Bell Canada is a business. That is obvious, yet is often set aside in the pro/anti-throttling conflict; too much of the discussion has been on 'moral' grounds. One side says that throttling is immoral, while the other says that P2P is immoral since it affects service quality for everyone and is often used for unlawful purposes. I am going to put this aside as well since, while questions of morality are interesting, the concrete matters of law, regulation and greed will dominate. Politics is off in the wings for the moment, and may stay off the stage, though it is always possible that the CRTC could be swayed despite its supposed independence since consumers are also voters.
Thus I come to business motivations. Why will Bell spend money to increase data (internet) capacity to support the increasing average per-subscriber traffic loads due at least in part to P2P, whether from their affiliated ISP (Sympatico) or unaffiliated ISPs that utilize regulator-mandated DSL access (wholesale)? What's in it for Bell?
"Greed is good"
Business is amoral; corporations are formed for the primary purpose of generating positive monetary returns to their investors. It is often said that corporations also have the purposes of creating jobs, valuable services and products, and other social benefits, but this is false. Those things are done by corporations only if it makes money for its owners. An unprofitable corporation is a dead corporation since it is unsustainable; only profit keeps a company a going concern. For non-investors who depend on the company's products this may be a bitter pill to swallow. A company keeps its customers, employees and the broader society well-disposed toward them when it is to their financial benefit. Individuals within a corporation are moral actors, but the corporation itself is not. Individuals come and go, whether employees, customers or investors, yet the corporation remains as a profit-generating entity with its own independent existence.
I suspect at this point some readers may be disgusted with what I've written, yet it remains true. Keep in mind that corporations are not unrestrained in their capacity to make money. There are laws and regulations put in place by citizens, by means of government, to constrain them so that society is protected against undesirable behaviour. Within these bounds anything goes, and I like it that way. In case you haven't already guessed, I am a greedy capitalist who likes open markets with only modest government intervention.
Investing Capital and Dealing With Competition
Back to Bell Canada and its business motivations. As everyone knows it is a straight-forward matter for them to buy and install more strings and cans (see part 2) to keep pace with the behaviour of both retail and wholesale customers, which are DSL subscribers in this particular case. Just like you and me, when we put a $1 into a savings account, a T-bill, a mutual fund or an equity, in future we expect to get back more than $1, and so does any business. So when Bell Canada puts $1 into its network it wants to not only get back more than $1 in profits (net of operating and other costs) it wants to get back as much more as it possibly can. Employees who are senior executives don't generally last long by making unprofitable investments for their owners. That's how their performance is measured.
If DSL revenue, both retail and wholesale, is not increased the return on every $1 invested in the network is negative, possibly as high as the original $1. However if they do not invest, and traffic rates increase as they are sure to do, DSL subscribers will be motivated to switch to competitors. This assumes there is competitve choice, which as we know is limited at present. There are the cable companies, including Rogers and Shaw, and wireless. Existing wireless choices are expensive. New operators using Wi-Max technology are still far off for the average consumer. Further, the cable companies are throttling P2P traffic. For this reason Bell Canada has some discretion in choosing to invest in its network, and also customer service.
Since their wholesale DSL rates are partially under the control of the CRTC, they cannot easily increase those prices to get a higher return on that $1 investment. If they raise Sympatico retail prices they lose customers to DSL wholesale (lower per-subscriber profit) or cable (lose the business entirely). Similarly if they throttle only Sympatico subscribers they lose customers to ISPs utilizing DSL wholesale who don't throttle and often have better customer service. They don't however lose throttled customers to cable companies, since they also throttle and tend to have even worse customer service.
Bell can use usage caps and rates, or speed caps and rates, to tier pricing plans so that they are more consistent with network investment. That way they have some assurance of making a profit. Again however, the regulator skews this in favour of those DSL wholesale customers to counteract Bell Canada's near monopoly; it's a matter of public policy, which is changable. Fighting the CRTC, and the public, is a time-consuming process with no assured positive outcome for Bell. So they choose to throttle everyone (having experimenting first on their Sympatico subscribers), and ask for forgiveness rather than for permission. This is a time proven tactic used by businesses, and by individuals; don't ask your spouse if you can have an affair, ask for forgiveness afterward. It works more often than it should.
Value of a Bit
Like electrical power and water, transportation of bits is a commodity business. It is also, quite often, a natural monopoly, and therefore prone to regulation. Commodities are by their nature low-margin (low profit), making the commodity business unappetizing for many investors. Unlike commodities like iron and wheat, bits are easily manipulated (modest investment) to building higher-value products. If your business is bits, there is a strong internal impetus to add value.
Here are some examples of how a company like Bell Canada adds value to bits:
Telephone service (streaming 64,000 bps): phone numbers, global traffic exchange, appliances, vertical features
- Internet (DSL): email, DNS, web hosting
- Mobility (CDMA or GSM): telephone service as above, appliances, presence, SMS, internet access
- Television (satellite or IPTV): programming distribution, VOD, time-shifting
As you may have recently noticed, Bell Mobility and others are being criticized for charging for SMS. One argument is that it's just bits. Sure, but so is every service offered. The question is whether the price works in the market. If not, SMS or any service will either not be used or the customer will, if possible, switch to a competitive offering.
I remember once years ago I did a calculation of how much revenue a typical carrier get per bit for various services. As you might guess, simple data transport was at the bottom of the heap. Basic telephony was higher, though still quiet low. Vertical telephone features like Caller Id, Voice Mail and Call Forwarding add a lot of revenue per bit, as does SMS. In many cases the prices for these services are only limited by regulatory oversight, fear of regulator intervention and the more-usual market willingness to pay.
All of this value-added revenue is under threat. Competitive threats include VoIP, web-based IM, Twitter and much more. The enabler is IP and the internet; it is now far easier to bypass the bit transporter to get at 3rd party services, thus reducing carrier profitability. You may cheer this, yet you still need Bell Canada and its ilk. Remember what I said above - a corporation that is not profitable is a dead corporation. The mighty can indeed fall.
The Worst Job There Is
Bell Canada knows all of this very, very well. They try to navigate the changing competitive landscape while also buying time by impeding competitors and influencing favourable regulatory outcomes. In the long run change will happen regardless, which they, too, understand. Right now they need to keep investors happy by sustaining profits and executing on a credible strategic plan to transform their business. The recent sale of Bell Canada highlighted many of the stresses on their business, and their past failures.
Now imagine you are the executive in charge of wholesale products at Bell Canada. You are responsible for selling products that enable outside businesses, including competitors, to add value to Bell Canada's transport of bits. Every other executive in the company wants you to fail since you are enabling their competitors and therefore damaging their ability to meet their own business objectives. There is some fierce internal competition in these companies. Pity the unfortunate wholesale business head, fought and ostracized by his or her peers.
I have known some of these very executives in my time. No, not at Bell Canada, but in the US. When I say it's a dreadful job, I know first-hand from talking and working with them. Turnover was high since the entire corporate team did what they could to make wholesale fail. The smart or young ones left. Others rode the downward slide until they got a golden parachute or retired.
I see that today Bell Canada announced its new management team. There is a new president of wholesale, John Sweeney. Let's see how long he lasts. He may have a difficult tenure.
Conclusion
Don't expect Bell Canada to voluntarily invest in their network to support P2P or any other bandwidth-intensive services that are not also offered by themselves. It simply is counter to their interests. While the CRTC may tell them to shut down their throttling systems, that will merely be one battle lost. The war will continue. I would be surprised if they have not already planned their next steps no matter the outcome. They will fight becoming a mere transporter of bits to the end. In the interests of their owners this is the right thing for them to do. The interests of the rest of us are secondary at best, and will remain so.
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