Taking a Break

The best-laid plans for a few last pre-Xmas posts went awry due to the pressures of work and the holidays. I've decided to admit defeat and simply shut down until after New Year's.

When I return there is one topic I particularly want to focus on over a few posts. That is one of how telephone companies, wired and wireless, use technology to assert control over what users and competitors can do with and on their networks. These are ways they strive to maintain control over their business model, and fight the migration of service intelligence.

So until January, thanks for reading and have a great holiday.

The Price of Regulation

Let's take a quick survey of some of the recent failures of communications regulation in Canada.

• 911 Service: VoIP and wireless emergency service is lagging badly and it is costing lives. Lots of talk and no action. We leave the industry to police itself. VoIP providers are particularly prone to deferring important upgrades such as 911 since they are running bare-bones operations and are at the mercy of the incumbents who make them pay to connect to or integrate with their 911 systems. This is also largely unregulated so they take advantage of their power to make it just expensive enough to cause pain to their competitors without waking up the CRTC.
  
• Spam: Much of the email spam coming from Canada referenced in this article isn't really criminal activity within Canada. It's just that we have lots of unsecure computers being recruiting into zombie/bot-nets. However there have been cases of the actual perpetrators being in Canada, but not being prosecuted.
  
• Telemarketing Fraud: I don't mean the usual crud, it's the criminal activity of phishing and commercial fraud that is the serious problem. The Do-Not-Call registry doesn't stop criminals (no surprise) and, worse, they are now using the DNC registry to harvest more numbers to call, especially mobile numbers which are otherwise unpublished. Pressure from the US did eventually cause Canada to against criminal call centres operating in Canada that targeted Americans, despite most Canadians remaining unaware of the issue.
  
• Surcharges: It's those extra fees you find on all of your telecommunications bills. Things like system access fees and 911 fees. This is a great way (for the service providers) to increase your service charges without changing the basic service charge. It's completely bogus. The US is well on its way to implementing truth in billing, yet sadly that is not even being considered with any seriousness in Canada.

None of this should be cause for surprise. During the 1990s the Liberal federal government made massive budget cuts across every ministry to rein in the deficit. They succeeded in part by reducing regulation and enforcement. Industry self-regulation became their mantra. Of course this was not limited to communications, but also food and product safety, among other areas.

Passing laws is cheap. Enforcement is expensive. Much of the time we don't even bother passing laws. It takes a lot of public chatter and complaint to get regulations enacted and enforced. This has happened recently with food and product safety, water safety in some cases like first nations' reserves, and there will likely soon be action on prescription drug safety. Teleommunications safety, truth in billing, and performance? Forget it. Even with well-documented cases of lives lost due to unimplemented yet available 911 solutions there is only more talk. Politicians are habitually half-deaf so the noise has to be loud and sustained for them to take any notice, and even louder before they act. We aren't there yet.

If The Big 3 Aren't Bailed Out

It will not be doom and gloom. Of the 100s of thousands of people directly impacted, the disruption should be short term. Let's look at this piece by piece.

• Automobile purchases: Much of the projection seem to include the view that the automotive sector will be diminished by the current market share of the failing companies. Yet we will continue to purchase vehicles in the same number and type as before. Obviously, for those who would purchase from one of the failing companies, they will have to choose a car from another manufacturer. But if you're going to buy a car, you will still do so. Therefore the size of the retail car market is unaffected.
• Imports vs. domestic: If you accept the above argument, there is still the prospect that the manufacturing sector will decline proportionately while imports will rise. Short term this may be true since domestic supply will decline. However this is a short-term impact. Other foreign manufacturers (the big 3 are also foreign) have good economic incentives to manufacture locally, and this will not change. Short term they would likely add shifts and hire recently unemployed assembly-line workers from the failed companies.
• Suppliers: Outside the big 3, many of the parts come from overseas rather than from domestic parts suppliers. This is no surprise since there is a very tight relationship between supplier and manufacturer. For the big 3, many of their suppliers were originally part of those companies but were spun off for a variety of (good) business reasons. So, yes, all those parts suppliers could be in trouble. Here is where government could help by pressuring or providing incentives to the remaining manufacturers to source more parts domestically.
• Sales: Ever talk to automobile salespeople? Many of them hop among dealerships quite frequently during their careers. A salesman has no knowledge that is so specialized that it isn't transferrable to selling another company's cars. The dealerships themselves will have to change, of course, but then many have done so in the past as consumer preferences have shifted away from the big 3. There will a short-term acceleration of this trend, which I expect will not be overly disruptive.
• Service: Car dealers have a problem when they, as pointed out above, shift their businesses to selling vehicles from other manufacturers, and yet don't have trained service staff for those brands. Mechanics nowadays are highly trained technicians and much of that training is brand specific. Retraining will be required to support the cars being sold. While dealerships will have to compete in the short term for suitably trained service staff, the mechanics themselves could find themselves in a seller's market and so do quite well. For consumers the impact is not so awful since while the new car sales mix will change overnight, the actual mix of cars on the road will only change gradually. To get good service, consumers may have to change where they do business but the support will be there.

So just what does this government money (our money) accomplish? Buying habits aren't changed by the money, except to slow consumer abandonment of failing companies, which means job losses and factory closures will continue regardless. The workers still lose. Ultimately the money goes to supporting the companies' shareholders and, more significantly, their creditors who cannot so easy sell that debt due to its illiquidity.

Is buying a year or two of time to allow these companies to get their houses in order going to work when they have mostly failed to do so until now, and knowing their business choices were unsustainable? I am unconvinced. Let the market choose the eventual winners and losers.

Deflation In Action

Ottawa is relatively protected in this recession. At least so far. Yet the impact on the local economy seems not far different from that in other locations, ones that are actually seeing major impacts.

This is a reflection of psychology, or what economists often call consumer confidence. When you lose confidence in the economic outlook, even if there is no hint of coming disaster in your own future employment, you change your spending habits. That is happening in Ottawa, a town with a large public sector that is pretty well protected from serious cutbacks. It is hard to ignore the distress all around and continue on as if it's business as usual. Maybe you look at your mutual fund statements and wonder if you'll have the means to retire in comfort, as planned, in 2040. That's an awfully long way off, yet people still worry.

As I go about my daily rounds, shopping for this and that, which I tend to do at smaller establishments, I always like to ask the proprietors and sales staff how business is going. It isn't going well. Even in supposedly safe businesses like groceries (we all have to eat), hair stylists (hair doesn't stop growing) and even coffee shops (for the caffeine addicted), people are radically changing their habits. Yes, people eat, but they eat out less and are choosing more economical food items for the home. As my barber mentioned, hair grows, but rather than come in every 3 to 4 weeks for a trim, more men are figuring that once every two months is good enough. Or, why spend $3 on a premium coffee when you can get it for a tenth that price at home.

This ripples up the supply chain. My preferred (imported) coffee retailer told me to expect some significant price reductions next time I visit. His suppliers are feeling the pinch, which gives the retailers negotiating power over price. This of course ripples further back to the coffee producers. We see this on a larger scale over the entire commodities market, on which Canada's economy relies. Even Alberta is seeing a slowdown.

This is deflation in action. Economic planners fear this since it encourages more deferred spending. The thought-process is, since products will be cheaper tomorrow why buy today. This is the opposite of inflation which encourages spending today since it'll cost more tomorrow, especially where savings interest rates don't keep pace with inflation.

This isn't good. Until consumer confidence reverses the economy will not heal. This is one place where political leadership can help, by promoting confidence in the future. It isn't quite a rational strategy but is nevertheless one that can work. For each of us individually, if we are financially stable we ought not to cut back spending to any great degree. Just go on as before. That isn't easy to do when the media is broadcasting fear 24x7. Turn off the TV and spend like it's Christmas!

Fairness and DSL Wholesale

The latest decision on high-speed DSL wholesale from the CRTC renews an old question: how much should the incumbents be required to offer to their competitors? Many people will rapidly align themselves with one of two extreme viewpoint, either saying everything or nothing should be made available. Although I have a certain self-interest since I am a DSL consumer, my own views are more nuanced.

Bell Canada, Telus and the other incumbent telcos are businesses. As businesses they are obligated to maximize share value, dividends and other returns to their shareholders. Offering wholesale DSL to ISPs who then compete with them in the retail market is not in their business interest. It is therefore perfectly appropriate that they'd fight to stop it. Whether they ought to win is a matter of public policy balanced against the need to let the market work.

Let's briefly look at why the CRTC, and regulators in other developed countries, impose this type of mandate on incumbent telephone companies. Since fairly early in the 20th century the telephone companies have been monopolies. It didn't start out that way. They achieved their status through an aggressive campaign of acquisitions. As telephone service was increasingly considered part of the country's critical infrastructure, government stepped in to regulate these large, dominant companies. The public good was set off against pretty much guaranteed returns for the companies' investors. It was both boring and lucrative. Part of the public good side of the equation was investment in research and development, so that despite their monopoly position these companies did sustain a decent level of innovation.

Various pressures mounted over the years, that when combined with a renewed sense that competition would deliver benefits to the country, the telecommunications market was gradually opened over the past few decades. The US took the lead in much of this, with Canada, Japan and Europe not far behind.

However there was a large problem with creating competition in a such a locked-down industry. The capital cost to build ubiquitous networks is enormous, and would have to be spent far faster than the incumbents own capital budgets if the new entrants were to ever level the competitive field. This is felt most strongly in the so-called last mile, that last bit of copper that is dedicated to each residential and business subscriber. Other capital costs are modest in comparison.

To prime the competitive pump, regulators decided to force the incumbents to lease those copper loops to their competitors. The understanding they had was that, due to the capital costs involved, the last mile was a natural monopoly. Every country mandated this loop unbundling in different ways though the principle was much the same for all. For example, the local loops had to be offered at a wholesale price that permitted others to offer competitively-priced telephone service. As you might guess, all this market-opening policy resulted in a massive amount of government intervention, with ongoing regulation and legal strife. No company gives up their profits and successful business models without a fight.

Now one thing you should never do is let governments pick winners and losers, neither companies nor technologies. Yet that is what happened. By focusing on the copper loops they did not address the existing and evolving competitive local loop technologies, cable and wireless. These were judged by most regulators to be entirely separable matters since, in their view, they did not offer realistic alternatives to copper-based telephony. Of course they do, especially now, yet the regulatory regime continues to mainly target the copper loops.

With that brief tour of the historical background, we can return to DSL wholesale. This odd history explains why, for example, the cable companies are not mandated in Canada, and many other countries, to open up their residential broadband pipes to outside ISPs. Whenever this inequity in regulation was noticed, it was seen as a public good since a cable industry kept whole would, over time, offer competitive voice and data services - which was the objective all along. This has indeed occured. But what now?

Today if you want broadband internet access you have many choices, even though they are not equivalent or fully deployed: DSL, cable, Wi-Fi (in some places), cell-based 3G+, Wi-Max (soon, maybe) and even fiber/FTTH (eventually). Yet the CRTC remains focused on twisted-pair copper local loops and beating up on the incumbent telcos. Is this the right thing for our government to be doing?

Despite my reliance on wholesale DSL via a non-Bell ISP, I am not convinced this is the right thing for the CRTC to be doing. This is not the 1990s (or the 1980s!); everything has changed. If they want more retail competition they need to act more equitably across all the competitive network operators by mandating them to similarly wholesale their broadband data access facilities. Or, to take a more laissez-faire approach, stop mandating DSL wholesale and let all the companies decide on their own what to offer the market. There is broadband internet competition, without wholesale DSL, even if the number of network providers is not large.

Instead, the CRTC has chosen to be consistent in their current policy direction. On that basis it makes sense to level the competitive field by permitting ISPs to offer the higher-speed version of DSL. It includes the same local copper loop natural monopoly, just with improved electronics (modems) at the network end of the loop. If this was a discussion about telco investment in fibre in the last mile, and opening that up to third parties, the conclusion should, and likely would, be entirely different.

Command and Control At Ottawa City Hall

It's both dismaying and disappointing to watch Mayor O'Brien totally fail to provide effective leadership at City Hall. I voted for him, hoping to see improved spending discipline from Council. While he continues to sleepwalk through the remainder of his term it is perhaps worthwhile to look at what I believe are the principle factors for his failure.

Larry O'Brien is a CEO. He is accustomed to having everyone around him do as he says and to anticipate his desires. A CEO is final arbiter in any company, provided he has the support of the board. He can hire and fire at will as one tool for delivering on the company's business objectives. This is a necessary power since the CEO is fully accountable for those results.

Every CEO exercises a mix of command and control, and leadership, though not always in equal proportion. From those who have known him in the corporate world, O'Brien is known more as a command and control kind of guy. This doesn't necessarily make him likable, but that doesn't matter if he produces results. A good leader is one that, when he shouts, "follow me," others willing and enthusiastically follow. A command and control CEO simply removes those who don't follow orders.

Command and control works in many political situations. Think of a Prime Minister in a majority government. Even when in a minority, as Harper is today, command and control can work if used with due care. It doesn't work at all in Ottawa's government since the mayor is in a minority of one; the councillors are all independent. This is where leadership needs to be applied by a mayor who would hope to have success with his agenda.

The trouble with O'Brien isn't his background in command and control. His failure is that he can't adapt his style to one of principally leadership. He knows what needs to happen but he can't figure out how or, more worrisome, he refuses to learn. There is some parallel here with Harper's recent performance as a command and control minority PM where it blew up in his face. Except that when O'Brien fails he's still the mayor; there is no government to fall. So we're stuck with a lame duck whom the more politically-savvy councillors walk all over. We become the biggest losers.

Which brings me to my second point: the councillors. No mayor can successfully lead the councillors when he cannot bring political pressure to bear on them. This is a very difficult task for a good politician, let alone the incumbent. To build political capital the mayor must generate support for his vision among the population, that the mayor can then use as leverage with Council. The premise being that if Council doesn't align itself with the mayor, and therefore citizens, they risk losing their seats in the next election. Another way of looking at it is that the mayor needs to get voters to support him rather than councillors with opposing views.

Regrettably this isn't happening. Voters keep reelecting the same councillors every election while preferring instead to change mayors. The councillors know this and use it to their advantage. This is how they pushed through a 4.9% tax hike while O'Brien stupidly looked on with his jaw hanging open. He has no political currency with Council or with voters, while Council can confidently rely on getting a bye in the next election by only focussing on oiling the squeaky wheels - the special interests generating all the news coverage.

Most voters, even while getting cranky about taxes, will continue to support the freely-spending councillors. It only becomes a problem for them when we start to vote according to the weight of our wallets. Will we ever do that? This is not a problem O'Brien will solve - he has neither the will nor the competence. 

Negative Equity

The latest news out of Nortel is not good, even if not too surprising. A structured bankruptcy filing was certainly a possibility before this, though it perhaps wasn't expected to be telegraphed to the market so soon. Nortel has learned its lesson and now knows to give the market ample notice of potential adverse events. That is, since it is a non-negligible possibility they need to let the market know now so they don't, again, get hit with shareholder lawsuits if this dire outcome occurs.

But why bankruptcy? Nortel's assets and liabilities are finely balanced so that even on commonly-mentioned valuations shareholders are left with approximately zero equity. On that basis the common shares are worth nothing. Yes, that would be $0.00, and not the currently quoted $0.50 price. Anyone buying shares at this price is betting on a turnaround of some sort.

The corporate debt is not now in default and isn't due for some time. Unfortunately their market capitalization is so low (~US$200M US) in comparison to that debt (well over US$1B) that Nortel cannot issue shares to extinguish even a small part of this debt. If they tried, the share dilution would be so severe it would only accelerate the share price drop toward zero. Then there's the pension shortfall, equally large, that is largely a result of the low market cap. For this reason the pension shortfall can only be made worse with a new equity issue.

On the asset side the picture is equally gloomy. The one business unit that does have some good value is MEN, yet there are clearly no buyers coming forward, or just not at the valuation Nortel would like. This impairs the market's view of their business assets. Add to this the slashed capital budgets of their customers and Nortel's enterprise value, and prospects for future cash flow, basically suck. The market is coming to terms with a situation where Nortel will be in a negative equity position, where their liabilities exceed their assets and enterprise value on the basis of the expectation of any realized market price for each.

Nortel isn't alone in this predicament. This also underlies how sub-prime mortgages played a large role in the current economic crisis. As housing prices declined and debt costs rose, so-called home owners were in a negative equity position. This meant they were better off walking away from the house and letting the banks foreclose. This now unwanted asset undermined the banks since the value of the houses is less than value of the asset they replaced (mortgages).

If Nortel does file for bankruptcy protection, the debt-holders will likewise end up owning the company. Shareholders end up with nothing. The debt-holders also lose big time since not only does the debt exceed the assets, they get saddled with a poorly-priced company that is difficult to sell. This is very much like all those foreclosed houses in the US right now.

While I earlier considered that Nortel might be worth buying at some point, I no longer feel it's worth considering. Miracles can happen, but don't bet a lot on it. It's increasingly likely that Nortel's shares go to zero.

Culture of Risk

I've written about it before, and it is a common topic around Ottawa: the lack of early-stage venture capital for technology start-ups. It's a shame since without these companies having access to funding much of the future of the local technology industry is doomed. Entrepreneurs will have to either leave the city or simply give up.

On markets, it is said, bottoms come when despair reaches a crescendo. No one buys, and even the sellers have given up. Despair isn't as visible in the private equity market, yet it is out there. It's a shame really, since this could be the best time to invest, the argument being that the only direction left to go is up. Except when you're cowering at the bottom of a deep dark hole you rarely see the positives about the situation.

So, how to get the funding machinery working again? Except during the height of the dot-com boom nearly a decade ago, VC was never at the same level in Ottawa as in the US. This may be the more conservative nature of Canadians; Americans are more likely to embrace risk than we are. This drive in the face of risk can create some enormous and cutting-edge corporations, while also fomenting disasters such as the current financially-driven crisis. Is it comforting that our banks, being more conservative and more-strongly regulated, are doing better? Is the lack of risk-taking in Canadian business an acceptable by-product of this behaviour? I don't think so.

Absent VC and angel funding, there are alternatives. It's nice to see some local activity to put forward proposals that could increase the pool from which funding is available. This is a double-edged sword since looking toward small investors is necessarily involving less-sophisticated investors. Our governments, in keeping with our tendency to over-protect ourselves, currently prevent what they define as "unsuitable" individuals from investing in this type of venture.

I would also hope that the proposed initiative permits venture funding up to at least $1 million. With the moribund VC situation, companies need some runway to get through the present drought. If you are only permitted to raise $100,000 to $250,000 using this mechanism, you will likely need another round of funding before becoming cash-flow positive. This is typical of product development ventures which require substantial investment before there is revenue. Yet if the VC market has not opened up when that small amount capital is consumed, the company risks failure. We need a complete funding eco-system, not just one piece of it.

Apart from the private market we also have a public market for venture financing - the TSX Venture Exchange. While this can work, and since it's public it is open to everyone, it has its problems. The market tends to be illiquid and opaque, and places an administrative burden on the company. If government regulations put fewer barriers in the way of individual investors there would be less need for a market like this. Nevertheless, it is being used by local companies such as Counterpath.

It is encouraging to see ideas being presented and promoted, yet I have to wonder if it can get traction, and get it soon enough to be of use - the problem that needs solving exists now. Our cultural ambivalence toward risk may well be reflected in the Ontario government's response to this initiative. The promoters are all risk takers, so their action is no surprise. If they plant the seed there will be a lot of work required to ensure the crop thrives.

Political Dissonance

It's over. Whatever chance the coalition had to assume power now appears to be stillborn. Not everyone will agree with me, but that's how I think it will play out over the coming weeks and months. Ssomehow, in his stumbling around in the dark, Harper managed to dodge this bullet. I am now going to shove this matter aside to talk of what I believe is a more fascinating matter - that Canadians' view of government in this country is out of tune, in dissonance, with the formal rules.

Let's review the basics by considering the following two statements. You can think of it as a quiz:

1. Canada is a constitutional monarchy.
   
2. Citizens elect local representatives  to Parliament to represent and defend their interests. The elected MPs select a government. The government selects its leader, the Prime Minister. The government stays in power by retaining the confidence of Parliament.

I expect that any child who has made it to high school could confidently affirm both statements. Every constitutional lawyer and political scientist would agree. Except that they are all very, very wrong. This is not how our political system actually operates, despite the constitution and the law. This became clear to many this week when the system was severely stressed.

Let's first look at the idea of a constitutional monarchy. I know that many people, perhaps even most, felt uncomfortable that an unelected individual could choose our government without consultation and without justifying that choice. That is a monarchy in action, and is perfectly legitimate in Canada. There is the nub of the first dissonance. While we mouth empty words about being a monarchy, our sentiments are republican - we elect those we put into power over us.

With all respect to the Governor General's prerogative, this is unacceptable. I suspect she understands this quite well. While I certainly do not know, I believe this played a role in her acceptance of Harper's recommendation to prorogue. Despite violating tradition and undermining the coalition's ability to govern with the confidence of Parliament, this was the decision that minimized the national dissonance. The realpolitik is that Canada is a republic and she affirmed this by bending to the government's will. Despite the unhappiness of the opposition and their supporters, and their defensible appeals to the constitution, I believe this decision sits best with the country at large. In Canada, the monarch remains a figurehead, as we largely believed all along.

Next, let's look at this idea of electing MPs and selecting a government. Again, everyone understands the rules of the game well enough. The legally correct arguments of the opposition are in dissonance with many people, without regard to their correctness. Canadians are not stupid and don't need a lecture from the politicians. When we go to the polls we go to elect a government. The idea of local representation at the national level has grown very week. Votes are largely cast on the basis of national, not local, interests, and as presented by parties, not individual candidates. I am not saying this is right or wrong, only that this is how we actually cast our votes. Or at least so it seems for the majority, or is at least the uppermost fact in the minds of the majority.

When Harper says that Canadians elected a government, he is wrong in law but right on the street. He has won this game because the street supports him. Even many of those who did not vote Conservative tend to feel this way. Rae's impassioned pleas to the people on the basis of law falls flat since in our bones this is not how we feel about democracy in this country.

Even while I struggle with the strange events of the past week, I am getting more comfortable with the outcome. In my opinion, Harper's peculiar victory, despite some of his unsavoury tactics, could prove to be a victory for democracy in the long run. Our centuries-old traditions need some sprucing up. Forget Westminster, we need a new Canadian parliamentary tradition.

Surviving the (Tech) Recession

Instead of writing a "me too" article about the present political situation, I will look at the economy. Not only is this far more important, it is also of particular interest to me because of the threats facing small technology companies in Ottawa. Small companies don't travel to high-level meetings with politicians and attempt to sway national policy in their favour. They weather the storm or fail.

Rather than write my own thoughts on this topic I want to direct you to an article written by Michael Wakim of Fidus. This short article gets to the heart of matter with a style that is elegant in its simplicity. If you, like me, believe that the small technology firm is the model of success for the high-tech industry in Ottawa, you should read it.

The Business of Unsolicited Communications

Crime doesn't pay.

Do you believe that? Often it's true, but not always. There are both successful and unsuccessful criminals, and the successful ones typically have failed one or more times in the past. Further, success isn't a guarantee against future failure.

It is no accident that the above description is equally valid if every occurence of criminal is replaced with entrepreneur. Too often we define criminality and business using very distinct value systems, which tends to blind us to the common economic foundation for both:

Success(profit) = Revenue > Expense

If you find this morally abhorrant please put the feeling aside for a moment. I will not be arguing that criminality is ok, or that business isn't. Instead I want to say that many forms of economic behaviour are driven by a desire for profit. We value various behaviours differently, as we should(!), yet there is that common ground among them all.

So we come to the subject of this article, the business of unsolicited communications, and specifically email spam and telemarketing. Both are regularly in the news since they are a constant source of grief for almost everyone. What is so often missed is why it exists. If pretty much everyone hates this stuff why does it continue? What's in it for the perpetrators?

As you may have guessed by now, if you didn't already know, it exists because it pays. Its legitimacy or criminality is secondary to its profitability. It pays because for those who do it the revenue exceeds the expense. The same is true of any criminal enterprise, including drugs, property theft, financial malfeasance, protection rackets, and so on. For crimes, there is also the indirect expense of jail time, yet even that can be turned into a dollar figure - opportunity cost. Criminals are businessmen. They are not always successful businessmen, but all are driven by the pursuit of profit.

Email spam is interesting because of the technology angle. Email is cheap. Really, really cheap. That permits the spam merchants to address a large market, repeatedly, and remain profitable even with the very low percentage of targets they convert into customers. They have also branched out into related fields like blogs and social networks.

Telemarketing is more expensive but works because the hit rate is much higher than for email spam. There are social and psychological reasons for this with which we can all identify. With technology also working its way deeper into this sector, for both the legal and illegal telemarketers, their costs are declining. This causes telemarketing to increase in volume and in the range of products sold. They can remain profitable with less revenue potential per outgoing call.

This profit angle is why governments and police forces have found some of their greatest success in fighting crime by increasing the expenses of the criminal enterprises they target. Regrettably this often has a high cost to the taxpayer; enforcement is very expensive. That is a key reason why criminals are hard to stop - as a society we can only afford so much enforcement expense. Indeed, for the large criminal organizations a popular counter-strategy is to increase the cost of enforcement. Often this is achieved through brutal means, such as violence and corruption, but the financial strategy is sound.

In the meantime, every successful enforcement action is given maximum press exposure. This is largely done for political purposes, to try and convince the populace that government is on the ball. The numbers say otherwise. Drugs continue strongly, as do spam and telemarketing. All are increasing. Large court settlements over spam, while often undisputed are impossible to collect, either because the criminals are insolvent or, more often, are anonymous and overseas. Enforcement has failed, and will continue to fail.

Since many of our laws are based on a shared sense of what's right and wrong it is difficult for us to attack the other side of the profit equation - revenue. Drive down the criminal's revenue and you can put them out of business. When it comes to drugs the top strategies seem to be education and legalization. In the former case, reduce demand by getting people to stop consuming drugs (or responding to spam), and in the latter case, reduce the street price by making the drugs legally available. It's quite the dilemma. We see these debates all the time nowadays, and there are no easy answers.

So coming back to unsolicited communications, if as individuals we cannot adequately address either the expense or revenue of the perpetrators what can we do? This is where technological solutions come to the fore. By this I mean spam filters and telephone screening products. These can work, and they are, slowly, getting better. Unfortunately these do come at a price, measured not only in dollars but also in inconvenience and filtering errors. Yet this is all we can truly count on since laws against spam and telemarketing are pointless without the requisite enforcement. For now we are on our own.

No Crisis in Parliament

The antics going on in our federal Parliament right now are very interesting. I believe that no matter the outcome this is very healthy for democracy in Canada. In this article I will attempt to explain why I hold this view. I say this from a somewhat detached viewpoint since I am not a partisan; I hold all our political parties in some degree of contempt.

First, the media is unsurprisingly playing up the events, and I will admit that these are newsworthy since our government, and in particular governance, are at stake. But we should not allow the media to cause us to conclude there is a crisis. That is, while there may be a crisis brewing, it is not our crisis. It is a crisis by and for politicians.

Second turmoil in Ottawa will hamper any federal attempts to intervene in the economy for some months, though it is questionable whether that is a bad thing. Politicians can show leadership yet it is not necessary if citizens are motivated to act on their own behalf. After all, the country's wealth is held by the people, not government, and so the recovery is ultimately up to us. Indeed any intervention the government does take could work to our disadvantage by propping up corporations that are less than viable and shuffling tax dollars from one sector to another or from our region to another. The economy is likely to recover on its own and more effeciently without government intervention.

What the government can best do is try to restore confidence in our future. Too many people left to their own will focus on the dire present, which is not healthy and can further erode the economy. The nice thing about the political crisis is that if it focuses on the economy then every political party is telling citizens that they agree this is the uppermost priority. Even if they do nothing (or if they do something it will most likely be a merely token effort) this picture of the politicians caring about peoples' predicament can raise spirits. I realize that this view sounds cynical and even insulting to those suffering in the recession, yet I believe it can work.

Now I want to remind you that economic leadership isn't really the subject this article. It is the issue of parliamentary governance in Canada as introduced in the opening paragraphs. I only spoke of the economic backdrop to allay concerns that a short-term parliamentary crisis is bad for the economy, or that it should sway us from the bigger issue.

We do not have an admirable record of parliamentary democracy in this country. When a party has a majority they rule like autocrats. When the governing party is in the minority we stumble along from one manufactured political crisis to another, sliding inevitably toward an early election. Some say that minorities work better since there is some amount of compromise required, which better represents the country's diversity of political views. I am unconvinced. Both work only moderately well, just differently.

There are experiments with minorities with which Canada has minimal experience. Coalitions? Nope, not us. Include a broader representation of political outlooks in cabinet, as Obama is now doing in the US? No, not us. Why not? Why is there this fixation in the parties (Liberal or Conservative) with governing as if they had a majority when they don't? It simply isn't effective. What we get is endless political brinksmanship and even greater attempts to discredit others, all in an attempt to stake out positions in front of an (expected) election. We deserve better.

This is why I care about the current crisis. For once there is a possibility that we'll try something different. I have no love for a possible Liberal-NDP coalition supported by the Bloc, yet it is an experiment from which the country could benefit. It's time we tried a coalition. Especially in the present age where we have a greater degree of fragmentation of seats among the parties, and so a decreased probability of majorities. Many others countries do so as standard procedure, yet we tend to implicitly admire the US two-party system and equate coalitions with instability.

A further advantage to coalitions is that elections will matter more, and can result in an engaged citizenry. When there is the possibility that a smaller party can attain even a small share of power there will be less strategic voting toward one of the larger parties and more voting on the candidates and parties individuals truly care about. I believe that's a good thing.

I have no idea what will happen in the coming days and weeks. What I do know is that for once they have my undivided attention.

Belus?

Curiouser and curiouser.  Looks like the Bell Canada-Telus merger speculators are making their case. I had also hinted at this possibility, though admittedly not too seriously, in an article last week.

In my article I drew attention to the gutting of the more forward-looking technology teams at Bell Canada and how that might very well signal a merger with another large telecom company; it's difficult to remain independent once you've significantly impaired your future options.

If this Belus speculation has any validity I now have to wonder if George Cope and the board already came to the conclusion months ago that the privatization deal would fail given the historically poor credit market. That could explain some odd tactics on Bell's part.

Before you jump to this conclusion and rush out and buy BCE shares, think very carefully. Consider the possibility that BCE's share price will not budge even if the offer price is far above the $25 or so its shares are trading for today. Look at what happened to Teck Cominco when the market came to understand the implications of the debt they needed to take on to acquire Fording Coal. Then there is HudBay Minerals' offer for Lundin Mining. Teck and HudBay stock crashed and burned; Lundin stayed put at first, then continued to fall in the commodity meltdown.

Telecom and mining are hardly similar businesses yet these mergers require the same thing - debt, and lots of it. Investors, having been burned once are turning shy. This may be a poor time to speculate on a Bell Canada-Telus merger.

MPAC and Property Assessment - Solving the Wrong Problem

When you have a hammer everything looks like a nail. That old truism comes to mind when I read about MPAC property assessments, property taxes and fairness.

The latest news in this morass is a proposal to decrease volatility in property assessments. As described in the article it doesn't sound half bad. Unfortunately it isn't likely to be implemented any more than so many other schemes that have come and gone over the years. Putting "fairness" into the system is hardly a novelty; it isn't all that hard to do, and has been a feature of earlier proposals.

Every new idea that comes up is attacked, often with great vehemence, by those who feel disadvantaged by the proposal. The political outcome is stasis since governments are loathe to stir up controversy; no matter the proposal they are sure to come up losers. They would also quite rightly note that it isn't that terrible an issue since folks are indeed still paying their taxes, which is a type of confirmation that the system is working. Sure it's imperfect, but it does work.

In my view this is all a pointless distraction from the bigger issue. That issue is Ottawa city council's inability and lack of motivation to rein in spending. The best way to reduce property taxes is to cut spending, not by inventing new property assessment algorithms. It's also eminently fair since every homeowner benefits from reduced city spending.

My advice for property tax activists is to focus on council's unwillingness to tackle a budget that is spiralling out of control. Even the province is helping out, at least a little, by starting to reverse the Harris government's program downloads. Council should be under our control, if we hold them to account for their budgetary philandering. So call your councillor and tell them just how they can lower your property taxes. Or else.

Telecom Decision CRTC 2008-108

I have now read the CRTC decision on throttling. It is a most interesting read for those (like me) who find these regulatory processes intriguing. I am also a not totally disinterested party since I get my home DSL service from an ISP that relies on the GAS tariff. Neither am I unfamiliar with regulatory processes since I have participated in them earlier in my career.

While the proceeding was ongoing I wrote a series of articles (parts 1, 2 and 3) regarding my take on what might be going on under the hood, both on the technology argument and on the business drivers. More recently I  wrote about failing VoIP providers which have similar challenges. In particular, ISPs that exploit Bell Canada DSL are "utterly dependent on their fiercest competitor[s]." Without GAS there is no 3rd party DSL business; Bell Canada was mandated by the CRTC to submit the tariff and they don't like it one bit.

Now before I provide a detailed review let's understand GAS. It's a tariff, which is a sort of contract between the government regulator (CRTC) and the carrier (Bell Canada). Neither end users nor ISPs are parties to the tariff. The ISPs have service contracts with Bell Canada which include the GAS tariffed service. The ISPs then bundle GAS-enabled services as part of their retail services. Despite its role as an enabler, the tariff is distinct from the contracts. The tariff and the law provide mechanisms whereby customers of the tariffed service can appeal for redress where they feel the carrier is not performing as mandated. The CRTC may also act on its own if it chooses.

The upshot of this gobbledygook is that the tariff can change without violating the contract and, most importantly, if the carrier interprets the tariff in a manner that is to the disadvantage of its customers it is up to the regulator to intervene, if they choose to, and rule according to the law and (more loosely) policy. This isn't much different from ordinary phone service, including mobile, where the underlying tariffs are associated with but are not determined by service contracts with individual subscribers. Now on to the decision.

As expected the decision is clearly written and structured, focusing on the key points of law under which they needed to make their decision. Nothing wrong with that so I'll only talk about what I feel are key points in the decision. I will mostly pass over the large part of the document that summarizes the evidence they received from the parties and focus primarily on the commentary and decision text.

6. Bell Canada submitted that it is engaged in traffic shaping on its network, which consists of slowing down the transfer rates of all peer-to-peer (P2P) file-sharing applications during peak periods, which it defined as between 4:30 p.m. and 2:00 a.m., daily.

I am surprised the CRTC didn't question this in their decision. Is 1:00 a.m. a peak period? Not a chance. Right here I am beginning to smell which way the signs are pointing.

15. ...Bell Canada submitted that its GAS tariff specifies maximum upstream and downstream speeds, which are offered on a best-effort basis and are not guaranteed at all times.

Ah, this is very like the Llap Goch defence in which a footnote to the wild benefits promised for this secret Welsh art of self-defense said something to the effect of "where it is understood that 'up to any number' includes the number nought." This is sting of the 'best-effort' phrase that is tied to pretty much all broadband services. The GAS tariff is no different since the DSL portion of the service is identical to retail DSL.

23. ...Cisco Systems, Inc., in support of Bell Canada, stated that even if more bandwidth were added to the network, P2P file-sharing applications are designed to use up that bandwidth.

This is wrong. No user can utilize more bandwidth than that available on the DSL link. Adding more capacity in the network behind the DSL access portion does not increase any user's available bandwidth. The error is either on Cisco's part or in CRTC's summary of Cisco's position. In paragraph 25 they note that CAIP made this very point.

29. In the Commission's view, CAIP has not demonstrated that Bell Canada's methodology for determining congestion in the network is inappropriate. The Commission notes that Bell Canada, as a network operator, is responsible for ensuring that its network is operated effectively and efficiently, and considers that Bell Canada should be able to take measures in this regard. Furthermore, the Commission is satisfied that Bell Canada has established that there is congestion in its network during peak periods.

There are good reasons why details of a carrier's network operations and economics are not available to 3rd parties, including complainants. The primary reason is that it would publicly expose trade secrets that competitors could exploit. Whether that is true in this case we'll likely never know. Enforcing privacy of this Bell Canada data will no doubt aggravate those involved in this proceeding. That they must trust CRTC to have made a correct assessment of the privileged disclosure doesn't sit well, yet CRTC has most likely made the right choice.

However, the CRTC does not provide this assurance in their very next paragraph.

30. ...The Commission considers that intensive use of such applications could, during periods of high Internet traffic, result in network congestion and degrade the performance of Internet services for other end-users.

32. The Commission considers that, in the circumstances of this proceeding, Bell Canada has established that the use of P2P file-sharing applications by the end-users of GAS customers during peak periods would contribute to the network congestion that exists in Bell Canada's network...

So now, in paragraph 30 they say "could" when they ought to have been able to say "did". This gives the impression they accepted Bell's conclusion about congestion without studying the network data itself. This is further supported by their choice of words in paragraph 32 where they say "would contribute to the network congestion that exists." CRTC says there is network congestion but can only offer that P2P is a contributing factor. Sure it is, but so is playing videos from YouTube.

33. The Commission notes Bell Canada's submission that the traffic-shaping approach it has implemented is the only practical option that is technologically and economically suitable, at this time, for addressing congestion in its DSL network. The Commission further notes that while CAIP and others suggested alternative traffic management approaches for Bell Canada, there is no evidence on the record regarding the availability, feasibility, or utility of any such alternative solutions.

I have to agree with this. The CRTC will not and should not order a carrier to develop new technology; at most they would request an economic analysis based on technology that is already available in the form of vendor products. I think it would be useful to compare what Comcast is doing to implement usage caps. The products are coming but are not yet sufficiently mature for the CRTC to order that they be purchased and installed by Bell Canada.

42. Bell Canada submitted that it had not introduced traffic shaping to give itself a preference in the retail market when it launched usage-based billing, IPTV service, its "Max" DSL service, and the Bell Video Store. Bell Canada submitted that it had not commercially launched IPTV service. In response to CIPPIC's questions, Bell Canada submitted that high-speed DSL users were throttled in the same way as other users. Bell Canada submitted that any allegations of an ulterior motive connected with the launch of the Bell Video Store...

The CRTC seems to have avoided the implication of paragraph 42 in their decision. While it is true they throttle P2P for both retail DSL and GAS, they do not throttle IPTV. Therefore if you get your video entertainment via P2P, for which there was evidence submitted that legal content providers do distribute programming via P2P, there is discrimation that will benefit the Bell Video Store when it does go commercial. However this is only the potential for future discrimination, not actual discrimination, and is therefore perhaps not relevant in this decision.

45. ...the Commission considers that there is no evidence on the record to establish that Bell Canada has benefited from the implementation of traffic-shaping measures with respect to GAS in the manner alleged by CAIP.

It's one thing to claim discrimination and another to demonstrate it. The CRTC appears to have made the right choice here. I am not surprised because throttling is done for both retail DSL and GAS, which would weigh strongly in Bell Canada's favour.

58. ...The Commission considers that, in the context of a P2P file-sharing application, the fact that the transmission of a file is delayed does not alter its meaning or its purpose.

Another point that I believe is well argued by the CRTC in the text leading up the quoted passage. Of course the delay is annoying but the material is not edited.

65. The Commission notes CIPPIC's submission to the OPCC regarding Bell Canada's alleged violation of several principles of PIPEDA through its implementation of DPI technology for traffic shaping. The Commission considers that issues regarding compliance with PIPEDA are outside the scope of this proceeding, and they are therefore not addressed in this Decision.

Nice deflection, yet one that appears to be legitimate. Perhaps CAIP should launch a privacy complaint even if the evidence for a violation is weak.

70. Bell Canada submitted that it would provide one day's advance notice in the future.

74. The Commission notes, however, that Bell Canada's actions have had significant impact on the performance of its GAS...The Commission considers that the notification period should be at least 30 days...should provide clear and meaningful information...

Here we have a clear violation by Bell Canada, and outright impertinence about it. Yet the CRTC lets them off the hook. While they do make a suitable order on future notifications they have forgiven Bell Canada's past transgressions. This is despite their own conclusion that the ISPs were harmed.

78. ...the Commission directs Bell Canada to file a report on the resolution of complaints related to affected non-P2P file-sharing applications by 9 January 2009.

This is weak but not surprising. To demand resolution might require technology that is either not in Bell Canada's possession or that is not even available. Asking for a report is however insufficient when the CRTC recognizes that perfectly ordinary subscriber activity is being impaired. One could argue, as noted earlier, that P2P is also ordinary subscriber activity since it is used for legal content distribution, but the CRTC has carefully drawn a fuzzy line around P2P by accepting the contention that P2P is unique by its ability to cause network congestion.

There is in this point of the decision an unstated but implicit value judgement by the CRTC. They are in effect stating that Bell Canada's claimed network congestion by P2P users is a sufficient justification to impair, even though unintentional, the service of non-P2P users, which includes VPN and other uses of encryption. This does not sit comfortably with me. It would be better I believe for the CRTC to assign a higher value to the damage done to those innocent bystanders, of which there are many, and a lower value to the weakly-demonstrated incidence of congestion. But then that's just my opinion based on my values.

As should be apparent, the CRTC is quite skilled at performing this sort of juggling act.

In closing I draw attention to a CBC interview with CRTC Vice Chairman Leonard Katz. In it he comes across as surprisingly clueless about what CRTC staff has done in this proceeding. If this is representative of the attitude of the Commissioners it does not bode well for any appeals of this decision or of the coming proceeding on network neutrality. His attitude indicates to me that despite the howls from the ISPs and their subscribers this matter is neither interesting nor important to the CRTC. Or perhaps it's only Katz.

If Teksavvy's CEO is any indication this issue will not go away quietly.

Mark Cuban vs. SEC

I doubt that most people know or care about this issue, or more specifically the eventual fate of Mark Cuban. While I am among that number I do find the surrounding issues interesting. I certainly do not know or particularly care whether he is guilty of insider trading, which is itself a slippery subject; it is the reasoning behind the charges that fascinate me. There is also a loose Canadian connection due to the origin of the public company involved, mamma.com. If you want to read more about it I recommend this article which looks at the case from an informed and disinterested perspective.

Corporate governance laws and regulations are not strongly enforced by the SEC in the US, and even less so here by the OSC. They seem to pick a few high-profile cases to create the impression they are active and doing their jobs. The Cuban case may fall into this category. There is also some reported animosity between Cuban and SEC that may have contributed to the action.

One argument against the SEC action is that at present there are far worse securities violations that are now coming to light due to the financial crisis. So why does the SEC go after an alleged $750,000 of illegal profit when billions and trillions are at stake elsewhere? Does it even matter. Let's imagine an analogous situation where a driver is stopped for speeding.

Officer: I have you on radar going 60 which is 10 over the 50 limit.
Driver: Didn't you see that guy blow by me at 120? Why don't you go after him?
O: Sir, that isn't your concern. Would you like to see your speed reading?
D: No! I want you to go after that scumbag! Someone could get killed.
O: I'm writing you a citation. You can of course challenge it in court.
D: This is ridiculous! I wasn't hurting anyone. That guy is the one you want.
O: Here you go, sir. Take it easy and have a nice day.

We have two separable issues here. One, the behaviour of the stopped driver and, two, the officer's failure to act on what is arguably a greater violation. The error is in conflating the two. The driver is guilty since the standard to which he is being held is the law; guilt is not relative to the behavior of other violators. The second issue of the officer's performance is valid. Citizens might well wonder if their police force is spending its effort most fruitfully.

Looking at this analogy we see the SEC in the role of the officer, Cuban as the driver, and financial executives and directors in the car up the road. Everyone has dirty hands. It would be better in my opinion to deal with that fact rather than stand around having an argument about whose hands are the dirtiest.

Laws. Regulations. Tariffs. Politics.

I have not read in detail the CRTC ruling on Bell Canada DSL throttling though I intend to do so. It is already evident there is a lot of discontent out there as can be seen in the comments on this CBC article and this one in DSL Reports.

Here is a prime example of why it is important to dig into the specifics rather than responding on the basis of emotion. It doesn't matter how we feel about the ruling. What matters are the reasons given by the CRTC. Any cogent action that may follow will have to address specific points made by the CRTC. Rants achieve nothing except, perhaps, the ranter may derive some enjoyment from doing the ranting, and getting affirmative feedback from other ranters.

Whether or not the ruling is well-founded in law, regulations and tariffs, there is the political climate to be considered since the CRTC would certainly be sensitive to that. Even among the ranters there is a sad recognition that those most unhappy with the ruling are in the minority among the general population. That is not helpful if politics is at play; in politics numbers matter. It would be easy to speculate that the political winds would blow in favour of large corporations since they are large employers and taxpayers. This is particularly pertinent in a recession. If assessed on politics alone, had the CRTC ruled against Bell Canada I believe their public relations machine would have been given free rein to turn public opinion against the government on this issue. I also believe it would succeed since the majority don't understand the issue and can be swayed to accept an implication that the vocal minority are mostly illegal file sharers. Politics can be vicious. It can also operate effectively without regard to the facts, whatever those facts may be.

Now to find an hour or two to read through those documents and see what's what.

Where, or If, to Invest Public Money

The auto companies' request for help from taxpayers is an interesting question that immediately polarizes people. There are those that see it as a must-do, to save jobs and the manufacturing sector, and those on the must-not side, seeing it as throwing good money after bad.

As a consumer and taxpayer I am in the latter camp. My thinking is as follows. They tried to get my money by selling me their products and services. Having failed at that they now want to get my money via the government, who got it through taxation. That back door tactic does not sit well with me. However, apart from my personal feelings on the matter does their request have any broader economic appeal?

Government already invests our tax dollars. This is primarily via holdings of equities and other instruments as part of the national pension fund. Of course these holdings have melted down recently along with the overall market decline but that's a separate issue. There is always new money to invest as long as they take those CPP contributions out of paycheques. The feds also invest in new technology ventures. In all cases the objective is a positive return on investment.

Is investing in the auto sector a good bet? That is, is there a positive return for investors? Of course there is an immediate benefit for the companies' employees, investors, creditors and suppliers, but what about us, the prospective new investors? It depends on how the money is applied.

If the money goes into the existing businesses as they are currently structured and operating, I see it as a dreadful investment. It will only delay the day these companies really hit the skids. The money in this case is little more than a temporary replacement for EI, and perhaps a way for other investors and debtors to reduce their losses somewhat.

If the money goes into structurally segregated new automotive technology enterprises, that is a risky but more interesting bet. However it does nothing to help the existing businesses and all those dependent on them for their livings.

Standing back a bit further for a broader perspective, the better question to ask is, assuming we as taxpayers are willing to allow the government to invest more of our money in selected economic sectors to build future prosperity, is the auto sector, whether the existing one or new businesses, the right one? Here I am doubtful since there are some attractive competitive alternatives for our investment dollars. Two examples are alternative energy and software/internet ventures that could make a strong case to attract that same pool of funds.

On balance I am opposed to the government investing further in the auto sector. I say this knowing full well that there will be more tales of personal and social hardships as this sector continues its decline. I also believe that new opportunities can arise from the ashes of the old. It is just not a certain outcome.

High Mobile Data Pricing - They Can Until They Can't

It isn't news that mobile phone service is more expensive in Canada than it is in the larger and more competitive US market. This is true of both voice minutes and data volume. It get much worse when you roam, leading a small fraction of users taking aggressive measures. Unfortunately these measures are beyond the ken of the wider population and are therefore no threat to the Canadian operators. As to the reasoning behind these high wireless prices, and data in particular, it goes something like this:

Question: Why do they charge such ridiculously high prices?
Answer: Because they can.

Some time ago I put forward some thoughts on how wireless competition might evolve in Canada due to the granting of new spectrum licenses. It's still much too soon to know if my predictions are right or wrong, though I can speculate how pricing pressures may come to bear in the next couple of years.

First, while more wireless competition is coming, it isn't here quite yet. The new guys will be spending scarce capital to build their networks for some time before service can be turned up. When they do it is likely they will offer better pricing than the incumbents. However it is not certain. The reason is they want to maximize revenue while also inducing people to switch over to them. To best achieve this they will price data to undercut the incumbent, but not by too much. Lowering the price further will have to wait until the incumbents respond with their own price reductions, which, as I explain below, could take awhile.

Second, since the networks of the new entrants will be built out in stages, or in some cases will be regional according to their license terms, true pressure on the incumbents will only rise slowly. Should a new guy offer a great price in the early days the incumbents may not respond at all. They could simply advertise that their service is national and so commands a premium. It would even be true. The response to that by the new guys should be to form partnerships whereby they can offer seamless roaming among their combined coverage areas with no roaming charges. That may induce price reductions by the incumbents.

Here it's worthwhile to distinguish the data pricing for local, national roaming and international roaming. Saunder's article correctly threw the focus on international roaming charges. To bring those down we would have to see roaming agreements between our new wireless operators and those in the US, and that the US operators consent to low mutual roaming charges. Except they would feel no strong business inducement to offer better terms than in their arrangements with the Canadian incumbents from whom they earn the bulk of their roaming revenue. This could prove to be a barrier to lowering international data roaming prices.

Third, until the new guys are up and running and have a credibly ubiquitous service, and a track record of reliability, we should expect some shifts among the incumbents. In my previous article I mentioned how Bell Canada is decimating the ranks of their technology groups among other wholesale workforce reductions. This goes far beyond the needs of closing the sale of the company since it leaves the remnant weakly positioned to respond to emerging competition. As one acquaintance opined to me, he believes this means it's more likely that Bell Canada will be acquired (or merged, depending on your perspective) with Telus. That makes some sense. What this means is that until the new providers are fully operational there could be even less competition in the Canadian market. Prices could therefore rise further before falling, increasing the time until we see prices lower than today's.

A briefer summary of the scenario I've laid out here might be this rephrasing of the Q/A exchange I posited at the beginning of this article.

Question: How much longer will they charge such ridiculously high prices?
Answer: Until they can't.

It Isn't Just Nortel

Nortel's woes are front-page news both locally and internationally. However Nortel is not the only local Ottawa technology outfit cutting back, even if they are the largest. There's Mitel making the headlines for similar reasons and, occasionally, other smaller companies in the same boat make the headlines. Seemingly overnight the recession has arrived and business has dried up.

There are many small, local technology companies that are cutting back. Most of these fly under the radar since the media either aren't aware of what's happening or choose not to report about these high-percentage cuts that are low in absolute numbers. I suspect the truth is more the former case since the investors and management of these companies do not want these cuts to become generally known. The most likely reason for the companies' silence is to avoid a loss of confidence among their few current and prospective customers. There is little that can kill a startup faster than a prevailing belief that it will not survive; businesses can't risk purchasing goods from or becoming even modestly dependent on a company that is soon to be no more.

But talk to people and the stories come out. Sometimes they are told loudly and sometimes merely whispered. Those companies that haven't cut head count are freezing hiring and getting ready to squeeze the layoff trigger if they get a whiff of revenue drying up. Business confidence is running very low.

One important company that is making cuts to their local technology staff is Bell Canada. While it isn't a secret I am surprised that it appears to be largely escaping the notice of the media. I don't know why that is. When the majority of the technical staff studying and planning new product initiatives is let go you would think that is newsworthy. Yet the cuts go further, cutting across many technology groups in the company.

I am both surprised and not surprised by this development. On the not surprised front, it makes little sense to spend money developing new services if they are not being pushed out to the market. The company's stance for the past few years has frozen many initiatives to get new technology out to customers. How much of this is due to the long-duration process of selling the company, I do not know. Perhaps management just doesn't believe that technology, and the new services it can enable, will get them out of the competitive hole they are slowly sliding into. What surprises me is how a company like Bell Canada which is so dependent on technology could sit on it collective hands for years, knowing that competition from cable and new wireless providers is increasing in scope and intensity.

Cutbacks like those described above are likely to continue in the local high-tech scene. VC's are sitting out the downturn so their investments must do so as well. Unfunded startups must continue without capital injections. Public companies are scrutinized by their public investors and must try to defend share price by reducing expenses at this difficult time. It isn't just about investor relations; they have to do it.

2009 is going to be very difficult for many technology firms in this town and elsewhere.

Mouse-over Madness

One of the innovations on the web is that of the mouse-over. This is where you position the mouse pointer over some image or other widget on a web page and then, without needing to click, some action is performed. The action may be to display an ad, provide the first lines of text of another page, open a new service, and so on.

If it's done well it can greatly improve the web browsing experience. If done poorly it can be hell. By hell I don't mean irritating the user with mouse-over ads; these are easily avoided by going elsewhere. Here I'm referring to intentional behaviour of otherwise reputable sites in delivering desirable content and services.

In my view, a properly-implemented mouse-over should wait before launching any complex action. That is, provide the minimum guard time, even a quarter second, to have some assurance that the user is intending to activate the service. There are web sites out there that will go nuts with activity if the widget so much as gets a hint that the pointer is moving in its general direction from the opposite side of the window.

Those little text boxes with introductions to news stories are not the biggest problem since they minimally interfere with the user's view of the page. Rather it's mouse-overs that launch entirely new content pages or switch you over to a different site or service. It's like I've been arbitrarily transported to a peculiar video game, something like the old Minesweeper game on Windows, where I have to thread among the hidden widgets to get to my real objective without setting them off. Hit one of those mines and you have to waste time shutting down unwanted pop-ups or finding my way back to the original page, and then trying again to do what I want.

Some web designers seem to think this is good practice. It isn't. The objective is not to exercise every new Web 2.0 innovation but to use them sparingly and prudently to improve the user's experience. Please.

Nortel is Now CTO-less

To no one's surprise Nortel's quarterly results stunk. Now there are more cuts. Is it enough? I have no idea, though I see that there many out there in the investment community who think not or have otherwise moved on from the likes of Nortel. From the tone of quotes in the media even their own employees seem to have lost hope, and interest.

I wrote about the past and future prospects for Nortel back in September, and I was not hopeful. I predicted then that Nortel would not survive the decade, and I still feel the same. Long time Nortel and technology watcher Duncan Stewart tells it like it is in this CBC article (an article which also happens to include quotes from a couple of employees):

"Every industry watcher is saying this a company that is almost certainly going to be broken up or sold entirely in the next 12 to 24 months."

Several top executives are also departing. Most distressing to my thinking is CTO John Roese, or, more specifically, the reason he gives in his blog for why his role is no longer required:

"Each of those BU's will be lean, focused and autonomous..."

From the few people I know who have had dealings with him he is reported to be intelligent, knowledgable, honest and competent. So what he says in his blog is worthy of scrutiny. I picked those few words out of a long blog post since it seems to support the view that Nortel will be dismantled.

If the business units (BU's) are to be independent that does two things. First, it declares that Nortel will no longer seek to be a system integrator and prime vendor to their large customers. This is one of the roles to which a revitalized Nortel might aspire, as I described in my September article. Second, a business unit that is disentangled structurally, financially and operationally from the others is the ideal preparation for selling it off.

Looked at this way, selling the successful MEN group makes sense; it would be the first of the reorganized three business units to be sold off in this fashion. This isn't entirely new ground for Nortel since they have in the past sold off 'non-strategic' product lines to other companies, including much of their access business.

So the final question I find myself asking is this: is Nortel a good investment? On the basis of the rest of this article the question may seem preposterous, but is nonetheless valid. We have to distinguish the company from the stock. If the company is in distress and is being sold off in pieces, and those pieces are worth more than the whole, or at least more than the current market price, it can be a good investment.

Unfortunately I don't know the answer to my own question. The stock may get much cheaper since their business is in decline, the telecom sector is in a funk, and their debt and pension obligations loom darkly. With the fear about Nortel's survival now motivating more commentators to tell people to stay away from the stock an attractive share price could come sooner rather than later.

Measuring Gigabytes

Just how much is a gigabyte (GB)? This question is becoming very popular among those debating ISP monthly usage caps. More to the point, those in the know, or at least those most concerned about it, are wondering whether the hypothetical average broadband user knows what it is.

It's a good question. Unfortunately the discussion tends to generate more heat than light (see commentary under various posts in DSL Reports for some examples). However the marketing tactics of the ISPs is very questionable, and is responsible for much of the anger.

Just how many emails or web pages make up a GB? Silly question; it's silly because if all you do is email and browsing you are very unlikely to have reason to care - you'll never hit the usage cap even in a lower-tier service with caps of 5 GB or even less. Advertising that a cap of several GB is supposedly equivalent to some millions of emails, SMS messages or web pages can only be intended to make the majority complacent, confused, or both, without giving a true measure of what can in fact be accommodated within the cap.

There is an analogous situation with electrical power consumption. I am always surprised when I quiz people who are confused about power usage to find they have a poor understanding of how much is consumed by everyday devices. One popular choice for biggest power consumer in the home is the television (wrong!).

I have found it helpful to make a brief, ordered list of power consumption to help them improve their understanding:

1. Heating (kettle, stove, microwave, refrigerator, space heater, clothes dryer)
2. Motors (lawnmower, washing machine, power saw)
3. Lights and electronics
   

Of course this is an incomplete picture since it doesn't take into account how many and how much of each is used. Still, it does help to communicate the abstract concept of power consumption to those with little technical knowledge.

If we were to do the same with data consumption the list might look like this:

1. HD-DVD
2. YouTube, MP3/music/podcast
   
3. Photos
4. Browsing and email
   

Again, this presentation is incomplete but able to communicate an abstract concept.

Yet the ISPs are proposing a measure using the least burdensome applications. This is dishonest since it misleads the majority who are not technologically knowledgable; sort of like focusing on compact fluourescent lights rather than home insulation. As to why they do this, a popular hypothesis is that this is part of their campaign to impugn the reputations of those who use a lot of rich media, including P2P users. The subliminal argument being along the lines of: "you can do more stuff with your broadband service than you could possibly consume, so obviously those who find 2M emails/month inadequate are abusing the service and it is justified for us to put limits on them. Sure you, too, have the same limits, but you aren't one of them. You are a responsible, law-abiding consumer."

Of course they aren't actually saying this, so perhaps I am unfairly tarring them when their intentions are only the very best. Time will tell if they are being fair or are merely buttressing their existing desire to impair any and all rich media services other than their own, whether absolutely legal or in the nebulous regions inhabited by P2P.

Should the fight against this ISP strategy depend on the average user becoming knowledgable about gigabytes, then I am not confident of success.

Sun and Their Servers

I was reminded of the time in my career when I found myself making server technology choices when I came across this article today. It's been a long time since the glory days for Sun Microsystems, and about as long since I was choosing servers. Much has changed since then.

Sun built an enviable reputation for server technology at a time when the market for servers was growing explosively. It was driven by the web boom and also by a shift in the telecom equipment sector from custom processors to standard processors and then complete hardware systems. Sun's servers were of high quality for the intended applications, used an operating system (Solaris) that was Unix based but extended to handle real-time and high-volume transaction processing. Like IBM and other industry leaders, Sun invested heavily in technology research and for their pains has ample intellectual property (patents) on high-availability software and hardware methods which are so important to commerce and telecommunications.

Then the industry changed. As the telecom business became more competitive and with the low cost of entry to participation in web services, there was a drive to lower equipment costs. Sun was slow to respond. This created an opening for Linux (OS software) and Intel, Dell and all the rest of the component and system players. Yet Sun held the technology advantage for quite some time. Linux, for example, was not well-suited to real-time applications in the early days, though that has long since changed.

While costs were coming out of their competitors' products (and quality was improving), Sun was held back by their custom hardware and software; because they were the only users of it, they did not achieve the volumes and thus lower-costs of the competition. In time they did change, though by then competition was full blown. It would have happened anyway though it is arguable that shifting strategy earlier would have left Sun in a more dominant position.

An important factor that further harmed them was that they misread the changing market. The focus shifted from high-reliability servers to racks full of less reliable but very cheap servers. While Sun built more and more expensive and fully-redundant servers in their Netra line, culminating in the ft-1800, customers were opting for alternatives. Cheap servers could be discarded when they failed and distributed over multiple networks and locations for superior service availability. Google has perhaps taken this to an extreme with their buildings full of ultra-cheap servers, and the transaction distribution technology to make it all work. Those expensive Netra servers did not fit the changed requirements.

I made a similar decision at one point to switch product strategy from internally redundant servers to redundancy over multiple servers. My decision was driven by customer feedback. They all loved Sun but laughed at the price tag of the ft-1800 and similar technology. These servers were nevertheless an impressive engineering achievement.

Now, as the author of the referenced article states, Sun appears to be drifting into irrelevance. What a shame.

Why VoIP Providers Fail

Considering how long internet voice services (VoIP) have been around I found it surprising how often folks, including those in the business, misunderstand the business of VoIP. When I read this recent article in GigaOM by Ian Andrew Bell I was motivated make a few points.

First the obvious - VoIP is not a business model, it is a technology. The technology has been used by many startups to offer a telephone service that undercuts the prices of conventional service, especially where distance is involved. This is better known as price arbitrage, where the new kids on the block are unencumbered with the regulation-mandated fees between carriers and the cost structure of the incumbents. There is nothing inherent in VoIP that makes it low cost; it's just arbitrage.

These VoIP providers became viable when always-on broadband reached significant penetration levels early in this decade. That was needed since utility VoIP service that mimics conventional telephony requires that it be in place - it's a prerequisite. The early players knew full well that if their consumer pitch was something like, "$9.99 per month for all you can eat telephony, and, um, you also need to sign up for $40/month broadband," it would not fly. However once the consumer has eaten that cost the pitch became very attractive.

So now they're failing. Vonage is perhaps the poster boy for struggling VoIP providers since it was the biggest pure-play out there. Nevertheless they are all in trouble, as the GigaOM article states. But why? VoIP is more popular than ever.

Let me describe what I feel are the true reasons for the failures before I come back to what Bell suggests are the reasons.

• Low barriers to entry - Anyone with a few bucks can get into the business. All of them use the same equipment and applications from the same vendors, interconnect via the same set of conventional telephony carriers and are poorly differentiated from each other on both price and features. It is not surprising that Vonage has spent hundreds of millions of dollars on advertising to sustain and grow their business. And it was all for nought.
• Utterly dependent on their fiercest competitors - Every one of these VoIP providers depends on reaching their customers via the services offered by the telephone and cable companies, who are larger, meaner and wilier than they are, and are not at all pleased to see customers drop their high-margin services to switch to these pesky new guys. But rather than compete solely on price, which guts their profits, they have successfully impeded their competitors by various means. These include application filters, lobbying for regulations that force VoIP providers to incur higher costs, refusing interconnection, patent suits, and, perhaps more ethically pure, lowering prices by marketing bundles that the pure play VoIP providers cannot offer. Like them or not, these tactics work.

There are no other reasons of similar significance that are shredding the pure-play VoIP providers. This is not to say they haven't tried.

Years ago Vonage and others tried to offer white label VoIP services to cable companies, all of whom were well behind in the VoIP game. Instead the cable companies chose to forego the service for a few years while the technology improved and they were better placed financially and technologically to deploy, in volume, competitive telephony services. They did not want to share revenue with the upstarts, or dependent on them.

Others have built VoIP apps for mobile handsets only to find the devices and networks turned against them. Sometimes it works, sometimes it doesn't, making it very risky for consumers. One of the biggest surprises to me was how undifferentiated all these companies have been. There are a few innovative players out there, like Grandcentral (Google) and Skype (EBay), but they are noteworthy by their rarity.

Enough of that. Now I'll address a few points I disagree with in Bell's article.

Evolution vs. Revolution: Companies like Nortel, Siemens and Ericsson rank among the top VoIP equipment vendors today, not startups. Technologists completely underestimated the sway and leverage that the traditional vendors held over their customers.

This is wrong. The real reason is that big companies prefer to do business with other big companies. Smart startups, if they can swing it, distribute via the large vendors or, better for the investors, get acquired by them. The others die, as they should - this is the startup game.

SIP in a Box: SIP might be an open protocol, but networks were built proprietarily and have not been bridged together. Most telecom services still communicate with each other via public switching, meaning that the wonderful possibilities that SIP might enable are limited by the capabilities of the plain old telephone system.

This is partly right, partly wrong. Interconnection of VoIP (SIP) islands is moving at a glacial pace because there is no compelling business reason to do so. We should not confuse fancy slideware from the vendors and service providers with customer willingness to buy. All these fancy SIP services have been used, to date, within these islands, with little customer desire to have them work outside their enterprises or, on the consumer side, outside small groups of family and friends.

Landline Decline: Even as networks were evolving, the number of landlines around the globe was shrinking. People found more convenient ways to communicate via wireless, SMS, instant messaging or pervasive email.

This is an odd statement. Wireless is still telephony, and people are talking to each other more than ever before. Sure communications is evolving, but this has not done in the VoIP providers any more than it has the conventional telephony providers.

In closing, I would fervently agree with Bell that there is a race to the bottom in telephony, but that it is happening regardless of the technology. Basic voice telephony, both wireline and wireless, VoIP or PSTN is getting cheaper and there is no end in sight. This is why all service providers, regardless of technology, are struggling, clumsily at times, to find the elements of value that can replace the lost revenue. We are still in the middle innings of this game.