “bandwidth hogs”. This is nonsense – while the pipe may require some occasional upgrading at interchanges, it is the same pipe running into your home that was there 30 years ago. If anything, the telcos and cablecos have been able to parlay investments in wires into homes made decades ago into massive new profit streams. Over time there may be need to upgrade the long-haul fibre-optic backbones that amalgamate all of that traffic but the amount of data that can be carried over those fibre bundles by far exceeds the data traffic of Canadian consumers.

This is, plain and simple, a profit grab. For example, the latest stats for the cable industry show that they made profits of $2.5 billion in 2009, with a whopping profit margin of 27.5 cents per dollar of revenue. It is important to note that the initial investments in cable infrastructure were made to deliver cable television to subscribers, and terrific profits were made. The advent of the internet was an unanticipated windfall for the cable and telecom industries, who were able to leverage that investment into even bigger revenues per household by getting the customer to buy the modem to connect to the internet.

I had some first hand experience with all of this back in the mid-1990s, when I got a post-MA job with Industry Canada. I did  economic policy work for the Information Highway Advisory Council, a blue-ribbon task force that aspired to lay out a policy framework for the looming “information highway”. Fresh out of school I saw that this was all about the Internet, but the major cable and telecom reps on the committee saw the future as providing “video on demand” as a pay-per-view service. Though they eventually caught on, in the process devastating the landscape of small start-up internet service providers, this notion still informs their thinking about the internet. Interestingly, there was one guy at Industry Canada who advocated a “bit tax” on the emerging internet, a proposal that was quickly killed within the IHAC (the analyst was marginalized within the bureaucracy). But the industry, now even more dominant than anyone could foresee back then, is now pushing for essentially the same thing – with the proceeds going to them.

At the heart of this situation is a failed model of competition. Back in the 1990s we had cable monopolies and telco monopolies, each of which was regulated. The emerging idea of “convergence” was that opening up the markets of each to the other would create competition, and this would be good for consumers because, you know, competition is good. Ditto for cellular phone service, which opened up new markets by giving most of the licenses to the very same pipe companies, while other new entrants lasted a couple years before getting gobbled up. An IHAC member, Charles Sirois, from Teleglobe was the only major player to call for a single-pipe solution, but that went nowhere. And when the IHAC’s report was tabled, it was treated by Industry Canada like legislation that had to implemented, rather than put out for public consultation (in fact, chunks of the final report were literally written by dedicated telco lobbyists).

Then as now the policy elites were blinded by the ideology of competition, even though basic economic theory suggested that the massive upfront costs of entering this market meant that oligopolies were likely to dominate the market (leading to an outcome not unlike a monopoly in terms of price). Fifteen years later, Canadians are getting routinely gouged for their internet access and cell phones (which are now morphing into portable internet devices), with among the highest access charges in the world.

Preserving this basic ideological framework, some commentators, like Michael Geist, are calling for removal of restrictions on foreign entry, because this will increase competition and lower consumer prices. But this is just the same model in an industry that is not amenable to the type of competitive marketplace of economics textbooks. Greater foreign entry may be the future, but don’t hold your breath for a better deal.

So what are the options given that the Internet has become too important to our lives to accept this ongoing gouging? I think there are three paths forward.

First, nationalize the pipe industry. This is probably the least likely to happen politically, but would be the best outcome for consumers.There is nothing special about the service being provided. It is just pipe, and this model would allow us to treat it like electricity, where capacity is added in a rational manner, and any profits go back to taxpayers.

A second option would be to go back to more rigid price regulation for the industry, in a way that guaranteed a certain rate of profit but that made that profit more like investing in bonds. This would preserve the less-than-ideal existing structure but could be imposed by will of the public on the companies.

A third option is more of a wild card, and that is the use the CBC to provide a public competitor to Big Pipe. CBC already has a huge presence all across the country and massive sunk investments in pipe that connects the nation. What they are missing is the wires into your neighbourhood and home. But they could start by placing wireless routers in the downtown cores of the major cities for free wifi services, and then expand from there. This would really put price competition on the map for Big Pipe while giving our public broadcaster a much-needed revenue shot in the arm.

In any event, Canadians have been angered one too many times by the gouging practices of Big Pipe. There is a great campaign here for an astute political party, and an opportunity to change the media landscape in a positive way.

Enjoy and share:

Comments

Comment from andrew jackson
Time: February 9, 2011, 5:04 pm

Now that is just the kind of thoughtful post that should be a widely distributed op ed. I’d ramp up the case for a crown corporation or CBC solution. As you say, it is just pipe along which all kinds of market opportunities could be generated in terms of gizmo products and services, a sensible social democratic solution rather than wild-eyed radicalism. And Geist has this terrain too much to himself.

Comment from Steve
Time: February 9, 2011, 5:09 pm

Marc, there are a few other alternatives: increasing the % of pipe that is unbundled (LLU) and then allowing more entrants such ISPs to offer services based on that infrastructure – obviously this would still require regulated pricing and a lower margin than is currently the case. Or, functional separation, where telco’s would be split into service and network components. This would have the same effect as nationalisation (in the sense of setting a fixed rate of return). I don’t think it is possible to change the structure of the industry – it is too entrenched and well connected. Its interesting that Canada is behind the UK by about 15 years, where they started implementing this in the mid to late 90’s.

Comment from Travis Fast
Time: February 9, 2011, 5:40 pm

Agreed especially in this case where the pipe carries a non-scarce resource and thus the size of the pipe determines the flow.

Of course that would leave Big Pipe without a dream aka a business model.

Comment from Shan
Time: February 10, 2011, 8:39 pm

Your second option, proper regulation of wholesale prices to allow competition, sounds to me like the best and most likely. It seems to work well enough for long-distance phone service.

It would be “the kind of thoughtful post that should be a widely distributed op ed” with one small change: The over-use of “pipe” was disconcerting. It’s a slangy bit of dated jargon that should be used but sparingly. The effect is like an otherwise serious-looking article on monetary policy consistently using “moolah” to mean money.

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