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.