CRTC Decision 2010-632: Commissioner Denton's Dissenting Opinion

Last week I promised to follow up with a critique of Commissioner Timothy Denton's dissenting opinion on the CRTC's recently released Telecom Regulatory Policy 2010-632 on High-speed Wholesale Access. Luckily I only answer to myself when I miss a deadline, but be assured that I gave myself a stern talking to regarding my tardiness. I promised myself that I'd do better in future, but I have some doubts about my sincerity on that score.

So let's get right into it. You can read along in the actual CRTC decision to see the full text since I will only show selected extracts from Denton's opinion. I'll just mention right now that I really dislike most of what he said in his opinion so that you know what to expect.

This is a good decision, which does not go far enough. It keeps independent ISPs (Internet service providers) somewhat competitive, in the interests of the Canadian consumers and businesses. Yet it does not overcome the ambivalence that lies at the heart of the Commission’s decision-making in regard to the independent ISP sector. It neither eliminates them nor allows them the scope to compete effectively. It maintains them in a kind of regulatory limbo.

It has to be said up front that the only reason the 3rd-party ISP business even exists is because of regulatory intervention in the market. To speak of regulatory limbo is a ludicrous statement in this context. Further, this limbo he speaks of is that middle ground between allowing the unfettered free market to operate as it will -- which would eliminate those ISPs -- and having the government micro-managing the internal business operations of private corporations to make them serve every desire of their natural competitors.

While there is ample room for opinion and debate, at least the CRTC is attempting to strike a reasonable balance between oligopolistic market practices which would harm consumers and forcing the carriers into becoming public utilities, which would the harm the health of their businesses -- impacting employees and shareholders, among others -- and handicap them in the global market: such as when foreign companies, that are not so fettered, set up shop in Canada or our carriers seek to extend their operations in other countries. In these difficult matters it helps to try to see both sides and not be swayed by personal interests which might favour one party over the other.

As regards the eventual elimination of wholesale services, I have doubts about whether wireless based alternatives will ever be sufficiently cheap and capacious to justify their elimination. This is a future state of affairs on which it would be superfluous to speculate, and I let the matter rest for the unfolding of events.

On this point I strongly agree with Denton. As I mentioned in my article last week, the CRTC is not only at odds with the government on whether wireless could be competitive with wired broadband service, but they also appear blind to the technological trajectory. Wireless remains the least capital intensive way to build networks and is therefore best positioned to deliver competition that does not require government intervention in the market. On this point I believe the government has it right and the CRTC is wrong.

Where I depart from my friends on the panel is in relation to a technical arrangement called CO-based ADSL access service.[46]  The advantage of such an arrangement, if it were brought into being, would be to allow an independent ISP to get behind the traffic management measures imposed by the incumbent carrier. The effect of doing so would be to allow substantial service innovations, so that the lessee of the wholesale service could rearrange the technical characteristics of the signal without harming the underlying network, and which would allow it to offer quality of service guarantees, different bit rates, capacities and prices...

My concern is that the Commission is not engaging the steps that would be consistent with allowing significant service innovation, and doing so on rather flimsy grounds that it knows better than industry participants what the difficulties might be. It has done this both in relation to CO-based ADSL access service, and with regard to local head-end-based cable access service. It has not investigated the matter in depth, in the sense of spending extra time investigating these matters. It has relied in part upon cost figures from the parts of the industry opposed to these possibilities. I think the Commission would have been better off looking into these assertions in greater depth than we did.

The ellipsis is where I skip over a lengthy, and in my mind simplistic and naive, history lesson on the benefits of open networks and the innovation that comes from small, entrepreneurial companies, which I feel is so condescending as to be insulting to the industry players participating in this proceeding; I think these companies and their leadership teams don't need lessons from a regulator on obvious business dynamics.

I might have forgiven him for this, considering that he may have been attempting in a way to educate members of the public of these matters, until he went on to suggest that the CRTC is better than the business they regulate at understanding the sophisticated business practices, technologies and engineering practices they employ. It is of course right that the CRTC ought to inquire deeply enough that they can challenge the network engineering and financial analyses that the carrier present to support their positions, but to suggest that they can do better? Perhaps Mr. Denton is in the wrong line of business and ought to apply for a management position in one of these companies.

Although I can believe that he is an intelligent and thoughtful individual, from the bio of him posted on the CRTC web site I can see nothing that would qualify him for a senior position in a telecommunications company other than perhaps in a government relations role where he can interact with...the CRTC. Interestingly, however, he was counsel to CAIP back in 1990s. In his opinion he does wax poetic about the heady days when ISPs flourished, before broadband replaced dial-up, so perhaps that is why he has some attraction to the current plight of the retail, 3rd-party ISPs.

I shudder at the thought of Mr. Denton or the CRTC attempting to suggest or mandate reconfiguration or equipment investment in the carriers' networks. However, I am pretty sure that this goes beyond the CRTC's power, for which we can all be thankful.

The large carriers have the inclination and ability to convey their messages to the public and the political class relentlessly and effectively. That message can be reduced to the simple proposition that they should at all times be allowed to maximize profits because only then can they make the investments they need to keep Canada internationally competitive. No matter what the profit margins are on leased equipment, wholesale services are always deemed to undermine profit maximization. It is a message constantly heard by the Commission and we have repeatedly found it to be without merit.

Networks are private property and derogations from the full rights of ownership are deeply suspect. In this view, those who lease equipment and services, regardless of the profit margins allowed by regulation, ought in principle not to exist, or if allowed to exist, they should have no rights to lease services at tariffed rates, but should have to negotiate the price.

Wow! I find it difficult to believe he could say something so obviously false about profit maximization and to imagine that the government has an obligation to not merely dictate what services the carriers are _required_ to offer, but to also allow their competitors a role in setting the prices. It's one thing to find a compromise, a middle ground between the public interest and private interest, but to hear the Commissioner willing to discard private interests entirely is a way out of line.

Contrary to his contention, there is a also very simple reason why wholesale reduces telco profitability: it enables more competition for the higher-value, higher-margin retail services that the telco sells. He, and indeed many others, may not care about telco profitability, but the impact can be substantial. I wrote about these internal telco business unit dynamics over two years ago when this blog was still very new.

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.

Commissioner Denton is either posturing or displaying an ignorance of what it takes to run a successful business. Just because Bell Canada and other carriers are big, profitable and dominant does not make them evil; they, like any business, have a responsibility to their employees and shareholders, and sometimes, unfortunately, that means they would prefer to not offer some services or to at least have the pricing power to generate profits.

The result is that the possibility for service innovation was turned down, without sufficient consideration, in my estimation. The current ambivalence about the role and legitimacy of smaller carriers continues. They are allowed to exist but denied the means to innovate. In a business with as much uncertainty as this, turning down the possibility for technical and business innovation seems a riskier move than letting it go ahead. To that extent, I dissent.

Denton has this completely wrong. It is not for him or the CRTC to decide which companies are the ones with the duty to innovate and move the industry forward: no regulator should be in the business of picking winners and losers, and then explicitly changing the ground rules to favour their preordained choice. Innovation does not have to come from small, non-facilities based ISPs.

In fact I would argue that they are not the innovators, but merely (though important) enablers of access to the real service innovators. These include companies like Google, Skype, Salesforce and Ebay, to pick a few prominent names, but also a plethora of small companies located around the globe, including right here in Canada and in Ottawa. Perhaps Mr. Denton would benefit from a trip a few kilometers west to meet with some of these innovators. He appears to not only be cavalier about protecting the tenets of Canada's free market economy and the reasonable rights of Canadians, including protecting the assets of the companies they invest in and operate, but he is also out of touch if he believes ISPs are the true innovators.

We do need those ISPs and healthy competition for internet access services since they contribute to the success and innovations of new Canadian businesses that depend on those networks to reach their customers both at home and around the world. As a consumer of internet access services and other internet-based services that broadband enables I do want healthy competition. I also know that an overly-interventionist regulator or government will inappropriately favour the easing of short-term consumer pain over the uncertain promise of enabling long-term business success stories. Because I strongly believe this level of CRTC intervention to be against Canada's wider interests I am appalled by many of the views expressed by Commissioner Timothy Denton in his dissenting opinion on CRTC decision 2010-632.