Usage-Based Billing as Distribution Fee

The internet has been a-buzz this week with the news that the CRTC-approved usage-based billing tariff has been approved and is slated for introduction on February 1. I won't repeat what was said (and re-said again and again) elsewhere so that I can focus on a perspective that is being incompletely reported elsewhere. This is the idea that UBB is going to be used as a content distribution fee by the ISP. This is not unlike the stratification that we are seeing in other household utilities (electricity and natural gas) where the delivery fee is scaled to, but separate from, the content (kWh and m3, respectively).

In the case of natural gas, Enbridge has exclusive rights to delivery while competing with others on the content (and on gas-powered appliances). In a similar fashion, Bell Canada has rights, but not exclusive rights, to deliver internet broadband service, competes with other ISPs on a range of connectivity services layered on that basic service (Sympatico), and, in competition with companies world-wide, content. Unlike Enbridge, Bell Canada does not have exclusive rights on broadband service since they compete with Rogers and others for both wired and wireless broadband. The difference is important since they are not a monopoly and that is, apparently, sufficient for looser, or at least more permissive regulation. Thus, UBB.

Putting aside for the moment the Bell Canada's true costs and their justification for their rates, let's look at what they are in effect charging for content distribution. However, we should first not that there is a type of exemption for what are purportedly the majority of broadband DSL users, those whose usage is below the threshold for UBB.

Currently, only a small percentage of users download enough data to hit these new caps. But many fear these fees will soon apply to everyone as the internet becomes more video based.

Since I am a customer of Primus I directly received the widely-reported email that they sent to their customers to outline the new fee schedule, partly to inform us but also I believe to add some fire to the brewing public relations battle. Here is their description of the new fee schedule

• Your existing High Speed Internet plan will now have 25GB of monthly usage included
• For the minority of customers who exceed this amount, additional usage up to 300GB will be charged at $2.00/GB to a maximum of $60.00/month. Usage in excess of 300GB per month will be charged an additional $1.10/GB
• Additional Usage Plans can be purchased starting at $5/month for an additional 40GB

Of course most people have at best a vague understanding of the relationship between traffic volume and content, and until now they haven't had to give it much thought. That is, although video streaming has a large impact on traffic volume, far more so than for voice and music, outside of Canada, even in the US, the caps tend to be much higher than 25 GB.

The service [Netflix] launched here in September, offering movies and TV shows streamed over the Web for a monthly subscription fee of about $8...
...
Video streaming eats up a lot of bandwidth. This isn’t a problem for Netflix in the U.S., where one of the strictest plans is Comcast Corp.’s, which limits users to 250 gigabytes per month. That’s still enough to watch eight hours of Netflix per day. In Canada, Internet providers have capped bandwidth use much more aggressively.

This seems to agree with what I've heard first-hand from Netflix users that one hour of video content is about 1 GB: 1 GB x 8 hours x 30 days = 250 GB. Therefore to stay under the 25 GB cap here in Canada limits Netflix users to under one hour per day. Of course this is misleading since other uses of broadband would already be eating up a substantial amount of that 25 GB. This is especially true in households with several people, including children, where their current usage may already be enough to incur UBB fees.

Therefore let's assume that all Netflix usage is subject to UBB fees. As shown above, Primus will pass along a charge of $2/GB, which translates to $2/hour of Netflix. Since the fee is capped at $60/month, this is 30 hours of content, or one hour per day. If you consume more than 8 hours, and provided you stay under 300 GB/month, the hourly rate will therefore decline in proportion to hours of content. For example, watch 2 hours/day and the effective UBB fee is $1/hour of content. Nevertheless, for that $8/month Netflix subscription you can easily pay far more, $60/month, to the distributor, Bell Canada. Nice, eh?

As a private company Bell Canada certainly has a right to run a profitable business that provides a financial return to their investors while offering a legal set of services that customers value and will pay for. Since they are not a monopoly the regulator is justified in avoiding micro-management of their business, or those of their competitors. However, as we all know too well, competition is limited and is not enough to drive costs down to those of comparable companies in other markets. With effective competition not only would prices come down but customer service would improve and they would use every business and technology trick-of-the-trade to drive down costs even further so that they can lower prices further.

As matters stand, their profits are not outrageous but they are misleading since they have limited incentive to lower costs through increased productivity. For those of us outside of Bell Canada (and even for most within the company!) getting a true picture of costs, and of costs that can be well-correlated with any one or several specific services, is nigh impossible. Yet that doesn't stop many commentators from declaring that Bell's costs are really much lower than they are saying, even though Bell doesn't break this out in their financial reports (and probably couldn't do so if they wanted). The CRTC does see some detailed service costing information, which is kept confidential for good reason, but this is almost certainly massaged to Bell's best advantage while still appearing credible. The CRTC's ability to challenge those figures is limited, even though they are sometimes foolish enough to think they should.

This brings us to CRTC telecommunications policy, a subject I've covered many times in the past, which is focused on promoting facilities-based competition, not retail competition layered on incumbents' networks, as the appropriate way to achieve true competition and market-driven pricing. Interestingly, this point is finally striking its mark, just as the CRTC (and the government for that matter) have intended.

Andrew Day, the chief executive officer of Primus Telecommunications Canada Inc., says that, taken together, the CRTC’s recent decisions provide a clear view of the future, including what it would cost to own and compete over more of its own facilities; in short, becoming what is known in the industry as a “facilities-based” competitor that owns its own network, such as Bell or Rogers Communications Inc. “It gives clarity to competitors on how to make investments going forward,” says Mr. Day. “You now have perfect information to put forward a facilities-based business case.”

Unfortunately, as I've also said before, facilities-based competition is neither quick nor cheap, so don't hold your breath. Wireless competition will help but only in part. We'll have to wait to see if CRTC's policy will truly create effective alternatives across the country, even if only in some urban centres. Everyone will benefit, including Bell Canada and the other incumbents in the long term as they adjust their cost structures to industry norms.