The 15% Solution

Every time the CRTC's decision on usage-based billing (UBB) comes up you see the usual talking points from the usual parties. This week's revision to the decision was no exception. What you get is a lot of faux outrage from the ISP community, consumers ranting about evil, money-grubbing corporations, and the incumbents trying to convince everyone how badly the CRTC is hurting them, and the jobs of hard-working Canadians. The media makes sure to give all of them a few lines in the inevitable follow-on articles, giving a bit of free distribution to their public relations departments.

The thing is that this 15% fee reduction by the CRTC changes not much at all. The decision still holds, as does the March 1 implementation date. There was no possibility for a reconsideration of the decision at all, and implying that there was is nothing more than a talking point by those who wish to shift blame onto the CRTC by claiming they've blown another so-called opportunity to do the right thing, where the right thing is whatever it is that most benefits whichever side is speaking.

From all the media coverage I've seen, that appears to have been successful since the CRTC is pretty much without any supporters on this matter. However, I don't see that they've failed at their task at all; they are doggedly, if somewhat clumsily, going about implementing policy, which is pushing the industry toward facilities-based competition. They are trying to make it sound attractive to those paying the price today, although that attempt seems futile.

As to the specifics of that 15% wholesale price reduction, the media generally gets it wrong, as in this Globe and Mail article:

The regulator, as it usually does, has attempted to find middle ground.

No, that's not it. Let's read what the CRTC itself has to say about that 15%:

7.      The competitors and MTS Allstream submitted that wholesale UBB rates should be discounted relative to comparable retail UBB rates. The competitors generally submitted that discounted wholesale rates would provide a margin from which competitors can recover additional costs associated with wholesale UBB, including activities related to customer inquiries and potential discrepancies between carrier usage bills and competitor records. The competitors also generally noted that, because retail UBB charges are not prepaid, there is a risk that customers will not pay them. In general, the competitors submitted that the financial risk is more significant for competitors than for carriers because unlike carriers, whose retail UBB rates are not cost-based, competitors must pay wholesale UBB rates to carriers as a direct cost.

This is interesting since you might almost expect that the GAS-dependent ISPs would pass the price straight through onto their customers' bills without any value added, much as they might with government taxes such as the hated HST. I find it funny that they'd argue that suddenly these fees would add such a burden to their cost of operations. While I'm sure there could be some tense moments when a few high-usage customers open their April bills and have an attack of sticker shock, the real impact almost certainly will be less than 15%.

8.      The competitors also generally submitted that discounted wholesale UBB rates would permit continued retail service differentiation. They argued further that allowing a discount would reduce what they characterized as an anti-competitive cross-subsidy from competitors to carriers that results from wholesale UBB rates not being cost-based. The competitors generally submitted that GAS and TPIA services are one input among others they use to provide retail Internet services, that these wholesale services are not resale versions of the carriers’ retail Internet services, and therefore that symmetrical wholesale UBB charges are not appropriate. The Canadian Network Operators Consortium (CNOC) proposed that wholesale UBB rates be discounted by a minimum of 50 percent relative to retail rates, to redress various disadvantages faced by competitors relative to carriers.

I'm not surprised that a request for this 50% reduction was rejected by the CRTC since they made it quite clear in their decision and stated policy that the CRTC is not particularly interested in forcing differentiated pricing for the ISPs use of incumbent facilities since they want to promote facilities-based competition. At the bottom of my last article on UBB I noted that the ISPs were finally accepting this point.

Now we come back again to that 15% figure and how the CRTC arrived at it. As referenced above, to some it is a compromise between the ISPs' request for 50% reduction and the incumbents' desire for 0% or, better, a price increase. Let's now look at how the CRTC arrived at 15%.

10.  However, the Commission considers that, for competitors, carriers’ wholesale UBB rates are an additional, direct, and unavoidable cost that competitors will need to recover from rates paid by their retail customers. The Commission also considers that wholesale UBB charges will result in additional customer care costs for competitors, including a review of the relevant carrier’s wholesale usage records and associated UBB charges.
...
13.  Regarding the amount of the wholesale UBB discount, the Commission considers that if it is too large, the effectiveness of UBB as an economic ITMP will be reduced, while if it is too small, competitors’ capacity to recover costs will be undermined.

14.  The Commission concludes that a discount of 15 percent for carriers’ wholesale UBB rates relative to their retail UBB rates recognizes these considerations appropriately.

Somehow I strongly suspect that no one at the CRTC sweated for weeks over detailed spreadsheet financial models in an attempt to calculate or forecast the true costs to the ISPs of passing through UBB fees or the true network costs of the incumbents. Unlike what I said up above, it may actually be that 15% really is a compromise of sorts, since it certainly isn't based on any real analysis of costs. I can just imagine them talking among themselves, concluding with something like:

[Hmm, 25% is half way between 0% and 50%, but for policy reasons we want to dissuade use of incumbents' network. So lets swing the value a little bit in the incumbents' favour.]

Although I've completely made up this conversational snippet it sure seems to be closer to the truth than anything else I've heard in the past day or two.

So get ready to pay these fees starting 5 weeks from now. According to my calculations in that last article, I calculated the overage fees for going beyond 25 GB starts at $2/GB (it declines at higher volumes). I am assuming that the retail pricing stays as is since that 15% discount will not be passed on to consumers. If the ISPs were to do so they would be seen as having been dishonest in their CRTC submissions where they claimed to need an even greater discount to break even on UBB.

Now compare this to the woes south of the border where the dispute between Level 3 and Comcast continues to rage, leading Netflix to say in a financial disclosure document:

...at $1 per gigabyte over wired networks, it would be grossly overpriced.

Keep in mind that Comcast customers pay UBB after 250 GB, not 25 GB, so that half-price deal looks particularly appealing in comparison to the situation here.

In the US the carriers and service providers also have, and frequently make use of, the ability to take the FCC to court. This is now beginning with Verizon and at least one other company on the closely-related topic of the new network neutrality rules. In Canada the options are more limited.

Tuesday’s ruling is being considered the regulator’s final say on the matter. So any service providers who remain unsatisfied with the new pricing model will likely now have to take their concerns directly to Parliament.

Well, Parliament might care, but the government most certainly will not. They, too, have taken actions in the past to promote facilities-based competition, and despite having little love for the CRTC no one should expect that Stephen Harper is about to jump into this shark tank. This is too minor an issue for them to take the risk in what may be an election year. Besides, I suspect they would far rather be silent to ensure that all of the criticism falls on the Commissioners' heads.

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.

On Reading Orders by Telecommunications Regulators

Going by this site's web statistics, the most popular of my posts are those regarding CRTC rulings and orders. I suspect this is because of the relatively scarcity of in-depth discussion (from what I've found) on the web of actions of the Canadian telecommunications regulator. This is in contrast to the FCC in the US where every slightest movement on their part is analyzed -- whether rigourously or superficially -- by hordes of bloggers and more-mainstream media outlets. I wish there were more attention paid to the CRTC.

For the public, or at least those that pay more than the most casual and passive attention to regulator actions, there is a dilemma: to get beyond superficial, and sometimes misleading, reporting it is necessary to go the source and read the orders and rules that they publish. It seems that not many do this, other than the companies directly subject to those orders and rules. These companies -- typically telecommunications carriers and service providers, but sometimes their major suppliers and customers -- not only read what the regulators publish but are deeply involved in the process and have many specialists and contracters that understand the process and the network of people to influence to achieve their business objectives.

One big reason that few among the public get involved or even just read the material is that it is time-consuming. It is somewhat surprising that there is more of this avoidance in Canada since, in comparison to FCC orders, those by the CRTC are not difficult to digest. The reason is that the CRTC has more latitude than the FCC to both set policy and establish regulations. The US telecommunications regulation process is more politicized and by dint of the governing statutes there are many avenues to take the FCC to court to dispute the legality of their regulations; Congress writes telecom laws that go into an unusual level of technical detail regarding what the FCC is required and permitted to do. This is why the FCC is replete with staff lawyers and far more lawyers are employed by the industry.

A good case in point is the recent FCC Report and Order on network neutrality: FCC 10-201. This is a big document weighing in at 194 pages. It is far easier for the public to wait and read the summaries and analyses in the media and on the web. Unfortunately a number of these analyses are less than ideal since the writer may have an agenda, whether to influence the public or to stir up controversy in an effort to gain readers (aka link bait) and without some knowledge it can be difficult to know whom to trust. (Whether I am trustworthy on that score is moot since, because I see little in the Report and Order I want to comment on, I will not be providing any analysis of it.)

Beyond the mere page count, the core content of the FCC document where staff analyzes the issues and assessing the balance between their objectives, the law and the positions of intervening parties, is full of detailed legal references and written in a manner that is meant to withstand the gauntlet of the justice system. On the positive side, the core content of the document is far less than those 194 pages. That is fairly typical of FCC Reports and Orders. Here's my page count of the various parts of the network neutrality document:

• Table of contents: 1 page
• Discussion and determinations (the core of the document): 83 pages
• Procedural matters: 2 pages
• Rules: 9 pages
• List of commenting parties: 16 pages
• More discussion: 22 pages
• Statements of Commissioners: 60 pages

So there you have it: 9 pages out of 194, or less than 5%, contain rules. This is dwarfed by the 60 pages of Commissioner statements, which are mostly from the Republican dissenters. Unless you are enthralled by the political angle of telecom regulations you will most likely not miss much by skipping these 60 pages. Even less enthralling are the 16 pages of lists of people and companies that participated in the process (such as it was in this instance).

In fact the really interesting stuff isn't actually the rules themselves but the main body of discussion regarding how the FCC reached its determinations. While this is still 83 pages, a very rough guess on my part is that close to 40% of that is footnotes. For the casual (!) reader it is fairly safe to skip those, which leaves about 50 pages of text. This is a less-daunting chore since we have managed to exclude almost 3/4 of the document. A deeper reading of the document, unfortunately, will require reading some of those footnotes, but only the ones that provide background and not those that are legalese that are intended to buttress the FCC's legal position. That isn't so bad.

Although it is possible clear the clutter to reduce the quantity of reading one must do, it does help to understand the unwritten rules of the regulatory and political games underlying the proceeding, and a bit of history regarding how these things tend to unfold. That is one advantage I have since, although years ago, I once participated in these types of US regulatory proceedings. Even so, my guess is that a careful and intelligent reader who is not prone to irrationally clinging to preconceived notions will get a lot more out of the network neutrality debate, or any other contentious regulatory issue, by going to the source and reading the material published by the regulator rather than relying on others; these others may have biases or filters of convenience that distort their reporting or analysis.

The downside is the modest time and effort required to read these documents. My experience tells me that the learning curve isn't steep, so after the first one or two it gets much easier -- there is even a sort of primer in the case of the network neutrality order in the form of a 5 page press release. If you care deeply about network neutrality, usage-based billing or one of the many other current issues being considered by US and Canadian telecom regulators, reading the core content of these publications can be time well spent.

Plausible Deniability in Telemarketing

By now I'm sure that everyone has heard about the fines levied by the CRTC for do-not-call registry violations by Bell Canada, Telus and various firms that they contracted. The only real surprise to me in this matter is that the CRTC took enforcement action of any significant degree.

Although the CRTC claims that these fines -- $1.3M in the case of Bell Canada -- will hurt these firms, it really does not. Not only are these amounts very small relative to their overall business, considering the degree and duration of these violations it is also quite possible they made a net revenue gain after paying the fines. The only company that may have been hurt badly is Xentel, which was fined $500,000 since it is a far smaller company.

The style of enforcement is interesting since it resembles the actions taken in the US by the FCC when they began enforcement of their DNC regulations. First, they targetted large companies, including carriers like AT&T, and also DBS (direct broadcast satellite) providers, and they timed and bundled enforcement actions to maximum media impact. This is an effective tactic to combat public unhappiness with ongoing DNC violations. Going after the biggest companies, especially those that are dominant in their sectors, also works well since there is always an undercurrent of distrust and dislike of these companies that we are often unable to avoiding giving our business. The CRTC might therefore have adopted their own tactics in hopes of achieving the same positive public relations impact.

There is also the simple fact that large companies, if only because of the size of their businesses, are going to show up in the list of top offenders.

...the wireless sector had the distinction of taking the top three spots with Rogers and Telus ranking second and third respectively. There were also hundreds of complaints against Canada's top financial institutions and retailers including RBC, CIBC, Scotiabank, TD Canada Trust, and Sears.

Regarding the companies themselves, it is not unusual for companies like Bell Canada and Telus to outsource what they would consider non-core functions. It allows them to maintain business flexibility by contracting services as needed without building up an in-house telemarketing operation -- including the bad optics of then laying them off.

It also has a further advantage of giving them plausible deniability when the CRTC comes knocking. This allows them to claim that the contracted companies were renegades that (plausibly) violated the DNC regulations without explicit direction from themselves.

On Monday, Bell said it had terminated contracts with two telemarketing companies and suspended “several others” as a result of the investigation. Like Telus, Bell pledged to stiffen guidelines for telemarketing practices.

The deniability is plausible, but I simply do not believe that they did not know of or contribute to the violations by the contracted companies. I am not implying that they gave their contractors explicit directions to ignore the DNC registry, only that I can easily imagine there was a bit of "nudge, nudge, wink, wink" going on in parallel with the more formal instructions. Consider these points:

• The duration of the violations.
• The reputation of some of these firms is not always the best. They are often known to be aggressive in their methods for their other customers, such as charities. They would also have known which numbers were most likely to get a positive response from their historical database, although I of course don't know if they used that data in their contracts with the telcos. I can only suspect the possibility.
• Many of the numbers from which the telemarketers won business for the telcos must have been on the DNC list, and telcos should have known it. I'll bet they were careful not to cross-check the two lists.
• Worse, many of those numbers must have also been on the companies' own opt-out lists of people that explicitly requested that they not be contacted. The CRTC mentioned this point, though not quite in the same context.

Although plausible deniability does not excuse Bell Canada and Telus from paying fines and making other restitution -- and I doubt that they would have ever thought it would -- it does help them smooth over the inevitable public outrage by (as shown above) promising to do better in their contracting practices in future. In other words, they take responsibility while also shifting the ultimate blame to others. I think it is more likely that they knew exactly what they were doing and set things up so they could offer the plausible deniability excuse when trouble struck. The script they're following looks too perfect to support their innocence. However this is only my speculation, not an accusation.

Central Banks vs. Public Debt

Imagine that there is a car in front of you that is suffering from a range of mechanical ills: wheels out of alignment; needs an oil change; transmission won't reliably shift into reverse; and so on. Someone then places a tool in your hand and tells you to get to work. You look down and what you see is that you're holding an impact wrench. It's a very powerful tool but wholly inappropriate for most of the work ahead of you. However, it's all you have so, good luck, and give it your best shot.

Central banks are often in a similar dilemma: the economy can suffer from a variety of ills due to many and complex causes and inter-relationships, yet they must attempt to get the economy back on track with pretty much one tool, that of monetary policy. They are often smart enough to do the best they can with the tools they have but without access to a wrench and other useful tools there is a limit to what they can realistically accomplish. Often they must resort to leveraging the grand stature of their institution by giving speeches and influencing those holding the proper tools -- industry, consumers and government -- to effect desired outcomes.

Consider this quote from Peter Foster's opinion piece in the Financial Post:

“Cheap money is not a long-term growth strategy,” warned Mr. Carney during a speech in Toronto on Monday. But where did this cheap money originate? Also, from what I can remember of economics 101, cheapness is a signal to purchasers to buy, and that includes buying money. People are acting entirely rationally. The only problem is that they are likely not aware that they may have been lured into a cul-de-sac by delusions of macro management.

And this one by Maxime Bernier, also in the Financial Post:

Mr. Carney offers us three “lines of defence” that are clearly an admission of impotence.

Here we have Bernier, a government MP and former cabinet minister, complaining about the BOC's impotence when it is the government which sets the BOC's powers. It is amusing that he then goes on to complain as follows, in effect the pot calling the kettle black. For his part, Foster blames Mark Carney for only having, and then using, the limited toolkit he's been provided with by the government (elsewhere in the piece, he also seems to be confused about the respective roles and powers of the BOC and the federal government).

It is the government, not the central bank, that has the better toolkit for repairing the economy. This starts with building confidence among the true economic players: citizens, both as consumers and business owners. They could also use their powers over taxation which can be used to more accurately target problem areas than is possible with the central bank's interest rate policies. For example, the government could lower corporate tax rates, which would have the affect of encouraging private sector investment and hiring similar to lower interest rates, but without simultaneously encouraging borrowing. That is, leave more capital in the hands of those entities that can give the economy the push it needs.

There have been attempts by the BOC and the government to blame the banks since they are the ones we go to for our borrowing needs. This is unfair: the banks lend money as a business proposition and make loan decisions based on risks associated with both the broader economy and the individual borrower. Ed Clark, CEO of TD Bank has quite rightly deflected the criticism right back at the government. The points he raises in this article are spot on in my opinion. If the government, for example, wants to rein in low-quality mortgage risk -- most commonly associated with the longest-terms with their lower monthly payments but high interest costs -- they should prohibit them.

Speaking of blame, we should also beware playing the blame game when it comes to the US Federal Reserve or the Bank of Canada. It is easy to point fingers and they are tempting targets. Yet they would have an impossible task if they are the only institution expected to right what everyone else has set wrong. They can ease interest rates lower to make it less expensive for consumers and businesses to spend and invest, but that policy can spark investment bubbles and inflation. Go the other way and, as happened so famously following the 1929 crash, and we can be pushed into a deep depression. Finding an optimal middle ground, if it even exists, is more than a little challenging for a central bank.

Even so, Mark Carney is not being entirely forthright regarding debt and, as I will come to, neither is the government. The Governor's warning goes something like this:

When rates do begin to rise again, Carney said, the repercussions may be fierce and have the potential to catch many with debt loads they can no longer afford.

This is true and, although there are words of agreement from Flaherty, there is no mention of the government's own debt problem. They tell us, as individuals and as business owners, to be careful not to take on debt that we cannot easily repay when interest rates rise once more, while at the same time the federal government is taking on over $50B of debt in the current fiscal year. That is not really government debt; that is public debt. On our behalf the government is borrowing money against the wealth and wealth-production capacity of the Canadian public. That debt, too, could easily become difficult to repay when interest rates rise.

There is a measure of hypocrisy when they fail to discuss government-incurred debt, debt which is also our debt and subject to the same risks. I do not mean to criticize the government having used this debt to smooth over the worst impacts of the economic air pocket we've just been through, just that they should not avoid lecturing themselves at the same time they lecture us. The lecture is a good one for both the private and the public sectors.

The thing is that Flaherty does intend to rein in spending, eventually, and so he has missed an excellent opportunity to lead by example and explain how both types of debt are due to public borrowing. Perhaps he is being cynical in an attempt to retain some flexibility to keep spending, and taking on more public debt, for a while longer.

The question is even more pertinent in the United States where Federal Reserve Chairman Bernanke is thinking of the extreme government debt policies he has been pushing, including financial sector bail-outs, which very much depend on keeping interest rates low at least until some of that debt can be extinguished. We had all better hope that he does a good job of juggling interest rates and debt policies since if he or the US government stumbles the Canadian economy will also suffer.

Influencing Network Neutrality Outcomes

One thing you will likely notice when you pay close attention to any public policy discussion is that every party to the discussion will attempt to steer the outcome in a direction that serves their own interests. This is especially evident when there are different and divergent views. A common technique is to frame (or spin) the very definitions of the foundational ideas and catch-phrases to align with their preferred mode of thinking about the issues. This is equally true when it comes to network neutrality.

I my previous article I drew attention to this definitional issue. The issue exists because there is no broadly-accepted or legal definition of the term network neutrality; the legal definition is the more important of the two since it will persist and be enforcable even when discussion becomes confused. In the article before that one I listed a few major alternative, but not necessarily mutually-exclusive meanings of network neutrality. Every party to the discussion tends to list of wants in their particular definition of the term, and this is true whether it is consumers, carriers, content providers, the FCC and politicians. Even academics and industry analysts need to watched carefully since many are not neutral on neutrality; many have identifiable interests or ideological perspectives that can bias what they say, and the media tends to highlight those with the more extreme views.

Interested parties are therefore angling for influence and see the public relations battle as one where they want the prevailing understanding of network neutrality to align with their interests. It is also important to note that in addition to defining network neutrality, they also wish to define what it is not. For example, a network owner with media interests (such as Comcast or Bell Canada) might like to exclude equal traffic priority for other content providers from the network neutrality debate.

When these companies wish to create public support for their ideas they will target their messages accordingly. For the peoples' representatives in political office they will talk of (and exaggerate) the number of jobs and economic activity, including taxes, for which their industry is directly and indirectly responsible. However they will often choose to not mention the future potential for economic growth if other industries and business models are enabled by forms of network neutrality that are less friendly to their business interests. Being well-established with deep pockets they also have the capacity to contribute to politician and party campaign funds, and that gets them a degree of access and influence that may not be available to others.

They will also stoop lower to get the public support they need. For example, they might announce that if they can't throttle, otherwise manage or charge extra for heavy-duty downloaders -- which network neutrality, they say, will make impossible -- the pipes will get blocked up and you, dear user, will have trouble downloading dancing baby videos from YouTube. "Oh noes!" You might say to yourself, that's unthinkable, so of course network neutrality shouldn't allow that from happening:

Fourth: Network management. ISPs need incentives to run their networks, and we want those networks to be the “freest and fastest in the world.” Therefore, “reasonable network management" will be allowed in order to deal with harmful traffic, congestion, and other network problems. Again, we'll need to wait for the rules to see what might count as reasonable and what might not, and who decides.

The regulator itself is a party which has its own self-interest to protect. It is said that the first priority of any bureaucracy is to continue its existence. Therefore in the coming meeting we should expect the FCC to promote a view of network neutrality that requires FCC oversight, ensuring their continued relevance for years to come. Their task isn't easy since they must navigate the obstacle course of unfriendly politicians and industry power to develop policies and regulations that also maximize consumer interest and the national interest. All you have to do is read through last week's statement by FCC Chairman Genachowski. Consider, for example, the following sentence:

Informed by the staff’s additional legal analysis and the extensive comments on this issue over the past year, the proposal is grounded in a variety of provisions of the communications laws, but would not reclassify broadband as a Title II telecommunications service.

Notice how they've backtracked on reclassifying broadband as a telecommunications service, and therefore the non-discrimination aspects of common carrier law, to appease voices in Congress that want to assert their own power to determine policy. Statements like these are a good way to keep score regarding how successfully the various interests are wielding influence.

It isn't just the FCC that has to navigate the minefield: the same applies to the industry players themselves. Think back a couple of months to when Verizon and Google published a joint position on network neutrality. The predominating reaction that I noticed was one of outrage from the public, and even some of the companies that compete with one or both of these behemoths. The FCC itself was more circumspect. At the time I mentioned that this was one was to promote progress on a contentious public policy debate since the regulator and the government are potentially freed from having to (unavoidably) upsetting the status quo, creating both winners and losers; if the contenders agree up-front, that can create the conditions for an acceptable compromise.

The reality of joint-company proposals such as that by Verizon and Google are unfortunately less than they may seem. It is most enlightening to actually read the statement. I recommend doing so although it's a painful document to peruse. The reason that it is painful is not because the joint proposal is so terrible, but because it is so vague. Ultimately it is almost useless since it gives little of concrete value for the FCC to deal with. Let me pick one pseudo-random passage to highlight this point:

Additional Online Services: A provider that offers a broadband Internet access service complying with the above principles could offer any other additional or differentiated services. Such other services would have to be distinguishable in scope and purpose from broadband Internet access service, but could make use of or access Internet content, applications or services and could include traffic prioritization. The FCC would publish an annual report on the effect of 2 these additional services, and immediately report if it finds at any time that these services threaten the meaningful availability of broadband Internet access services or have been devised or promoted in a manner designed to evade these consumer protections.

Take a moment and try to parse that text. This is vague beyond reason and is wholly unsuitable as guidance on effective regulatory enforcement. It wouldn't, for example, stop Comcast from favouring its (coming soon) NBC Universal content by applying "traffic management" if it were to make the sort of charges it recently made against Level 3, and therefore Netflix, a competing content provider. Even their recommendations on FCC enforcement provisions are weak by making them conditional and fines which are (for the companies involved) inexpensive. A lesson here is that companies that compete to some degree are often not much better than a third party, including regulators, to find a middle ground that most would at least grudgingly accept; disparate and competing interests are inherently unresolvable if the objective is winner-take-all. I don't believe anyone should worry overmuch about how much impact the joint Verizon-Google will have.

When there is a joint proposal, or at least some grudging agreement among competitors, sometimes it does matter. Although it is fair game for companies to attempt to directly influence the regulator through the formal process -- you can't oppose this speech just because you don't like their message -- there is (at least) one way in which it can be judged as less than fair. To show this I have to backtrack a bit on something I said last month:

...the cable companies had to support the telcos so that the CRTC would be encouraged to choose the option that most benefited them...

Joint company proposals to the regulator (the CRTC in the above case) when they come from competitors can, in one sense, be seen as promoting progress on a controversial topic such as network neutrality. However, sometimes when competitors agree they do so to give the impression that the issue is resolvable since the regulator should not have to deal with the tricky issue of balancing the interests of competitors, large and small, new and incumbent. This is normally the minefield where the regulator often makes the mistake of choosing favourites among technologies and business models in an attempt to promote competition without unduly giving anyone an advantage.

The potential trouble is when the joint company position, if adopted by the regulator, has the effect of further entrenching those companies in a way that disadvantages consumers, other competitors or the greater public good. For example, if Bell Mobility and Rogers Wireless were to propose a (hypothetical) CRTC-mandated "network improvement fee" of $100/month on every subscriber's bill, they would achieve network parity, massively increase their revenue and make fruitless the lower prices of new wireless carriers. While this is of course a pretty extreme example that would never happen, it helps to illustrate the possible threat represented by the more-nuanced one to the FCC by Google and Verizon on network neutrality.

The machinations and vague threats that are now coming more and more frequently will not abate during the coming FCC meeting and subsequent rule-making process. It's terribly irritating but also important. Unfortunately the voices of the large companies and their interests are likely to drown out the quieter, more dispersed voices of the public, at least those in the public who can afford to pay attention and see past the spin.

The effect will be to manufacture what will be called the public good rather than focusing on what is good for the public. Of course the debate itself would be superfluous if there were more competitive choices since the companies would have to serve the public interest to avoid losing customers. Failing that, regulation is the second choice, poor though as it so often is.

Comcast vs. Level 3 vs. Network Neutrality

My preceding article on the bafflegab that follows the network neutrality debate like a malevolent black cloud only briefly touched on the brewing dispute between Comcast and Level 3. Within hours it has blown up into a widely-covered issue that, in the spirit of the bafflegab I talked about, is being used by many to trumpet their own entrenched position in the internet food chain. I had intended today to build upon the theme I introduced in yesterday's post, but this dispute simply provides too good opportunity to highlight a few key items in these companies' war of words that fit well with the theme I introduced.

First off, I do not intend to do what others are already doing; there are a few (maybe more) excellent articles that dig deeper into what the dispute is really about, but that may get drowned out in the flood of media coverage. There is one in particular I want to recommend, which was published by Ars Technica, that is short, lucid and does a good job of covering off the deeper nuances of the dispute and also provides references to some more comprehensive background material. If you want to learn more rather than merely pick sides in the fight, go read it.

There is only one sentence that I want to mention here since it goes to the heart of just what network neutrality is all about:

The DC group Public Knowledge blasted Comcast's stance as a net neutrality violation.

I like this since it is such pure nonsense. The thing is, there is no commonly-accepted definition of network neutrality when it comes to the internet -- which includes access, transport and services -- and there is certainly no law on the books that anyone is violating. That statement is mere misdirection with the apparent intent to sway others towards Public Knowledge's position.

To understand this more deeply we need to look at just how the internet is assembled -- the Ars Technica article provides better references so look there if you want more than the following brief and somewhat superficial description. The internet was originally constructed of autonomous systems that interconnected by mutual agreement for the mutual benefit of their users, irrespective of each system's size, public or private or government, using data connections whose cost was either shared in some fashion or covered by one of the two parties. The telco monopolies, which were common carriers, that provided those long-haul and short-haul transport facilities had no interest whatsoever in what was being carried; they billed for the transport and never even saw what was inside those pipes. This is peering in its simplest form.

As the internet opened to the public, the structure had to evolve. First, ISPs came on the scene with their racks full of modem banks and oodles of telco business lines that users dialed to access the internet and local ISP services like email. Those phone lines were subscribed by public tariff and were subject to the telco's common carrier responsibilities; that is, the telco had no choice but to offer those business lines as long as their network equipment wasn't harmed. At first this was good business since it brought a lot of new revenue, both from the ISP lines and all the second lines that residential customers installed for their computers.

The ISPs negotiated peering agreements with other ISPs to mutually terminate traffic to their customers, which included both users and services, and to route traffic to other ISPs further removed, even across the globe. The industry moved toward more stratification between access ISPs that served users, backbone providers that only provided transport and routing between access ISPs and other backbone providers, and service providers that provided the content that users wanted to access.

Backbone providers found it easy to peer among themselves since their traffic flows tended to be similar in both directions, and not charging for that traffic made sense since the burden of accounting could be dispensed with and the monthly net tended towards zero. The traffic differential between access ISP and backbone providers increasingly became unbalanced since as users accessed services that utilized the increasing access bandwidth they did not transmit much data upstream. Besides, since the backbone providers could not cover their business costs by peering, they charged the access ISPs for their services; but not for the raw transport, which the ISP alone was responsible for by contracting with a telecommunication provider, which was usually a telco or a raw transport provider such as MCI.

Notice that in none of this did I mention regulation once. That's because there was none. The data transport facilities that everyone used came from common carriers of one sort or another, but while the common carriers were tightly regulated the users of their transport services were not. It's the same whenever you pick up the phone and call someone; the telco provides a tariffed service as a common carrier but you are not regulated. The common carrier does not and, importantly, must not concern itself with how you are using that tariffed service. If they do get involved then they are almost certainly breaking one or more conditions of their licenses or even the law.

Because unlike network neutrality, common carrier has a definition in law and is enforced through government licensing and oversight, complete with penalties for non-compliance. However there is a benefit to the common carriers because even if you use a common carrier service to commit a crime (such as making a drug deal or arranging a murder) the carrier is protected by law from any liability; you can't sue Bell Canada because someone used their services to commit a criminal or civil offense that causes you harm. Similar legal protections have been extended to  ISPs and related services in the US for nearly 15 years by means of Section 230 of the Communications Act, although they are not common carriers.

Getting back to the evolution of the internet, as the business potential grew large and broadband replaced dial-up, through a multi-year frenzy of mergers, acquisitions and emergence of new business models, we now have the carriers in an enviable dominant position where they have the power to dictate terms to others. They have a pretty solid lock on access and transport, wireline and wireless, where they are (as Broadband Reports puts it) the "troll-under-the-bridge. They almost always stand between end users and web-based services, and they are unencumbered by common carrier regulations: the regulations are not applied to corporate entities, but selectively to each line of business that provides those particular services. For example, Verizon is a common carrier but also an ISP. The same applies to Level 3 with their transport and telephony services distinct from their routing and CDN services.

This last point is where an important nuance comes up in the dispute between Comcast and Level 3. Level 3 has a financial advantage over pure CDNs like Akamai since they can "sell" transport and routing between business units at a discount to what they offer to other companies. This may have helped them win Netflix business from Akamai. From Comcast's perspective, they do have a legitimate issue with regard to peering with Level 3 since, due to their CDN business, we would expect the traffic imbalance to be greater than with other backbone providers and ISPs.

Now, Level 3 proposes to send traffic to Comcast at a 5:1 ratio over what Comcast sends to Level 3, so Comcast is proposing the same type of commercial solution endorsed by Level 3. Comcast is meeting with Level 3 later this week for that purpose. We are happy to maintain a balanced, no-cost traffic exchange with Level 3. However, when one provider exploits this type of relationship by pushing the burden of massive traffic growth onto the other provider and its customers, we believe this is not fair.

Of course there is already an imbalance that any pure access ISP like Comcast will see since the bulk of their customers are end users that primarily download from content served by other ISPs. There is nothing to stop Comcast from getting into the content hosting business, it just isn't what they've chosen to do. The traffic imbalance is not due to any nefarious action on Level 3's part, just a natural consequence of Comcast's and Level 3's respective business priorities. Recall that none of this is regulated; while each company does have some FCC regulated business (Comcast's cable TV business and Level 3's transport business) their internet and broadband businesses are pretty much unanswerable to government regulators. Each company chooses its business activities as it sees fit with regard to internet.

To be more blunt, this dispute, which has nothing to do with network neutrality and where peering is optional not mandated by law, is almost entirely a private commercial contract negotiation between two companies. Neither is above slinging around terms like network neutrality, monopoly and fairness if doing so wins them political and public allies to buttress their side of the negotiations. Here's part of what Level 3 has to say:

John Ryan, Assistant Chief Legal Officer of Level 3 Communications, Inc.: "...the fundamental issue is whether Comcast, as the largest cable company in the country with absolute control over access to its cable TV and broadband access subscribers, has the right to unilaterally set a 'price' for that access that effectively discriminates against competitors of Comcast’s cable and Xfinity content..."

Notice how Level 3 tries to drag in Comcast's regulated business activities by insinuating that there is "leakage" between their regulated and unregulated business units which, if true, would justifiably draw government investigation.

The stakes for Comcast are quite high in this game of brinkmanship. While they do have a dominant position as gatekeeper to a huge body of internet access customers, just as they do for TV content distribution, and they are making inroads against the telcos by winning away telephony business, they are in fact surprisingly vulnerable. First, there is the talk about "cord cutters", which are customers, especially 20- and 30-somethings, that are showing signs of abandoning cable services -- TV, broadband and telephony -- since prices keep rising, customer service is awful, and their services are increasingly redundant with wireless voice and data. In other words, why pay for both if you favour internet media over TV and one device, the smart phone, gives you everything you need everywhere you go? Comcast doesn't have a wireless business. Further, even at the high prices charged for tethering, it can be the superior and cheaper choice to connect a PC or netbook to the internet (when a larger screen makes sense) in comparison to paying two broadband bills.

Even worse for Comcast is if the FCC and Congress feels that companies like Comcast are becoming overly aggressive their broadband billing and content practices for a service that is now seen as a pretty essential utility. Political influence goes only so far, and that is when the voters start shouting for Comcast's blood and want the government to take action.

Once they complete the acquisition of NBC Universal, if they continue to jack up cable and broadband rates, offer poor service and use their growing control over content, both TV and internet-based, to their own advantage, they might find they've painted themselves into a corner they can't their way out of. Not only is it more likely that the FCC will pursue turning broadband into a common carrier service, they may get the Congressional support that they need and currently lack. Worse, it is even conceivable, if still very unlikely, that the FCC could invoke Title VI of the Communications Act  and mandate "must carry" for internet media content (Hulu, YouTube, Netflix, etc.) in a manner similar to cable channels if Comcast is too aggressive in prioritizing content of those willing to pay them a premium. Companies with a dominant or monopoly position providing an essential service do have to take care to not cross that invisible and shifting line in the sand that will signal an end to government indifference.

Ultimately it is the consumer that will pay for all of this since all business costs are passed along in one way or another to end user, and governments know this:

This is a problem the Congress and regulators cannot ignore. Just as in the recent retransmission fights in the pay TV world, these rumblings between giant companies leaves consumers in the lurch, even though they’ve actually paid for access to the Internet — that is, the whole Internet, not one approved by Comcast or some other company. The problem, of course, is lack of competition in the broadband markets.

Network neutrality is just a word (or two), and no matter how much it is used to misdirect and obfuscate and attack a company's competitors, the real metric is when the howls of the public become audible in Washington. This is about politics and voter dissatisfaction; network neutrality is a definitional sideshow that should not distract our attention from the real issues at stake in disputes such as that between Comcast and Level 3.

Tactical Misdirection in the Network Neutrality Debate

As the FCC proceeding on network neutrality gets closer to a critical point it is interesting to witness how the contending parties are attempting to influence the regulator, Congress and the public. These generally fit within the following categories:

1. Obfuscate the issue so that it becomes difficult to impossible to discern what network neutrality actually is and, when confusion is successfully established, offer a clear and simple solution which coincidentally (!) benefits the proposing party or at least is disadvantageous to its competitors.
2. Obfuscate another's obfuscation of the core issues (see previous point) and then offer a clear and simple solution which... well, you can fill in the rest.
3. Disentangle and clarify the core issues so that everyone can have a clear understanding of the numerous technical and business aspects of network neutrality. Sometimes this is done in an effort to facilitate the discussions but can sometimes be used to promote an agenda. The agenda may be to maximize the public good, but that is still an agenda.

Perhaps a simpler way of saying this that everyone has an agenda and will do what it takes to promote that agenda, even if occasionally one must go so far to even resort to the truth! Unfortunately the volume and quantity of proposals, attacks, misdirections and often poorly-informed reporting makes it difficult for the targets of all this (mis)information to understand anything other than what the best-placed voices want them to conclude. In other words, the public discourse on network neutrality is not only a mess, it's a political mess.

The FCC is quite used to putting up with attacks from the public, industry and Congress. While some of it is justified, it is also true that there are many competent people on staff that understand the issues perfectly well. With perception being reality (as the saying goes) they end up spending much of their time fending off the attacks rather than crafting good public policy that is in accord with the letter and spirit of the law. That, of course, is the objective of those attacks; while the FCC gets knocked around the key players, those that stand to gain or lose from what the FCC ultimately decides are busy influencing the politicians who are in a position to make their interests take precedence in the FCC's deliberations. Politics and regulations are inseparable, whether the industry is telecommunications, resource extraction, banking or pharmaceuticals. This isn't going to change.

Despite the sorry state of affairs, allow me to briefly describe what I believe are a few of the key industry issues that get bundled under the network neutrality banner, since they are so often obfuscated, conflated, misrepresented or otherwise mangled by so many of the antagonists.

• Carrier control over vertical services: It is always in the carrier's interest to be the provider of all services offered to the public over their networks. Vertical services -- value-added services over and above raw carriage -- have higher margins than transporting bits. This should be apparent if you think about it, although I went so far as to calculate the added benefit years ago when the array of services was much smaller than today. Even better is if the carrier not only offer these services but also can exclude others from offering these services over their networks. This is why the FCC's intent to reclassify broadband under common carrier regulations is bringing out the big guns in political lobbying. This is also why Bell Canada is so opposed to GAS-enabled 3rd-party ISPs and why Bell Canada toyed with building a content empire, including CTV, and Comcast is acquiring NBC. However it is possible to push too hard and suffer what Australian government has just done to Telstra by splitting wholesale (network utility) from retails (vertical services). Yes, sometimes governments really do try to favour consumers over major corporations.
  
• Traffic management: Every carrier requires mechanisms to manage network performance so that no one user sees more their share of service degradation; network capacity is always finite -- even though it is expandable, within the bounds of reasonable capital expenditures -- and there is always the risk of one user's activity impacting the service quality of other users. This is especially true for broadband, more so than telephony, because there is a wide range in volume and timing of traffic demand across the user base. The problem comes when traffic management is surreptitiously employed to favour the carrier's own business interests over that of other services that their broadband users choose to access, even if they are not directly competitive with equivalent services offered by the carrier. It has been surreptitious or even misrepresented because blatant discrimination can result in serious political fallout and harm their long-term interests if the government feels compelled to quell voter outrage with some heavy-handed market intervention. Traffic management will remain an issue even if broadband falls under common carrier regulation because it is so much of a cat-and-mouse game where the carrier has all the control and outsiders are hard-pressed to prove a solid pattern of discrimination.
  
• Volume and speed pricing: When control over vertical services and traffic management are prohibited or otherwise fail to glean the revenue and market control the carriers would like, they can in the end resort to pricing strategies. These fall into the categories of usage-based billing (UBB) and speed tiers where the more data you consume and the higher the access speed you desire, the more you pay. If (and I mean if) the carriers are truly relegated to the role of broadband utility with no competitive vertical services and no ability to throttle selected applications, it can be reasonably argued that pricing should be in proportion to network load. Where this crosses the line into the realm of network neutrality is when they price by volume and speed in a manner that is implicitly discriminatory, especially if they pursue this strategy in parallel with offering competitive vertical services. This has come up time and time again in the CRTC proceedings on Bell Canada's GAS technology coverage and traffic management practices where the accusation is that if they do not similarly throttle or price their own retail services then they are ensuring 3rd-party ISPs offer an inferior service. Also telling is how carriers position and promote volume and speed tiers that can inherently place a monetary burden (or at least allegedly) on users that subscribe to services such as Netflix, where there is in effect an extra charge to the user for downloading a movie or other bandwidth-intensive media. That is, even if the carrier isn't or is prohibited from these high-value vertical services, by pricing broadband with surgical precision they directly derive revenue from those services. Precision is required since if the price-volume boundaries are too aggressive, the majority of users will be hit even though these types of services currently have low penetration (although this will change) or, in the other direction, they will fail to garner the desired revenue from carriage of those services. That is, they want to get paid but without attracting unwanted attention from the regulator. This is the reason they make a public show of all the pain they feel when a (current) minority of users use these services. If successfully executed, the regulator doesn't act and their revenue will climb substantially in the coming years. Of course if they offer competitive media services they can even double dip.

Apart from the tactics I listed at the beginning of this article I was planning to say a bit more about how the US carriers are manipulating the regulatory proceedings and political process on network neutrality to get what they want, but I've run out of time. I'll come back to this in a day or two.

To end this article I will repeat a point that I (and many others) have stated: in a truly competitive market there is no need for regulations over company business practices and services since market forces alone will compel all companies to lower prices and offer more and better services if they intend to survive and maximize shareholder value. We are still a long way from achieving that in the telecommunications industry despite what many of dominant carriers would like us to believe. There are few enough choices for consumers to reach the content and services they desire that all these political games do have a major impact. The fight for and against network neutrality will be with us for years to come.

Rural Broadband: CRTC Decision 2010-805

With the number of articles I've written recently on CRTC actions you might imagine that I follow them quite closely. In actuality I don't. Typically I peruse the major online news media and trade publications on a regular basis, and if I notice an article related to Canadian telecommunications (an interest of mine) I may then skim it for any potentially interesting content. If it's interesting enough I may search for related material, and if it looks worth commenting on I will go to the source -- the CRTC documents -- to see what they're up to. (The CRTC does have a what's new page but I don't read it and, as far as I can see, they don't supply an RSS feed.)

It was in this fashion that I came across CRTC Decision 2010-805 on rural broadband last week. Although this is an important topic in its own right, it isn't one that especially interests me; it was something else about the decision that caught my eye since it said something about how the CRTC operates.

I'll come to that in a moment, but first let's briefly look at what the decision itself is about. Much of rural Canada is (using CRTC parlance) in high-cost serving areas (HCSA). The density is low, the wires are long and even wireless captures fewer customers per tower. Once you leave towns and cities, and are not on a major transportation corridor, not only do you often not have access to broadband service or cable, you are also very often without cell phone service. This is quite a challenge to any objective to extend broadband services to these areas. In light of this, and a pool of over $300M that was slated be rebated to overcharged Bell Canada customers, the CRTC would like to see this used to extend broadband service to 112 rural communities in Ontario and Quebec.

9.      In Telecom Decision 2010-637, the Commission indicated that the Bell companies’ original proposal to use HSPA wireless technology to provide broadband services in the approved communities (the original proposal) did not satisfy the Commission's requirements as set out in the deferral account decisions. Specifically, the Commission indicated that the original proposal did not offer features comparable to broadband service in urban areas such as (i) a variety of service options, including various speeds and usage caps, (ii) an option for a greater than 2 gigabyte (GB) monthly usage allowance, and (iii) an insurance option that would provide an extra 40 GBs of usage for $5 per month. The Commission also considered that the original proposal would not represent the use of least-cost technology. The Commission therefore approved the use of wireline DSL technology and fixed the amount of funds available for broadband expansion at $306.3 million to serve all of the approved communities.

This is in fact our money (if you're a Bell Canada telephony customer in these provinces) since it should never have gone to Bell Canada in the first place. However that doesn't terribly concern me since, while it sounds like a lot of money, that $306.3M is only about $15 per person or perhaps $40 per average household. Despite the modest amount of money involved, it does worry me that the CRTC would use their power over the telcos to decide that money (our money) should be used to further a broader policy objective. This ought to be a political policy decision rather than a regulatory directive to Bell Canada to invest it elsewhere. Even if we concede that the initiative is worthy of this use of our money, it is still only a fraction of what it will cost to truly extend broadband throughout rural Canada.

Mr. Garneau's remarks before the commission are important mainly because significant broadband policy, from the regulator or from Parliament, would require hundreds of millions of dollars, possibly billions, from the federal government...MTS Allstream, a Winnipeg-based service provider, suggested during the hearing last week that this could cost upwards of $7-billion.
...
“If telecom providers are permitted to pick and choose customers and areas they want to serve, all efforts to achieve universal, affordable broadband are doomed,” said John Lawford, counsel with the Public Interest Advocacy Centre, an Ottawa-based consumer advocacy group.

The carriers will, quite reasonably, target service for areas and customers where there is profit to be made. Where it isn't profitable or insufficiently profitable in comparison to making the same investment elsewhere, it is good business to not invest in rural broadband. If the government decides, for policy reasons, that rural broadband is desirable, it should be funded from the public purse -- the general tax base -- like any other program. That is, the government pays the carriers to deploy rural broadband. These types of programs can easily turn into a morass if not handled properly, as evidenced by the corruption-plagued USF (universal service fund) in the US. We don't want to repeat that here.

By now you are thinking that this is what caught my interest about CRTC Decision 2010-805, but it isn't. Instead it is an inconsistency between this decision and an earlier one on high-speed wholesale: CRTC Decision 2010-632, which I wrote an article on, and another on the comments of one of the commissioners. Here is the passage of that earlier decision that I found contradictory to the present one:

Competition drives innovation and provides consumers with a choice of service providers and service characteristics. The Commission notes that ILECs and cable carriers are offering their retail Internet services at increasingly higher speeds. The Commission considers that, at present, retail Internet service competition results primarily from services provisioned using wireline facilities. Other retail Internet services, such as those offered using wireless and satellite facilities, are not generally substitutes for wireline facilities at this time.

In that decision, CRTC said that wireless was not a suitable alternative for wired broadband service, cable or DSL. This was a point of contention in 2010-805, where Bell Canada pushed for HSPA+ (wireless) service as the appropriate technology to extend broadband for those 112 communities. The CRTC agreed! Not only did they agree, they further departed from their earlier decision by requiring third-party ISPs access to that technology using GAS.

11.  Bell Canada indicated that it would also file a tariff to provide access to wholesale HSPA+ wireless broadband services under similar terms of service characteristics as the Bell companies’ existing Gateway Access Service (GAS),[5] in order to allow competitive providers the ability to offer retail broadband services to end-users.[6]

The reasoning presented by the CRTC in 2010-805 does not make clear why wireless is appropriate for these rural communities and for GAS and, further, they make no reference to 2010-632. This is quite interesting. What it really exemplifies to me is the CRTC latitude to make poorly-reasoned and inconsistent decisions without any political consequences. The situation is very different in the US where FCC decisions are frequently and vociferously criticized by members of Congress and even other branches of the government, and their rulings often end up in federal court. It is not surprising that the FCC employs many lawyers to carefully argue their decisions on the basis of legal statutes.

Unlike is another recent decision, this time the cable companies were very critical of Bell Canada proposal to use HSPA+ for rural broadband.

13.  Barrett, EastLink, RCI, and Videotron opposed the revised proposal. These parties submitted that, while they supported the principle of technological neutrality, the Bell companies should deploy a wireline DSL solution as originally directed by the Commission.

14.  RCI and Videotron submitted that HSPA services are now, or are expected to be, available from Bell Canada, RCI, and Videotron in most of the approved communities. As such, they argued that it would be inconsistent with the deferral account decisions to approve the revised proposal in order to fund broadband service where such services are already offered.

15.  Barrett also argued that the Bell companies should be required to provide access to individual components of the wholesale HSPA+ service, rather than the proposed aggregated solution.

16.  EastLink and Videotron argued that approving the revised proposal would result in the subsidization of Bell Canada’s mobile voice service. They indicated that it would be inconsistent with the Policy Direction[7] to distort the competitive market for mobile voice services in the approved communities by funding a technology that could provide both voice and data services.

17.  Barrett, RCI, and Videotron submitted that the revised proposal does not adhere to other principles in the deferral account decisions, as it does not represent the use of least-cost technology to deploy broadband services. These parties argued that alternative broadband service providers could provide a comparable service at significantly less cost than Bell Canada, and submitted that if the Commission approves the revised proposal, it should allow for competitive bidding to see whether other companies could provide the HSPA+ service at less cost.

I suspect they are right to level these criticisms. It does seem unfair that Bell Canada can, with money that ought to be rebated to customer, fund the deployment of network equipment that competes with cable and mobile services from other carriers. It is also interesting that Commissioner Katz, a former executive of Rogers, wrote a dissenting opinion in CRTC Decision 2010-637 to argue in favour of wireless for these rural communities, which was subsequently accepted in 2010-805.

I fail to see the logic in limiting the Bell companies' ability to use alternative technologies that meet or exceed the requirements imposed in the deferral account decisions.

Although I applaud Commissioner Katz's view that the CRTC should focus on service objectives and not specific technologies, I believe the cable companies have a valid argument that DSL could be just as cost-effective for these rural communities. For both DSL and HSPA+ there is a need to back-haul the traffic, from either the central office or tower, respectively, to their core network. Locally, the copper already exists, so the primary economic comparison is between DSLAMs and HSPA+ base stations (towers). Unfortunately, as is routine in these matters, Bell Canada's network costing figures are confidential. All we know is that the CRTC reviewed the submitted material, but not how persuasive it was or if it bore any resemblance to the true costs.

23.  With respect to the proposals to allow for competitive bidding in order to ensure the use of least-cost technology, the Commission notes that it rejected this idea both in Telecom Decisions 2006-9 and 2007-50, since it would add a significant layer of complexity, delay the implementation of broadband expansion, and result in substantial administrative and regulatory burden. The Commission considers that these reasons continue to be valid.

24.  In light of all of the above, the Commission finds that Bell Canada’s HSPA+ wireless broadband proposal is consistent with its determinations in the deferral account decisions. The Commission therefore approves the revised proposal.

Once again we see the capriciousness of an opaque regulator in our telecommunications market. We all need to keep a close eye on the CRTC and similar regulatory bodies if we are to ever see an end to invasive and poorly-justified distortions of the free market. This should worry everyone, including those individuals and companies that benefitted from these recent decisions; today's winners could easily become the losers in CRTC's next decision.

Asymmetric Pricing: CRTC UBB Decision 2010-802

While we all waited to go trick-or-treating on Sunday evening, the telcos did theirs a few days early. Dressed as little angels they knocked on the door of the CRTC then held out their bags and smiled. When Konrad Von Finckenstein answered the door he looked surprised and worried because he hadn't yet stocked up on candy to pass out to the little ones. Looking around the offices he found something even better: CRTC Decision 2010-802. Hiding their nasty smirks behind their angel masks, the telcos made their way back home to look over their loot. Then the press releases and media articles began appearing.

Bell Canada and other telcos got what they wanted in CRTC Decision 2010-802, giving them flexibility, though not free reign, to charge overage fees (usage-based billing, or UBB) to retail users of their wholesale GAS ISP customers. This does not surprise me, notwithstanding the attitude of at least one CRTC Commissioner, since the CRTC is attempting to allow market forces to work in the broadband sector. ISPs understandably don't like what the CRTC has allowed, and neither do their heavy-usage customers. Although all of us users of broadband have reason to gripe about the potential for paying more, after reading through the Decision I believe the CRTC has struck an appropriate balance. Like a lot of balancing acts it is unstable and will almost certainly require follow-on action in the future as intent and reality drift apart.

Media reports necessarily gloss over the details, instead focussing on news releases, interviews and complaints, which is unfortunate since the actual Decision contains what really matters for those with a strong interest in the matter. As I've done with some previous CRTC actions, I will provide some commentary on those details.

9.      The Bell companies proposed a new grandfathering arrangement whereby they be allowed to implement economic ITMPs for GAS ISPs’ non-grandfathered retail customers, provided that the grandfathering practices are applied on an equivalent basis to the Bell companies’ retail customers. Under the Bell companies’ proposed arrangement, flat monthly rates for unlimited usage would continue to apply for GAS ISPs’ grandfathered retail customers, while the UBB regime would apply for GAS ISPs’ non-grandfathered retail customers.

This is what we get when the regulator gets too involved in a market. The equitable pricing argument is a good one since, now that the CRTC has intruded as far as it has, it has to level the playing field insofar as it wishes to avoid asymmetric mandates among competitors. In their view, however, the telco competitors are the cable companies, not the ISPs; the CRTC sees the ISPs as customers of the telcos, not competitors.

12.  TELUS Communications Company (TCC) and the cable carriers supported the Bell companies’ proposals.
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35.  The Bell companies requested that the Commission vary Telecom Decision 2010-255 to approve the principle, consistent with what is currently being applied by cable carriers, of a UBB component and an excessive usage charge with a cap at equivalent rates to those imposed on the Bell companies’ retail services, instead of a 25 percent discount.

36.  TCC and the cable carriers supported the Bell companies’ request.

Then again, it is very interesting that the cable companies supported the telco interventions on both UBB and UBB caps. That does not sound like the action of competitors. I would have expected them to either remain silent or to make some bland comments, as is typical in these matters; they don't want to appear either disinterested or too supportive of measures that negatively impact their competitors. I solved this mystery -- or merely my own confusion -- by reading the cable companies' submission on the telcos' request for variance. The answer was there:

Conclusion
14. In conclusion, the Cable Carriers reiterate their support for regulatory symmetry as regards the application of ITMPs to wholesale services, and reaffirm their view that their existing TPIA UBB practices are already fully consistent with a policy of ensuring that UBB terms and conditions are applied no less favourably to wholesale as to retail customers.
15. The Cable Carriers agree with the Bell Companies that it should not matter that some retail customers are grandfathered without UBB, provided equivalent grandfathering opportunities are made available to wholesale customers. Similarly, it should not matter that UBB is applied to some service tiers but not others, or that UBB is applied to residential offerings but not business offerings, provided that when a given offering is made available at wholesale it incorporates the same UBB terms as are applied at retail. Furthermore, to protect against draconian results that could arise from an excessively rigid application of the equivalent treatment rule, it is entirely appropriate and of no offense to the principle of competitive equity to allow for de minimus exceptions to the rule.
16. The Cable Carriers agree with the Bell Companies that the Decision 2010-255 prohibition on waiving UBB charges on a promotional basis is an unjustified interference with the effective functioning of market forces in the internet access market. The Cable Carriers further agree with the Bell Companies that an equitable and effective application of economic ITMPs requires that the same UBB rates and caps be applied to wholesale as to retail customers

With the CRTC so focused on treating the telcos and cable companies equitably in this matter, the cable companies had to support the telcos so that the CRTC would be encouraged to choose the option that most benefited them; that is, the option that would give them the maximum flexibility to increase revenue and reduce ISP competitiveness with respect to TPIA, the cable equivalent to GAS.

10.  With respect to how to apply this proposal, the Bell companies stated that they have implemented a grandfathering arrangement for their retail customers and no longer offer flat-rate unlimited usage retail plans as of 1 February 2007. In their application, the Bell companies submitted that, consistent with their retail practices, a GAS ISP’s grandfathered retail customer would be a retail customer who was with that ISP before 1 February 2007 and whose service has continued without any changes.

11.  The Bell companies further stated that, rather than actively migrating retail customers to usage-based plans, their retail divisions have implemented an approach of increasing rates periodically for customers on unlimited plans to incent customer migration. They requested that the Commission approve a similar principle of applying an unlimited usage plan premium charge for GAS ISPs’ grandfathered retail customers.
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16.  The Commission considers that, if an appropriate grandfathering arrangement is established for Residence GAS, the requirement of equivalent treatment for wholesale GAS and retail Internet services would be met in a minimally intrusive manner and, consequently, it would not be necessary for the Bell companies to charge UBB rates to all their retail customers prior to implementing UBB for GAS.

http://www.cbc.ca/technology/story/2010/10/28/crtc-usage-based-billing-internet.html
This is the sweetener that appears to have helped sell the proposal to the CRTC, by stating that they will, over time, strive to migrate their own unlimited plan retail customers to similar UBB plans. This point about grandfathering and telco retail customer migration was not made clear in the CBC article I came across, though perhaps other media did better when reporting this.

Now that they need to act even-handed with respect to the competitors -- in the CRTC's judgment -- they feel compelled, by the law, to withdraw the UBB overage charge restriction so that the cable companies are not handed a competitive advantage by the CRTC. In this situation, the CRTC is behaving in a manner similar to a strong labour union. What a union achieves over time is near-equal salaries and benefits for each trade or profession they represent across entire industries, without regard to individual merit or the market forces that the affected companies must operate under. I care for neither since these are overt and excessive interferences in the free market.

30.  The Commission considers that requiring the Bell companies to extend the same UBB promotions to GAS ISPs that they offer to their retail customers would unduly interfere with their operations in the retail Internet services market.

This point on tying GAS UBB rates to the telcos' own retail promotions seems fair to me, if it is only for limited-time promotions and not done as a matter of course as a means to drive the ISPs out of the market. Every company should be able to use this tool of competitive marketing. The ISPs can do the same if they wish. These promotions do have an impact on costs, but that is true of both the telcos and the ISPs. The cable companies strongly supported this point, as can be seen in the passage I quoted earlier.

45.  The Commission notes that, in response to a Commission interrogatory, the Bell companies submitted revised cost information based on an Ethernet growth solution that included the missing cost elements described above. After evaluating the revised cost information, the Commission considers that the Ethernet growth solution would include significant reductions to switching and transmission costs that would offset the additional conversion and traffic migration costs suggested by the Bell companies.

In an earlier article on UBB I talked about the bizarre situation where the CRTC is making determinations on network and engineering costs to determine the basis for retail and wholesale service prices. They've done it again, with no explicit justification, by rejecting the (non-disclosed) cost calculations of the telco with respect to ATM and Ethernet access networks. Although I, too, would be wary of the figures submitted by these companies, the CRTC is unqualified to make the criticism on these fine details. I doubt that this decision will have much real impact on the telcos, it just annoys me to see the CRTC so intrusive and cavalier on these business matters.

As for the ISPs themselves, they can complain about the granting of the variance to the CRTC order all they like -- and they are! -- but this is the price they, and we their customers, must pay. As I've said before, the broadband ISPs live at the pleasure of the CRTC and their policies because only the CRTC can mandate their access to the facilities of the incumbent service providers. For now they will continue to live. How long the CRTC will support their existence remains to be seen. My guess is that when (if?) there is sufficient facilities-based competitive alternatives they will sunset GAS and TPIA.

Robocalls From O'Brien and Other Politicians

Robocalls cover several categories of automated, mass calling systems. Perhaps the most benign of the bunch (if there is such a thing) is the type that appears to have used by the O'Brien campaign. This is were a list of numbers in the targetted demographic or geographic area are machine dialed, and when the call is answered a prerecorded message is played. Very convenient and (importantly) inexpensive for the campaigner but terribly annoying in most cases for the rest of us.

There are other, more-insidious varieties of robocalls, and it is perhaps no surprise that they have, in general, been banned in countries like Canada and the US, and a growing list of others. Unfortunately, calls from campaigning politicians are excluded from the Do-Not-Call registry even if they are robocalls rather than if the auto-dialer connects you to a live human operator. It likely wouldn't matter in any case since the CRTC is not terribly aggressive in pursuing DNC violators, despite reports to the contrary:

According to the CRTC's rules, candidates can't ask for money or volunteers, but they can ask for votes. Auto-dialing must only be used during reasonable daytime and evening hours, and messages must start by identifying the caller as well as a mailing address and a phone number where the candidate can be reached.

None of the robocalls made during Winnipeg's civic election campaign appear to have included the candidate's campaign office address or phone number at the beginning of the message, though most candidates left a phone number at the end.

Officials with the Canadian Radio-television and Telecommunications Commission say they're looking into a small handful of complaints over the last couple of weeks, at least one related to robocalls made by Mayor Sam Katz as part of his re-election bid.

Katz's campaign staff say their telemarketing provider double-checked with the CRTC and was told the ADAD rules do not apply to political campaigns.

But two separate CRTC officials confirmed Tuesday that candidates must comply with the ADAD rules.

This activity is also going on in other cities because it can be so effective, such as in our biggest city, Toronto:

The company called 10,000 people in Vaughan’s Ward 3, collated from municipal electoral rolls.

• About 2,000 people “connected” and stayed on for varying periods, from a few seconds to a few minutes.

• 770 stayed on for a “sustained” period, 8 to 22 minutes.

• An astonishing 550 stayed on for a full hour, asking Del Duca questions about everything from local issues to high car insurance rates. It would be hard to achieve anything like that degree of contact through the time-honoured methods of door-knocking and doorstep-chatting.

Of course this is why they do it: it works. It works because enough people bite to make the campaign effective. This is the same reason that email spam and commercial telemarketing continue despite the fact that they annoy the majority.

There are scattered cases of worse robocalling behaviour by political campaigns south of the borders. In the 2006 and 2008 election years some people were getting upward of 10 or 20 calls per day from the candidates. Often they violated the blackout periods (such as late evening) that apply even to these DNC-exempt callers. Worse, some voters got calls in the middle of the night.

It turned out that these repeated or late-night calls were usually from opposing parties who would splice out of context or fictional messages from the other candidate in the hope that it would turn them against that candidate. By all reports it actually had that effect, since it was only later, after the election when the damage had already been done, that most of the truth came out. As far as I know this type of fraud hasn't yet occurred in Canada.

One puzzling report regarding the O'Brien robocalls is that some people claim they can't hang up on the calls:

Several recipients said they couldn't hang up and use their phones for another call once the taped message started. A YouTube video shows a man apparently trying in vain for more than 20 minutes to hang up on a telephone "town hall" meeting, basically a massive conference call featuring O'Brien.

This type of network behaviour pretty well disappeared in the 1970s when the first stored program controlled switching equipment was widely deployed. On older electromechanical switches it was indeed very possible for a caller to hold the circuit by remaining off-hook when the called party hung up. While it had valid uses -- such as going on hook on the main phone to pick it up from an extension phone in a bedroom -- it was often abused by stalkers, collection agencies and others.

I suspect that in the above report these people didn't go on hook long enough (a couple of seconds) before going off hook again, or another phone on the same line was off-hook or their phones were defective. Nowadays it is typically only 911 operators that have the required network feature to keep a line active when the other party disconnects.