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Curious and Curiouser: As Economists’ Anti-Common Carriage (#NetNeutrality)/FCC Case Crumbles, Industry Advocacy Group Lawyers Threaten Armageddon

Just over a week ago, the International Journal of Communication published an article that I co-authored with Jeff Pooley, “A Curious Tale of Economics and Common Carriage (Net Neutrality) at the FCC”—a reply to another IJOC article published in late March by Gerald Faulhaber, Hal Singer and Augustus Urschel that had claimed that economics was “curiously absent” at the Obama-era FCC.

In that paper, the authors hold up the FCC’s 2015 landmark ruling to reclassify broadband internet access services as common carriers (the historical bedrock principle that informs what most people now refer to as ‘net neutrality’) as exhibit A in support of their claim. They also point to a raft of other decisions over the past half-decade that addressed high levels of concentration in key segments of the mobile wireless, broadband internet access and TV industries as further evidence of the supposed triumph of populist politics over economic reason at the Obama-era FCC. Finally, they claim that the FCC’s refusal to file cost benefit analyses to justify any of these actions clinches their case about the “curious absence of economics at the FCC”.

The claims became a big deal after the Trump Administration’s new FCC chair Ajit Pai repeatedly cited them to justify his bid to roll back the common carrier rules and to create a new Office of Economics and Data (see here, here and here). Pundits, think tanks and telcos, not just in the US but in Canada and the European Union too, have pointed to the “curious absence” charge in their support of Pai’s rush to remake the regulatory landscape in the image that they have wanted all along: no common carrier rules and regulations premised on the assumption that communication markets are fiercely competitive.

As we show in our reply, however, the authors’ claims about the “curious absence of economics” are baseless. Our review of the FCC’s public docket for the Open Internet Order, several blockbuster mergers and acquisitions, roundtables, seminars, workshops, and so on shows that the public record of the Commission’s work is stuffed full with the contributions of economists—including those of Faulhaber and Singer. A better interpretation, we argue, is that, having lost many hot-ticket regulatory items in recent years, the authors have thrown up a dubious pretext for what amounts to a regulatory do-over in which they hope to score big under the Trump regime.

Not only does the paper’s main claim fall apart upon inspection, its undisclosed origins as a commissioned piece of policy advocacy runs afoul of scholarly publishing norms and ethics. Indeed, the paper is a model of information laundering, whereby paid policy advocacy prepared for an industry-friendly group—in this case, CALinnovates—is put on the public record in two separate FCC proceedings (see here and here), then recycled as an original article in a prestigious, peer-reviewed scholarly journal with no acknowledgement of these origins, and finally recycled back into the policy process on several occasions by Pai to justify his sprint to reverse many of the signature accomplishments of his predecessor—all with the telcos, consultants, industry-friendly think tanks such as the American Enterprise Institute, etc., cheering him on from the sidelines, both within the US and beyond.

Legal Threats

We had plainly struck a nerve. After a draft of our reply was shared with the article’s authors in late May, they started to backfill their missing disclosures (compare the lack of any disclosure in the original March publication, the terse one-liner that followed in mid-April after we called them out on Twitter, and a fuller but still wholly inadequate disclosure in June). And instead of dealing with any of our substantive criticisms about the complete lack of any evidence to support their main claim about the alleged “curious absence of economics” at the FCC, the authors along with the executive director and PR rep for the industry-friendly advocacy outfit, CALinnovates, wrote weak replies that protested loudly and threw a lot of mud, but did absolutely nothing to shore up their allegations. You can see those replies here, here and here.

As our article was being prepared for publication, CALinnovates also lawyered up and sent a barrage of letters to the editors of the International Journal of Communication—and its host, the University of Southern California. The legal threats—explicit and implied—ramped up in each letter (see here, here, here, and here).

In the first missive, the group’s attorney charged that the “academic portion” of our paper—those pages that constitute the bulk of our article and that challenge the original article’s sidelined-economists storyline and which provide copious details refuting that claim—is merely a “vehicle to serve incorrect and potentially libelous messaging to the public” about the group. He asked the journal to disclose our funding for the article (we have none), and to remove the CALinnovates discussion altogether.

The second letter, sent a week later, detailed “concerns” about our reply and warned that its “potentially libelous rebuttal,” the lawyer wrote, “seeks to tarnish the reputation of CALinnovates,” an organization whose “only role in this imbroglio was the funding of the [original] paper.” Quoting liberally from the journal’s code of ethics, the letter lays out 13 charges. “Winseck and Pooley,” he wrote, “have weaponized their rebuttal for the purposes of their own mischievous political goals.” The letter accuses us of serving “corporate interests,” which we—so said the attorney—failed to disclose.

Another week, another letter, this one from a second firm (“litigation counsel to CALinnovates”) and delivered not just to the editor but to the general counsel of USC, where the journal is hosted. It is, this attorney wrote, “extraordinarily surprising and deeply disappointing” that USC “would even consider publishing what appears to be a bias-motivated hit piece”. The letter concludes by warning USC that it would “expose itself to significant liability” by publishing our reply.

To its credit, the journal stood its ground, asking us to furnish documentation on just those errors of fact flagged by the lawyers. We replied with a point-by-point accounting. “Neither of us,” we wrote, “has ever received a single cent of funding for this reply or for work whatsoever from any parties.” Bluster aside, the innuendo and legal threats had the opposite effect, strengthening our resolve to publish the reply. Sponsored surrogacy like the “Curious Absence” paper needs ummasking now, before the Pai-led FCC recasts the evermore internet-centric communications universe in an industry-serving mold. If Pai succeeds, it will be hard to go back—hard, that is, to get the regulatory toothpaste back in the tube. At that point, exposing the industry scholar-lobbyist network’s campaign would be (merely) academic.

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Information Laundering, Economists and Ajit Pai’s Race to Roll-Back the Obama-era FCC’s Net Neutrality Rules

Today, the International Journal of Communication published my reply (co-authored with Jeff Pooley) to a recent paper in the same journal by economists Gerald Faulhaber, Hal Singer and Augustus Urschel. That paper has become especially influential after the Federal Communication Commission’s Chairman Ajit Pai repeatedly called on its “independent” evidence to justify his plan to roll-back common carriage (net neutrality) rules for internet access providers and to create an Office of Economics and Data. As our reply shows, the paper contains undisclosed ties to the telecommunications industry and is riddled with factual errors. Most importantly, its central claim that economics and economists have been “curiously absent” at the FCC in recent years is simply incorrect.

Faulhaber, Singer and Urschel’s “The Curious Absence of Economic Analysis at the Federal Communications Commission” is a prominent example of how industry-friendly think tanks have commissioned academic economists, legal scholars and others to flood the ‘marketplace of ideas’ with dubious ideas and ‘white papers’, often without disclosing these origins. These efforts, in turn, give a veneer of academic legitimacy to Pai’s sprint to reverse not just the net neutrality rules adopted two years ago, but a raft of measures that deal with concentration in the broadband, mobile wireless, cable TV and broadcasting markets, broadband privacy and pricing, and on and on. If the rollback is successful, Pai’s FCC will deliver a regulatory agenda beyond the biggest telecom-ISP and media companies’ wildest dreams.

In their paper, Faulhaber, Singer and Urschel purport to tell the story of the rise and fall of economic analysis at the FCC. They hold up the Commission’s landmark 2015 decision to reclassify broadband internet access services as “common carriers”—the bedrock historical principle underpinning what most people call “net neutrality”—as Exhibit A in support of their “curious absence” allegation. The authors also point to the FCC’s alleged failure to conduct cost-benefit analyses as further evidence of the agency’s supposed indifference to economics. Finally, the authors singled out John Oliver’s 2014 late-night rant on net neutrality for triggering “four million angry letters”. The episode exemplified, in their telling, the triumph of unruly populism over economic expertise—a gaping wound that needs to be redressed, and fast, they urge.

Straight away, however, the article’s main claim that economists have next to no influence at the FCC struck us as preposterous. This must be, we thought, the first article ever published to claim that economists don’t have enough influence on federal policy making. The story of social science and U.S. policy since World War II just is the story of economics (see, for example, Bernstein, 2004 and Franklin, 2016). More to the point, economists have been extensively—and disproportionately—involved in FCC rule-making for decades, this one included. What could the authors possibly mean?

Adding to our doubts, we quickly discovered that a longer version of the same paper had been submitted to the FCC’s official docket last summer, not once but twice, by CALinnovates—an “advocacy” group with deep ties to the telecommunications industry (see the submissions to Broadband Privacy and Business Data Services proceedings). In other words, the paper published in the IJoC originated as a white paper commissioned by a telecommunications industry advocacy group but without disclosing any of this background do the journal’s editors or readers.

Digging deeper, it soon became evident that the paper’s authors have been especially active in many hot-button issues before the FCC in recent years, including its landmark Open Internet Order in 2015—the main object of their criticism. They have also cast doubts on how the FCC has dealt with blockbuster mergers and acquisitions and sky-high levels of concentration in the mobile wireless market, backed an unsuccessful legal appeal of those 2015 net neutrality rules, and lent their work to a volley of actions now underway by the Trump administration’s new FCC Chair, Ajit Pai (see here and here).

In April—just five days after the peer-reviewed article appeared—Pai gave a major speech at the Hudson Institute lamenting that the views of economists “have become an afterthought.” Citing the paper (but with no mention of its provenance), Pai announced a new FCC Office of Economics and Data (OED). The authors’ “curious absence” claim supplied the warrant for creating the OED. Pai soon issued his fateful plan to roll back net neutrality regulations—set to take effect in a matter of weeks—and again invoked the authors’ work as a warrant for taking the course that he has (see here and here).

In short, an industry front group commissioned and funded research that was put on the public record in two FCC proceedings and then published in a leading academic journal. Soon it was cited by the country’s top policy-maker to justify his industry-friendly regulatory rollback. We contend that this is a clear case of information laundering.

Murky origins aside, does Faulhaber, Singer and Urschel’s core claim that the FCC has “abandon[ed] the dismal science” (p. 1215) hold water? Our reply argues an emphatic “no”. Our review of FCC workshops, roundtables, working papers, seminars, reports, dockets and rulings—including during its landmark 2015 Open Internet Order and several blockbuster mergers and acquisitions—provides detailed evidence to refute the paper’s core “curious absence” charge. Indeed, the public record is stuffed full with economists’ contributions—including those of the authors, though they mention none of it. As we show, the agency has actually been working in earnest to bolster, not sideline, economic analysis in recent years—a conclusion in line with other researchers’ findings (e.g., Copeland, 2013).

Moreover, while the authors charge that the FCC’s cavalier disregard for sound economic judgement is revealed by the fact that it does not do proper cost benefit analyses, the truth is that there are nineteen federal, independent regulatory agencies and none of them does such analyses along the lines they call for—except the Consumer Financial Protection Bureau (and for reasons specific to its own creation in 2011 in the aftermath of the financial crisis of 2008). While there have been calls since at least the Reagan Administration for things to be otherwise, those calls have been rejected because to concede to them would undercut regulators’ independence. In short, despite the authors’ misleading suggestion to the contrary, the FCC is not unique in this regard and as a matter of fact all federal independent regulatory agencies except the CFPB report to Congress (see Breger & Edles, 2015; Sunstein, 2013).

When Faulhaber, Singer and Urschel bemoan the “curious absence” of economists at the FCC in the IJOC paper, what they’re really objecting to is their own string of policy losses across several high-profile issues in recent years. What they want, in effect, is an across-the-board do-over on these issues. Their paper—with its serial non-disclosure—is already helping that effort. Indeed, the authors have been fighting on this project’s front-lines for years and their IJOC paper and its undisclosed precursors have been weaponized for this campaign.

The stakes couldn’t be higher. Pai is sprinting to reverse the most prominent accomplishments of the Obama-era FCC—and leaning on Faulhaber, Singer and Urschel’s paper to legitimate his efforts. The IJOC paper, and its undisclosed predecessors, also serve as the touchstone for op-eds across think tanks and their blogs as well as the business and popular press. The authors’ appeal to the authority of economics, in short, cloaks a full-throated political project designed to remake communications markets along the lines that incumbent telecommunications, broadband internet, and media industries have desired all along.

If the lessons of the last century are a guide, the outcomes of these battles could shape the emergent internet- and mobile wireless-centric communications universe for many decades to come. Moreover, the fact that much the same charges are being lobbed at regulators in Canada, the EU, India and other countries underscores the point that while the specifics of the US situation—and the FCC—are unique, the lessons to be learned are far more global in scope.

Legal Threats

We plainly struck a nerve. After a draft of our reply was shared with the article’s authors in late May, the journal’s editor received a barrage of letters from attorneys representing CALinnovates, the telco-linked group. The legal threats—explicit and implied—ramped up in each letter.

We will address more of the substance of these letters in a subsequent post in short order but for the time being we’ll close by saying that, to its credit, the International Journal of Communication stood its ground, asking us to furnish documentation on just those errors of fact claimed by the lawyers. We replied with a point-by-point accounting. And on their claim that we ourselves had written the “hit piece” under hire to either Free Press, Open Media, Mozilla or Google, we had a blunt response of our own: “Neither of us has ever received a single cent of funding for this reply or for work whatsoever from any parties.”

Bluster aside, the innuendo and legal threats had the opposite effect, strengthening our resolve to publish the reply. As a general matter, sponsored surrogacy like the “Curious Absence” paper needs ummasking because it tries to harness the academic credibility of scholarly, peer-reviewed publishing for private gain—typically without disclosing either the interests or processes in the information laundering behind such efforts. And if such critiques are necessary in general they are acutely so now before the Pai-led FCC recasts the evermore internet-centric communications universe in an industry-serving mold. If Pai succeeds, it will be hard to go back—hard, that is, to get the regulatory toothpaste back in the tube. At that point, exposing the industry scholar-lobbyist network’s campaign would be (merely) academic.

Why Bell’s Bid to Buy MTS is Bad News

Last week, BCE announced its $3.9 billion bid to acquire MTS, the incumbent wireless, internet and IPTV provider in Manitoba. BCE’s share of revenue (28%) across the telecoms-internet and media landscape is already close to double that of Rogers (16.3% market share) and Telus (15.9%). Approving this deal would only further gird Bell’s place at the apex of the Canadian communication system.

Blessing the deal would also be at cross-purposes with findings by the CRTC and Competition Bureau on several occasions last year that telecoms and TV markets in Canada are highly concentrated, while turning a blind eye to the anti-competitive behaviour that led to those findings. The number of mobile wireless competitors in Manitoba would also drop from four to three as a result, effectively putting a stake through the last government’s policy of promoting four wireless carriers across the country.

Of course, there is no need for the new Liberal Government to keep a policy created by its predecessor, but it would be well-advised to consider the real benefits of keeping this policy (see the OECD’s review for why this is so). Finally, and this is key to the analysis that follows, what if, contrary to the claims of the deal’s backers, MTS has maintained low prices while achieving profit levels and making substantial capital investment in 4G mobile wireless, fibre-to-the-doorstep and competitive TV services?

Do Low Prices Amount to a Short-Sighted Race to the Bottom and Low Quality Network Infrastructures?

So far several commentators have raised the alarm that a takeover of MTS will drive up prices as Bell, Rogers and Telus assert their dominance in Manitoba in a manner all to familiar to other regions across the country (Geist and Blackwell). Such a prospect turns on the fact that already Bell, Rogers and Telus price their plans $30 to $70 less than their equivalent offerings in Ontario, Alberta and BC to meet the rates charged by MTS and SaskTel in Manitoba and Saskatchewan, respectively. Figure 1 below illustrates the point.

Figure 1 Retail Wireless Plan Prices by Province (September 2014).

Screenshot 2016-05-10 02.35.38.png

Source: MTS, SaskTel & tbaytel (2015). Telecom Notice of Consultation CRTC 2014-76 Review of Wholesale Mobile Wireless Services (para 25).

According to Bell and MTS, however, the deal is not about maintaining cheap but lower quality services at all. Instead, it is about bringing MTS out of the dark ages and into the future with an ambitious billion dollar investment program spread over five years to bring state-of-the-art fibre optic networks in Manitoba, increase the reach of Bell’s “world class” Fibe TV service, and to expand wireless 4G LTE network coverage in the province (BCE, Analyst Presentation, 2016, p. 6).

BCE’s CEO George Cope has been keen to emphasize that the market might become even more competitive after the deal. As he sees it, there will be three large firms competing even more aggressively after the deal than the current situation where MTS rules the wireless market with over half of all subscribers followed by Rogers with a third of the market share, trailed far behind by Telus (9%) and Bell (7%) (based on 2014 figures) (CRTC, 2014, unpublished data; also MTS, 2014 Ann Rpt, p. 7).

The intensification of “sustainable competition” would be especially likely, it is claimed, after Bell divests one-third of MTS’s wireless subscribers to Telus, as the deal envisions, according to Cope. The upshot is that instead of two strong competitors, MTS and Rogers, followed in the distance by Telus and Bell, there will be three “strong players”. Table 1 below shows the pre- and post-merger results.

Table 1: Mobile Wireless Carriers’ Market Shares in Manitoba Pre- and Post-Merger

Figure 1

Source: MTS (2015). Annual Report 2014, p. 7.

According to this view, this is how dynamic competition works. Big players with deep pockets, staying power and know-how compete vigorously with one another on the frontiers of technological and service innovation rather than on the basis of “unsustainable price rivalry”. Regulatory economist Gerry Wall also chimed in to support this line of argument, telling the National Post that while MTS wireless pricing “forced the Big Three to match [its] low prices”, such a strategy is “unsustainable”. As Wall further added:

The aggressive pricing strategy has been successful in terms of keeping customers but I think it has taxed them financially – and the investment required for 4G and next gen networks is very challenging (quoted in Corcoron, 2016, “Good Riddance to Fourth Carriers”).

In simple terms, to focus on cheap prices now might sell Manitobans down the river in the long-run if MTS is not making enough money to build the infrastructure needed to support the province in the 21st Century. These are serious issues indeed, but are they right?

I don’t think so. In fact, as we will see below, while prices are low in Manitoba compared to much of the rest of the country, profits and capital investment at MTS are actually higher than Bell’s.

Why Even Imperfect Competition is Better than a Tight Oligopoly

BCE’s bid for MTS must obtain the blessing of three regulators: Innovation, Science and Economic Development (ISED, the recently renamed Industry Canada), the Competition Bureau and the CRTC. One of BCE’s main claims in favour of the deal is that it holds forth the prospect for sustainable competition if given the green light by regulators. Seeming to recognize that this is not a slam dunk, BCE and MTS expect the review process to take up to a year.

On the basis of the standard tools typically used to examine these things – i.e. Concentration Ratios (CR) and the Herfindhahl–Hirschman Index (HHI) – the case is doubtful. In terms of the CR measure, we will go from a situation where the top four firms control 100% of the market to one where three firms will do so.

While the distribution of market shares of Bell (40%), Rogers (34%) and Telus (26%) (see Table 1 above) that will result should the deal be approved does tally with Bell’s view of things, the HHI – which is specifically designed to assess competitive intensity – tells a different story. The HHI score will decline from 3786 to 3441, but the more urgent point is that this still indicates skyhigh concentration levels. Indeed, any result over 2,500 indicates extremely high levels of market concentration. This deal will do nothing to change that.

Even these points underplay the extent to which consolidation dynamics will likely be ramified by BCE’s takeover of MTS. For instance, while Bell presents its plan to divest a third of MTS subscribers to Telus as a magnanimous gesture intended to mollify regulators, this ignores the fact that the two have had a network sharing deal that covers the province since 2001 (see Klass, 2015).

Furthermore, Bell’s takeover of MTS could leave Rogers out in the cold given that it and MTS have paralleled Bell and Telus to build jointly-shared networks of their own. MTS and Rogers first joined forces in 2009, for instance, to build a shared HSPA+ mobile wireless network in Manitoba. Similar arrangements were struck again in 2013 to build a shared LTE network; in fact, before the takeover was announced, MTS already had plans in place to cover more than 90 per-cent of Manitoba’s population with 4G LTE wireless service by 2018 (MTS, 2013 AR, p. 12).

Where Rogers will stand once that agreement comes to an end, however, has so far gone unspoken. If Rogers is left out in the cold, then the circumstances will be worse than ever, with not even a full duopoly left, given Bell and Telus’ shared interests in the province. However, even if Rogers is taken care of, so to speak, the cozy oligopoly that now straddles much of the land will only be reinforced.

That already very high levels of concentration exist and could get worse is not a mystery. As Eli Noam (2013) observes, concentration levels around the world for these markets tend to be “astonishingly high” (p. 8).

What has made the difference is regulators willing to face up to such realities and deal with them accordingly. And a key element in such responses has been the adoption of fourth wireless carrier policies. Of course, there is no magic number in terms of how many players a market can sustain but experience shows that a fourth competitor helps to break dominant players’ tendency to fly as a flock in markets defined by a tight oligopoly.

The advent of four or more rivals, in turn, results in more competitive retail pricing as well as more robust wholesale access regimes and a virtuous circle of more competitors, greater pricing diversity and the advent of mobile virtual network operators, for instance – all of which helps to breakdown barriers to adoption. This is especially important in Canada with respect to mobile wireless services, where it ranks 32nd out of 40 OECD and EU countries (see Broadband Wireless Penetration sheet)

Moreover, the pursuit of the “fourth competitor” policy is far from being just a populist ploy, as some critics grouse. Indeed, with communication costs a key part of doing business within Canada and around the world, businesses are pushing for lower wireless and broadband internet prices. This is why such issues are pressing more urgently not just on Canadian policy-makers and regulators but also their international counterparts at the OECD and WTO as well (OECD, 2013, p. 21).

Profits @ MTS are High, Not Low

Claims that competition and low prices have been artificially sustained in Manitoba collide with the reality that profits at MTS are very high, not low, and much higher than BCE’s actually. Bell itself noted the point in its presentation to analysts, suggesting that MTS EBITDA rates were comparable to its own, i.e. in the 40% range (BCE, Analyst Presentation, 2016, p. 5).

However, even that low-balls the state of affairs. As a matter of fact, EBITDA at MTS has been considerably higher than those at BCE for the past six years for which data was examined. Table 2 below illustrates the point.

Table 2: Revenue and EBITDA @ MTS vs BCE, 2010-2015

Figure 2

Sources: Company Annual Reports.

In short, MTS has maintained low prices while achieving profit levels that are even higher than those of BCE. The same story holds for capital investment.

Capital Investment @ MTS is Not Low but Higher than BCE’s

To hear BCE boss George Cope and MTS’s CEO Jay Forbes tell it last week, MTS is starving for investment capital because cheap prices have led to low profits. Consequently, MTS is at risk of falling behind when it comes to upgrading the information infrastructures that Manitobans will need to survive and thrive in the 21st Century.

The very high levels of profit – by the standards of BCE, the communications sector, and across Canadian industry as a whole – however, paints a very different picture. The evidence with respect to capital investment also belies the claims being touted in support of the deal. As a matter of fact, capital investment at MTS has also been higher than BCE in relative terms. Table 3 illustrates the point.

Table 3: Capital Investment @ MTS vs BCE, 2010-2015

Table 3

Sources: Company Annual Reports.

MTS has been investing in the range of $200 million for the past half-decade or more. At best, BCE’s commitment to spend $1 billion over the next five years will hold the line on what MTS has been investing. In other words, the deal offers nothing better than what is currently on offer and we can only hold our breathe that BCE follows through on its pledges, but on this score, its track record does not instil confidence.

Capital Investment in 4G Mobile Wireless Services

Without taking an overly rosy view of things, MTS has made substantial capital investments in fibre-to-the-node (FTTN) and fibre-to-the-home (FTTH) networks, and to expand its 4G HSPA+ and LTE networks in cities and communities across the province. Its 4G HSPA+ and ‘true 4G’ LTE wireless networks now cover 98% and 78% of Manitoba’s population, respectively (MTS, 2015, para 20).

The latter is less than the 86% coverage that Bell has achieved in its service areas in Ontario, Quebec and the Atlantic region (BCE, 2015, p. 10), but this reflects two things: first the more rural and dispersed nature of Manitoba’s population and, second, the fact that the deployment of new networks takes place in “step changes”, with early leads typically being transitory. In any case, the gap that currently exists will likely narrow during the next 18-24 months as MTS reaches its goal of 90% population coverage by 2018 (MTS, 2013 AR, p. 12). To the extent that this falls short of BCE’s aim for 98% coverage, BCE has not included any targets beyond those MTS has already made in its takeover bid.

If there’s any question about the quality of MTS’s LTE network, such concerns can also be allayed by its first place ranking by PCMag.com in 2013. Moreover, its network sharing deal with Rogers also allows it to obtain access to wireless devices that might otherwise be hard to get for smaller scale carriers like itself (MTS, 2014 AR, p. 6).

Leaders and Laggards and a World Turned Upside Down to Sell a Dubious Deal

Wireless investment is one thing, but MTS’s investment in highspeed broadband networks has been greater than Bell’s for years. Indeed, the irony of the deal now being pitched is that the laggard (Bell) seeks to take over the leader (MTS) when seen from the vantage point of broadband internet development in general, and fibre-optic based networks in particular.

In terms of residential broadband internet availability, for example, 95% of Manitobans have access to basic broadband from MTS at 5 mbps – the current broadband target set by the CRTC in 2011 — a figure that compares favourably with Bell in Quebec and Ontario (94% and 97%, respectively) but which is higher than in the Atlantic provinces, where access to 5 Mbps broadband ranges from 77% in PEI to 90% in NB (CRTC, 2014 CMR, Figure 2.0.5).

Turn our attention to more advanced fibre-based networks to the neighbourhood and the premise, and services that run overtop of these networks, notably IPTV, however, and the advantage tilts significantly in MTS’s advantage.

MTS began to roll out such services in 2003 and within a year the number of IPTV subscribers began to take off. Now, 70% of households in Manitoba have access to its IPTV service – Ultimate TV — and with internet speeds up to 50 Mbps, while FTTH is available in sixteen communities (MTS, 2014 AR, p. 12).

In contrast, Bell only began to deploy such services first in the Atlantic Provinces in 2009, followed a year later in Ontario and Quebec. Bell boasts that 7.5 million businesses and homes currently have access to its FTTN or FTTH network (Bell, 2015 BSO Submission, para 39), and that its Fibe TV is available to 6.2 million households (BCE, 2015 AR, p. 32).

These numbers may appear impressive at first blush but reconcile them with Statistics Canada data on the number of businesses and residential households in Bell’s service areas and a different picture takes shape: i.e. only about 60% of all households have access to Fibe TV, while less than two thirds of residential households and businesses have access to the company’s FTTN and FTTH network. In short, Bell was slower off the mark than MTS and continues to lag behind in terms of the uptake of these services. Table 4 below illustrates the pint. .

Table 4: IPTV Subscribers, 2004-2014

Table 4

Sources: Company Annual Reports.

The uptake of the MTS’s Ultimate TV IPTV services has also been swifter than the take-up of Bell’s Fibe TV in its territory. Indeed, as Table 5 below illustrates, the take-up of MTS’s Ultimate TV is nearly twice that of Bell.

Table 5: IPTV Subscribers/Total Network Access Connections, MTS vs Bell, 2012-2014

Table 5 

Sources: Company Annual Reports.

Small Cable Packages, Pick & Pay TV and Consumer Choice: MTS Subscribers are Already There

The fact that IPTV take up in Manitoba is high compared to the standards that prevail in Bell’s operating areas reflects the broader fight that has been taking shape over “cable TV” during the past decade. Indeed, the conservative versus more progressive views of Bell and MTS, respectively, also comes into focus when we look closer at their respective approaches to TV.

In this regard, Bell, the largest vertically-integrated telecoms-internet and media conglomerate in the country, and the biggest force in TV by far (61 TV channels and one-third of all TV revenue), has fought the CRTC tooth and nail over the regulator’s push to give people more choice over their cable TV subscriptions by mandating the offering of “skinny basic”, pared down channel bundles and, by the end of 2016, true ala carte channel offerings. Indeed, having banked on the vertically-integrated model through its take-over of CTV and Astral in 2011 and 2013, respectively, Bell has been loath to yield control over its TV operations.

MTS, in contrast, is not vertically-integrated, and having taken the plunge into the TV delivery business with the launch of its IPTV services since 2003-2004, it has been eager to pick up subscribers as swiftly as it can. To this end it has been successful, with twice the number of subscribers on a per capita basis as Bell (see Table 5 above). And as part of this effort, MTS has been offering smaller TV packages for several years and even some of the most popular sports channels on a pick-and-pay basis.

Thus, as the company states in its most recent Annual Report about the CRTC’s Talk TV rulings last year:

. . . Because we offer a number of services on a standalone basis today, the changes to our systems to introduce pick-and-pay by December 2016 should also be relatively simple to implement (p. 25).

Yet, while MTS has been ahead of the curve, it also notes year-after-year that access to programming, especially high-end entertainment and sports programs, has been extremely difficult. Why? Because:

Much of this content is created and/or owned by our competitors (Bell, Rogers and Shaw), who could have conflicting interests when we negotiate for their content. To date, the CRTC has offered broadcasting distributors such as MTS limited protection against attempts by our competitors who own this content (for use in both traditional television and mobile applications) to charge us unfair rates or deny us access to this content altogether (emphasis added, MTS, 2015 AR, p. 25).

In other words, the CRTC’s attempts to introduce more competition and flexibility have been met by fierce opposition from Bell, which has turned to Cabinet and the courts in a series of bids to overturn these moves. Smaller, non vertically-integrated entities such as MTS, however, have seen the regulator as offering too little, too late.

Data Caps: Hesitant Use at MTS versus Major New Revenue Stream and Broadcast TV Protection Tool @ BCE

Another significant area where MTS has distinguished itself from Bell is in the use of data caps. As MTS comments,

. . . We are the only provider in Manitoba to provide unlimited data plans. With MTS, our customers can surf, download and stream all they want on our Internet and wireless services without worrying about paying overage charges within Manitoba. Our wireless networks, coverage and experience are all built to make it easy to stay powered and connected (MTS, 2014 AR, p. 7).

At Bell, in contrast, data caps are prevalent and so-called overage charges steep. Whereas MTS has been hesitant to use data caps to limit how people use the mobile wireless and internet access they pay for, Bell uses restrictive data caps routinely as a lucrative new stream of revenue and to protect its highly leveraged investments in broadcasting from the onslaught of over-the-top streaming service such as Netflix, Spotify and so forth.

This point strikes at the heart of Bell’s bid to acquire MTS because, as the telecoms consultancy Rewheel (2015) has shown, in markets that go from 4 to 3 wireless carriers, not only do prices tend to rise steeply but data caps become smaller and the cost of data on a per GB basis far higher. BCE’s take-over of MTS threatens to take a situation that is already exceptional by international standards (i.e. the prevalence of data caps is comparable in only three other OECD countries: Australia, Iceland and New Zealand) from bad to worse.

In sum, with data caps much less common and the cost per GB much lower in Manitoba than in most of Bell’s operating territory, the potential for similar results to take hold in Manitoba are great, especially with the CEOs and financial officers of both firms openly talking about the desire to drive up ARPU at MTS.

Some Concluding Observations and Options for What Might be Done

To be sure, one has to be careful not to idealize conditions in sunny Manitoba versus those in Bell’s operating territories. Indeed, not all is just fine in Manitoba.

The CRTC’s review of basic telecommunications service, for example, heard from one intervener after another that broadband access in both companies’ operating territories leave much to be desired. Yet, neither company appears eager to rectify the situation unless a strict business case can be made to do so. Moreover, while BCE and MTS executives have waxed on at length about how to raise average revenue per user (ARPU) at MTS, they have had little to say about how rural service might be improved (BCE, Analyst Presentation, 2016, p. 6).

The contention that conditions in the province lag those in Central and Eastern Canada, however, and that Bell will ride to the rescue of a beleaguered provincial carrier down on its knees due to populist pandering through cheap services that have undercut the potential for dynamic competition and innovation over the long run, is woefully misleading. There is no evidence that competition will become more intense on account of a marriage of the two companies, especially if Bell hands off a third of MTS’s mobile wireless subscribers and retail stores to Telus. This will be doubly certain without any game plan to ensure Rogers maintains network access comparable to what it currently has in Manitoba, but even then that would do little more than keep the tight oligopoly alive, and there is little to commend such a policy.

Furthermore, there is little to no evidence of a profit crunch at MTS disabling its ability to invest substantially in the information infrastructure needed to support the Digital Economy in the 21st Century. In fact, profit and investment levels are higher at MTS than at BCE, while prices remain substantially less in Manitoba compared to BC, Alberta and Ontario where the dominance of the big three remains solid. Despite the significantly lower prices in the province, ARPU levels at MTS are consistent with those elsewhere in Canada, implying that cheaper rates are leading to more use – exactly what the aim of good communication policy should be. Any takeover of MTS by Bell would likely see such realities quickly overtaken by Bell’s preferred model where expensive prices, restrictive data caps and high ‘overage charges’ are the norm.

So, what’s to be done? From easiest to hardest, at least in terms of political will, four options seem possible. They are:

Option #1: Do Nothing

Accept the deal as proposed by Bell with the divestitures to Telus and maybe some minor tinkering around the edges.

Option #2: The OFCOM Solution

In this scenario, Canadian regulators could join forces to arrive at a solution similar to what Ofcom did in 2011 when faced by a reduction of five mobile wireless competitors to four in the UK market. In that case, when Orange (France Telecom) and T-Mobile (Deutsch Telecom), the 3rd and 4th biggest players in the market, respectively, proposed to merge in 2011, the UK telecoms and media regulator blessed their merger on the condition that the new entity – Everything Everywhere (EE) — hand over a quarter of its prized LTE/4G spectrum to the number four player, Hutchison 3. The two other largest players – Vodafone and O2 – complained bitterly, but to no avail, and with access to spectrum, towers and other resources needed to be viable, 3 stepped into the breach to become a significant 4th player in the UK market ever since.

In the present situation, Bell’s plan to divest subscribers to Telus might look good on paper but ignores their long-standing network-sharing agreement. In the eventuality that Bell does acquire MTS, steps might be taken that simultaneously prevent Rogers from being frozen out the market once its network sharing agreement with MTS comes to an end while going further to support Telus as a larger force in the province at the same time as a new 4th player is encouraged.

Yet the chance of a new 4th player emerging in Manitoba are slim given that the most likely candidates, e.g. Shaw and Wind, already showed little interest in entering the province before the latter was taken over by the former. Indications since are that their reluctance to launch in Manitoba has, if anything, hardened. Shaw, for instance, transferred the 1700 MHz AWS spectrum it acquired at discount rates in 2008 as part of the government’s bid to cultivate new entrants to Rogers in 2014, while Wind sold 15 MHz paired AWS-1 spectrum to MTS last year (MTS, AR 2015, 6).

Thus, while potentially the most interesting and earnest option on offer, the hope of keeping four players alive — the “Ofcom Solution” — is probably the most complicated and least likely to work.

Option #3: Double-down on the open access and regulated wholesale access rules while promoting Mobile Virtual Network Operators (MVNOs)

Given that the second option is unlikely to succeed, and the reasonable prospect that a combined Bell-Telus arrangement and a marginalized Rogers might lead to an even tighter oligopoly than that which already exists in much of the rest of the country – i.e. with effectively 2.5 players – regulators might double down on the CRTC’s wholesale mobile wireless ruling from last year, while expanding it to include stricter access to towers, backhaul and for MVNOs.

Strict limits on the use of data caps might also be imposed. They might even be banished for a period of time, as the FCC recently did as a condition for blessing Charter Communications’ acquisition of Time Warner Cable and Bright House Networks (see here).

Option #4: Kill the deal

If evidence and rational argument were our guiding light, then the most palatable option – but also perhaps the most politically difficult, especially given Bell’s intensive lobbying of the new government some thirty-two times in the seventeen weeks since the Liberals have been in power – would be to simply kill the deal.

With concentration levels already sky high, it would be unseemly to bless more consolidation. This is especially so with the CRTC and Competition Bureau having found on several occasions in the past year that Bell, Rogers and Telus have significant market power in the mobile wireless and wireline markets and that they have used such power to do everything they can to give new rivals a still birth. Both regulators also arrived at similar findings on the TV side as well, to which the CRTC’s series of TalkTV decisions are a response.

Without these remedies having yet had time to produce the desired results, and Bell – more than most – fighting them tooth and nail every step of the way, giving it the green light to buy MTS would be akin to blessing bad behaviour. Moreover, Bell’s attempt to tee up a take-over of MTS within this context is a sure sign of hubris, and reason enough to turn it back.

A Radical Broadband Internet & Cultural Policy for Canada

This post responds to last weekend’s announcement by Canadian Heritage Minister Melanie Joly of a top-to-bottom review of Canadian broadcast, arts and culture policy. It’s also informed by the CRTC’s #TalkBroadband review where it is wrestling with the vital question of whether universal, affordable basic telecoms services should be expanded to include broadband internet access and, if so, at what standards of speed, quality and affordability, and who should pay for it all?

Both events offer enormous opportunities for good things to happen, but also for much mischief, especially if those who have been lobbying the new government day and night since it arrived in office last November get their way. Indeed, Bell has lobbied various arms of the new Trudeau government thirty-two times – nearly twice a week! — between the time it took power in November and the end of March (Office of the Commissioner of Lobbying of Canada). In light of this, while careful and considered thought is essential, there is no time to waste.

In this post, I want to do three things:

  1. outline the scale of the media economy and the state of concentration and vertical integration across the telecoms, internet and media landscape in Canada – the bedrock upon which all else unfolds;
  2. discuss what regulators and policy-makers have done in response to these conditions so far and broader policy issues related to broadband internet, mobile wireless and broadcast policy; and
  3. conclude with five modest proposals, one large one and one radical suggestion about what might be done to close the gap between how things are and what we might want them to be.

A Lay of the Land: Bigger Players and A Bigger Pie

While the Canadian media economy is small by US standards, it is amongst the biggest dozen or so in the world. The telecoms, internet and media markets in Canada have nearly quadrupled in size in the past thirty years. Total revenues were $75.4 billion in 2014.

Is media ownership concentration in Canada high?

Yes, based on historical, international and conventional economic measures (see the CMCR Project’s Media and Internet Concentration in Canada, 1984-2014 report).

Is the level of vertical integration in Canada high? Yes. The top 4 Canadian vertically-integrated (VI) companies’ – Bell, Rogers, Shaw, QMI, in that order — share of all telecom, internet and media revenues is 57%.

Figure 1: The “Big 4” VI Companies’ Share of the Media Economy, 2014

Figure-3-Vertical-Integration-and-the-Network-Media-Ecology-2014

Sources: CMCR Project Media Industry Data.

This is significantly higher than the top four VI companies in the US (40%): AT&T (DirecTV), Comcast, Charter (including Time Warner & Bright House) and Cox. Figure 2 below shows the state of affairs before yesterdays amalgamation of Charter, Time Warner and Brighthouse was approved.

Figure 2

 

Screenshot 2016-04-27 02.20.18

Sources: Company Annual Reports.

Canada ranks at the very top of the list of 30 countries studied by the IMCRP in terms of vertical integration (see here and here).

The big Canadian telcos – except Telus – all own substantial television operations, sports teams and arenas, and so forth. Other than AT&T’s recent acquisition of DirecTV, most US telcos do not own their own television and film operations: Verizon, Frontier, Centurylink, T-Mobile. Besides AT&T, there are no telcos on the list of four biggest vertically-integrated companies in the US.

But what about Google, Facebook and Netflix? Their combined share of all media revenues in Canada is less than 4 percent – as of 2014 (see CMCR Project Workbook “Top 20 w telecoms” sheet).

Are Canada’s vertically-integrated media companies too big to regulate? No.

Are they being regulated effectively? Not as effectively as they might be.

Do regulators have justifiable reasons to intervene? Yes.

Concentration and vertical integration levels are high and the companies’ abuse of their market power is now a conclusion of fact, not conjecture.

Wireless markets are under-developed; prices per GB on wireless and wireline networks are high; speeds relative to comparable international peers are high for wireless, modest for wireline. Adoption is moderate for the latter, but extremely low for the former (mobile phones) (a series of international price, speed, access, adoption and subsidy comparisons can be found here)

People in Canada are voracious users of the internet and all kinds of media, and have long been so (see Cisco’s Visual Network Index Forecast, 2015-2020, for example). Still, however, they must also measure what they watch and do with these vital tools of modern life because of the high cost of a GB in Canada and the prevalence of relatively low data caps on wireless and wireline networks.

Restrictive data caps reflect the high levels of vertical integration in Canada and serve to protect the VI giant’s broadcast operations from streaming services like Netflix, etc. Just two days ago, in contrast, the FCC in the US approved the take-over of the Time Warner and Brighthouse cable companies by Charter but only on condition that it commit to not using data caps for the next seven years. This was done specifically to remove an barriers to the further development of over-the-top video services like Netflix, Amazon Prime, and unbundled services from CBS, Viacom, HBO, the NLB, and so on (see here, here and the WSJ).

In Canada, the CRTC gave provisional blessing to data caps back in 2009. However, they have gone from being used sparingly to manage internet congestion to become a steady and lucrative new stream of revenue for Bell, Rogers, Telus and Videotron ever since (Shaw advertises data caps but does not apply them). Canadians loathe data caps and the expensive “overage charges” they entail. Data caps send a dumb message as well: that somehow we are using “too much internet”.

While Shaw distinguished itself on this point when appearing before the CRTC on Tuesday, it has been discouraging to listen to Bell, Telus, MTS, SaskTel, Bragg and the small indy telcos talk about the need to scrimp on how much internet people use and the speeds that should be available. Their visions of what Canadians deserve as part of a universal basic broadband service is myopic and wholly uninspiring.

The extensive reliance on relatively low data caps in Canada constrains what and how people watch TV, listen to music, communicate with one another over the internet and mobile devices, and work. As part of human experience, and critical infrastructure for society and economy writ large, this is a problem.

Information and cultural goods are public goods and paying for them out of the public purse is reasonable and ought to be pursued but commercial media stand steadfastly and vocally opposed to any such expansion of public communication. I propose that we amalgamate Canada Post with the CBC to create the Canadian Communications Corporation, the combined result of which could operate as the 4th National Wireless Company, Broadband Provider in remote, rural and under-served urban communities, and Public Broadcaster rolled into one.

Netflix and Google should be able ply the land free as they like within the usual bounds of the rule of law with respect to market power, privacy, copyright, free speech, etc.

It is not unreasonable, however, to talk about levying a “public data resource” royalty on Google in return for giving it a free hand in gathering all the data from our ‘human’ and natural resources that it uses to run Google Search, Android, Google Maps, Google Earth, Google Books, etc. Such a levy could be used to restore some of Statistics Canada’s funding and technical expertise, and the long-form census. At the very least, foreign internet firms operating in Canada should pay taxes like the rest of us. Indeed, rumour has it that Canada is the only country where Netflix doesn’t pay any taxes. Western University Professor Sam Trosow is right: we must think about information policy in a holistic way.

Whereas the Competition Bureau folded in its antitrust investigation of Google last week the day before the European Commission opened up a second prong in its antitrust case against the digital behemoth – the first with respect to its dominance of EU search markets, where it often has a market share over 90%, the latest a new front targeting Google’s leveraging of its Android operating system to gain prime real estate on people’s mobile devices for the its Play Store, Chrome Browser and Search to the exclusion of other competitors and a different range of preloaded functions, capabilities and apps – there is still time to take another look in light of the fuller view being brought into focus by Joly’s DigiCanCon review and the CRTC’s ongoing #TalkBroadband proceeding. We need a “whole of government” approach, and so far, that is missing in action.

What are regulators doing?

They are:

Unbundling the Network: Partially. Hesitantly. . . . Slowly turning from a systems and broadcast-centric view of the world to a lego-land, telecoms-internet-mobile wireless centric view of the world – skinny basic, untied streaming tv services like Shomi and Crave, and pick-and-pay TV are just the start (for an early vision along these lines, see Huber’s The Geodesic Network II).

The CRTC and the previous government have made the high levels of concentration in mobile wireless, broadcast distribution undertakings (DBUs) and television a centre-piece of their proceedings and policies.

They are rediscovering market power

The CRTC called a spade a spade in its Wholesale Mobile Wireless decision last year, for instance:

Bell Mobility, RCP [Rogers], and TCC [Telus] collectively possess market power in the national market for GSM-based wholesale MVNO access (CRTC 2015-177, para 88).

The Competition Bureau’s findings were crucial to this outcome, although its appearance before the CRTC hearing on the matter was abysmal.

They have rediscovered and applied section 27 of the Telecommunications Act in three cases: Wholesale Roaming investigation 2014-398; Wholesale Mobile Wireless Decision 2015-177; Mobile TV 2015-26.

The Wholesale Roaming investigation 2014-398 found that wholesale mobile wireless roaming rates were “clear instances of unjust discrimination and undue preference”; banished exclusivity provisions in wholesale roaming agreements; and opened a wider examination into wholesale mobile wireless services that led to the second-shoe falling, the Wholesale Mobile Wireless Decision 2015-177.

In Wholesale Mobile Wireless Decision 2015-177 the CRTC re-asserted its authority to regulate wholesale mobile wireless facilities and rates, set temporary caps on wholesale roaming rates and called a Phase II costing proceeding upon which it will set out new guidelines for wholesale wireless roaming rates.

The Mobile TV 2015-26 Decision did four things.

  1. it found that Bell and Videotron were giving themselves “an undue and unreasonable preference” by “providing the data connectivity and transport required for consumers to access the mobile TV services at substantially lower costs . . . relative to other audiovisual content services”.
  2. the CRTC concluded that this was bad for competition, the development and growth of new OTT services, and for consumer-citizens.
  3. it drew a sharp line between transmission (common carriage) and broadcasting (content). In so doing, it forced Bell, Shaw and Rogers to bring their Mobile TV offerings into compliance with some of the common carrier principles flowing from section 27 of the Telecommunications Act.
  4. it acted on the well-founded and meticulously researched and formulated complaint by a citizen and now Ph.D. student in the School of Journalism and Communication at Carleton University, Ben Klass.

Return of the State and Zombie Free Markets

That the previous government’s actions and ongoing regulatory intervention in the market is substantial in Canada is beyond doubt. At the same time, however, this is not unique. We have seen the “return of the state” in many countries. In the real world, the effective operation of “real markets” depends on the rule of law and the firm hand of independent regulators, back-stopped by, yet independent from, politicians, policy makers and the Ministers whose bailiwick it is to see that good things happen (in this case, this is Minister Navdeep Bains at Innovation, Science and Economic Development and Minister Melanie Joly at Canadian Heritage).

In terms of what has been done in recent years, we have had spectrum auctions aplenty, explicit spectrum set asides for new cellcos, regulated wholesale mobile wireless roaming rates, adoption of the Vertical Integration Code, the stripped down ‘skinny basic’ TV with a price cap, the push to keep over-the-air TV alive in so that the digital switch over of a few years back might bear fruit and become a thorn in the side of cable, satellite and IPTV companies whose rates continue to climb much faster than inflation, and the forced unbundling of tv channels.

All of these steps run counter to some of the companies’ – especially Bell and Shaw, but less so Rogers and QMI — ‘walled garden/information control’ models of operation. Having banked on such a model (and with the banks, especially RBC, holding significant ownership stakes in most of the key players), the push back against these efforts to limit the companies’ ambitions are coming from some of the most powerful forces in the land. Such push back can be seen, for example, in:

  • Bell’s recurring editorial interventions in the country’s biggest TV and radio news media outlets;
  • litigation (e.g. against the Mobile TV, Wireless Code, Superbowl Simsub rulings from the CRTC);
  • a Petition to Cabinet to overturn the CRTC’s forward looking wholesale access to fibre-to-the-X ruling;
  • threats of capital investment strikes and a bevy of other efforts to turn back the tide.

So what are the limits to this newly interventionist Regulatory State?

First, while the CRTC has rediscovered section 27 of the Telecommunications Act – the no undue preference clause – we must remember that it is followed immediately by section 28, which those in the know see as saying that carriers cannot give undue preference EXCEPT when doing so advances the objectives of the Broadcasting Act. This puts the best bits of the telecoms act at war with itself and risks subordinating telecommunications – broadband internet, basically – to broadcasting.

Such waffling runs counter to the principles of telecommunications upon which the open internet and mobile phones are built — tried and trued principles that come down to us in section 36 of the Telecommunications Act from Roman Roads, Venetian Canals, and the Taxis family courier service in medieval Europe.

Moreover, while one might argue that section 36 should be the crown jewel of the Telecommunications Act, there has been an extreme reluctance to use it. Why?

Regulatory hesitancy seems greatest on this point. This is evident in its almost complete lack of use during a time when those who own the media have become so inextricably intertwined with the ownership and control of messages. It is also evident in the exception carved out for over-riding this principle if it meets some ill-defined objectives of the Broadcasting Act. It is time to wheel section 36 out of storage and put it back in place as the crown jewel around which the entire set-up of the evermore internet- and mobile wireless-centric universe revolves.

This hesitance was also visible in the Mobile TV, a case in which content — and the carriers’ control of it — is very much front and centre. While drawing a sharp line between carriage and content, however, the CRTC refused to reach for the bedrock of common carriage: section 36. This seems to mark the outer limits of where it seems willing to go and in continuation with the fact that this section has been largely dormant over the years.

While the decision to kick some new life into section 27 is to be applauded, and the increased willingness to constrain the power of vertically integrated companies by loosening their grip over the basic building blocks of the network media ecology – spectrum, wholesale mobile wireless facilities and roaming rates, data transport and content – and sharpening the lines between carriage and content is great, much more is needed.

Like what?

5 Modest Suggestions + 1 Big One + 1 Radical One.

  1. Eliminate section 28 of the Telecommunications Act;
  2. Eliminate section 4 in the Broadcasting and Telecommunications acts so that both pieces of legislation can talk to one another (we don’t need new legislation and any attempt at such will only ensnare us in interminable delay and special (corporate) interest pleading;
  3. Breathe new and vigorous life into section 36 by firmly separating control over the infrastructure from influence over the messages / content flowing through the pipes / ether. Sharpen and harden the line between carriage and content. Any proposals to use a levy on ISPs and mobile phones to fund CanCon should be given a stillbirth. While the entrenched clients of the existing broadcasting system never miss a beat to promote “the ISP tax”, these ideas are out of synch with the times and the tastes of the people. They are anti-internet and prolong “a systems” view of the world that conceals a murky labyrinth of cultural policy funds flowing from one pocket to another, often within the vertically-integrated companies.
  4. Impose vertical separation along functional lines between carriage and content, and between wholesale access to passive network infrastructure and network operators and retail telecoms service providers.
  5. Transfer authority over spectrum from Industry Canada to CRTC.

1 Big Proposal

  1. Eliminate the whole category of broadcast distribution undertakings (BDUs) upon which the cable, satellite and IPTV industry is based. It’s all telecom-internet access and carriage now. Take the funds funneled into the Canadian Media Fund from BDUs directly out of the general treasury.

More generally, we need to think about bringing subsidies for broadband connectivity into line with funding for the CBC and Cancon. Currently, the CBC receives $33 per person per year, with nearly three-quarters of that amount again for the arts and culture at large. Broadband internet subsidies, by contrast, are a comparative pittance at roughly $2 per person per year.

I do not think that Canadian citizens would chafe at upping that amount to somewhere between what Sweden spends on broadband internet access subsidies (an average of $5 per person per year) and the CBC ($33 per person per year) (see sheets 3 & 4 here). Any bid to pare back the CBC and other arts and culture funding should be dismissed out of hand. We are not big spenders when it comes to arts, culture and Cancon, and generally at the lower end of the scale. In short, there’s little room for cutting, although how subsidies are organized, allocated and used are other matters altogether and surely up for grabs under the sweeping review that Minister Joly is spearheading.

1 Radical Proposal: The Canadian Communication Corporation (C3)

Merge Canada Post with the CBC to create the Canadian Communication Corporation (CCC) with a mandate to become the fourth national mobile wireless provider; blanket cities with open access and light up the vast stock of under- and unused municipal dark fibre; extend public wifi; extend broadband internet access to under- and unserved people in rural, remote and poor urban areas; create, disseminate and make public art and culture as accessible and enjoyable as possible, and fund it from the treasury not by an opaque labyrinth of intra- and inter-industry funds overseen by a fragmented cultural policy bureaucracy.

The original goal of the U.S. Post Office was to bring “general intelligence to every man’s [sic] doorstep”, while also serving as a heavily subsidized vehicle for delivering newspapers (John, 2010; Starr, 2004). The CCC could be to the broadband internet and mobile-wireless centric world of the 21st century what the Post Office was to the print world of times past.

The CCC could repurpose some of the CBC’s existing spectrum holdings and broadcast towers for mobile wireless service coast-to-coast-to-coast, real estate could be combined and used to site towers, local post offices used to sign up cellphone subscribers and sell devices, and Canada Post vehicles given more windshield time making sure that the country’s system of correspondence, communication and parcel delivery run as they should.

Postal workers are giving some thought to renewing the post office for a broader sense of purpose, but have not ventured into this territory — yet; at the same time, informal discussions with some Canada Post senior execs suggest that this isn’t the first time they have heard of such ideas. Equally important, I don’t detect any inherent hostility against them.

Maybe it is time to discuss a #RadicalMediaPolicy4Canada? With two official proceedings underway, maybe we can broaden the terrain with a third?

* This post reworks ideas first presented at the Forum for Research and Policy in Communication’s Rebooting Canada’s Communication Law at the University of Ottawa, May 22, 2015. Thank you to Monica Auer for inviting to present there.

The clash over the Internet infrastructure of the 21st century

Cities, corporate interests and the new Trudeau government are at the centre of a debate with massive ramifications on how Canadians access the web.

 

Just days before the Trudeau Government was about to be sworn in at the end of 2015, Bell landed a rarely used Cabinet Petition of a vitally important CRTC decision on the new government’s desk. The CRTC decision (2015-326) in question allows wholesale access by rival internet companies such as TekSavvy, Primus, Distributel, etc. to the fibre-based internet access networks now being built by the incumbent telcos and cablecos in cities across the country (Bell’s appeal can be found here and all of the responses for and against it can be found here).

The decision updated the wholesale access regime that has long been in place for the telephone and cable companies’ existing ‘copper’ and ‘coax’ networks and applied it to the fibre optic-based internet access networks that are now being built and which will likely be the information infrastructure for Canada throughout the 21st century. It’s basic thrust was that as the internet infrastructure evolves so too must the wholesale access rules, lest even the modest competition that independent ISPs like TekSavvy, Distributel, Primus and nearly 500 others across the country have been able to generate be left to wither on the vine.

As part of its appeal, Bell sought and obtained support from several mayors, notably the Mayors of Toronto and Ottawa, both of whom submitted letters to Cabinet supporting Bell’s position. Written on city letterhead, the letters implied that Mayors Tory and Watson of Toronto and Ottawa, respectively, were acting on behalf of their cities (see here and here), but the past few weeks has shown that they acted on their own without consulting council.

Thus, last week, in a 28-5 vote, Toronto City Council passed a motion that stands as a major rebuke to Tory while lending its support to the CRTC’s smart, well-reasoned and forward looking decision (see here). The Toronto Star and Globe and Mail both covered the issue.

In Ottawa, Councilors Jeff Leiper and Diane Deans, among others, have raised similar concerns and yesterday (February 10), Leiper introduced a motion in City Council similar to that adopted by Toronto. The motion is significant not just because it too, if passed, will stand as a rebuke to Watson and support the CRTC, but also because Leiper has several years of high level experience at the CRTC and much experience before that at a major consultancy specializing in the telecoms and internet industry. The plan is to put the motion to a vote at the next meeting of City Council on February 24. The Ottawa Citizen covered the story here.

These moves by the Ottawa and Toronto city councils also line up with an intervention by Calgary Mayor Naheed Nenshi, who far more than just offering up a modified boilerplate letter along the lines offered by Tory and Watson, had city staff prepare a smart and very detailed 30 page report in support of the CRTC, and with strong arguments as to why more competition is both needed and possible. You can find this intervention here.

While the mayors of Toronto and Ottawa and a few others signed off on letters in support of Bell, most cities across the country sat this one out: e.g. Montreal, Windsor, Vancouver, Quebec City, Edmonton, Winnipeg, Saskatoon, Halifax, St. John’s, Saint John’s, etc. We can be quite certain that Bell approached these cities and, not feeling that they could support the company, they likely chose to stay silent. Add these cities to Calgary’s opposition, and the overwhelming majority of Canadian’s live in cities that have not lined up in Bell’s corner.

There’s two other points to be made about Tory and Watson’s support. First, both of their letters repeat one of Bell’s key talking points on the issue: namely, that the CRTC is unfairly giving rivals discounted access to its infrastructure and this will likely deter future investment. As Watson told the Ottawa Citizen yesterday,

“They [i.e. Bell and the other companies] invest tens of millions of dollars in their network, just to have competitors come and use their network at a severely reduced cost” (emphasis added).

A week earlier John Tory hit the same notes in an interview with the Toronto Star:

“If you put politics aside, . . . when people make these investments, they have to be able to garner proper return on them, otherwise they just won’t make them. And I think that would be very damaging for the city”.

The CRTC dealt with such claims head on in its ruling and rejected them.

The problem with the mayors’ view is that the CRTC’s decision does not grant discounted access to the incumbent telephone and cable companies fibre-based networks. Instead, it gives rivals regulated access on terms that are still being hammered out between industry players and the regulator. However, if history is our guide, and it no doubt is, in the case of the old ‘copper’ networks, the Commission set the wholesale rates at a 40% mark-up on costs, or in other words, at a level that guarantees Bell a 40% return on its investment (see here and here).

In other words, far from being short-changed, Bell is likely to be compensated handsomely for the use of its networks.

Lastly, the intersection of federal telecoms-internet policy with municipal politics in our own time harkens back to the formative era in telecoms in Canada over a century ago. A few examples will help to illustrate the point.

  1. When the federal Patent Commissioner voided Bell patents in 1885 because Bell was not making enough of its equipment in Canada, Bell feared, and others widely believed, that competition would emerge, as happened in the US a few years later. However, this did not transpire. Why? Because while nullifying the patents gave would be competitors access to the technology, Bell’s exclusive municipal franchises blocked cities from granting competing franchises. With only weak powers under a strong federal government that had granted Bell a charter to develop the telephone system for the “general advantage of Canada”, municipalities tried to eek out a tiny amount of influence via their ability to grant franchises, but those often came back to haunt them.
  2. When Kingston pushed to have the telephone company’s poles, wires & rights-of-way taxed as capital assets in 1899, Bell mounted a legal case to have them taxed on their value as scrap–and won.
  3. When competition did break out, as in Montreal in 1888, for instance, Bell launched a ruthless price war with its rival, the Federal Telephone Company, until the latter capitulated and sold out to Bell three years later. In Winnipeg it created a “dummy company”, the People’s Telephone Company, to give the illusion of competition; while in Peterborough and Dundas, to kill new independent telephone Bell gave away service for free;
  4. When Kingston joined the Ontario Municipal Association in 1903 in the adoption of a resolution calling for municipal authority to regulate telephone rates, Bell threatened not to renew its franchise and withhold further capital investment;
  5. In the same year, the Mayors of the Montreal suburb of Westmount and Toronto, William Lighthall and Oliver Howland, respectively, spearheaded a drive to gain greater regulatory authority over telephone rates for municipalities while calling on the federal government to take control of the long distance network. By 1905, 195 municipalities had joined the call, with support from the Montreal and Toronto business associations and the farmers’ association, Dominion Grange. While evidence at the time and recent historical research has shown (Wallsten) that the model had been successful in some Scandinavian countries at the time (e.g. Sweden and Denmark), the cities’ calls fell on deaf ears at the level of the federal government.
  6. As a result of this drift of events, in 1902, 1-in-50 Ottawa citizens had regular telephone service. The upshot, as Bell Canada President Charles Fleetford Side never missed a chance to stress, was that the telephone was treated as a luxury not necessity.[1]

This history reminds us that, unlike Toronto and Ottawa today, and similar to the position now being struck by Calgary and its more progressive mayor Naheed Nenshi, cities have long chafed under their weak position subordinate not just to the giants of the telecoms industry but to a federal government seemingly all-too-willing to turn a blind eye to their demands. Instead, at least historically, the latter has seemed more willing to acquiesce to incumbents’ demands to build things on their own terms and time line rather than, as Bell’s charter once required, for the general advantage of Canada.

The CRTC’s wholesale fibre internet access decision offers a chance to turn this around. While it is easy to get lost in the weeds on this one, the key point is that fibre internet access will be a key part of cities and Canada’s infrastructure for the 21st century. Without it, the stubbornly high levels of concentration and strong tendency for incumbent telephone and cable companies to fly as a flock rather than compete vigorously will likely persist, at the expense of Canadians from coast-to-coast.

The new Trudeau Government should act swiftly and decisively in the present case. It would be wise to avoid granting Bell’s wish lest it erode confidence in the regulator while lending succor to the view that the “Natural Governing Party” – as the Liberal Party is known in far too many quarters — is too close to the industry, and thus unable to act in the best interest of all Canadians.

[1] The points on the history of the telephone in Canada are taken mostly from Robgert MacDougall’s (2014) The People’s Network: The Political Economy of the Telephone in the Gilded Age (pp. 44-46, 125-127). Philadelphia: Penn State University; Dwayne Winseck (1998). Reconvergence: A Political Economy of Telecommunications in Canada. Cresskill, NJ: Hampton; Robert. E. Babe. (1990). Telecommunications in Canada. Toronto: University of Toronto.

The Anatomy of Internet Service Provider Responsibility: Three-Strikes Copyright Law Comes to New Zealand

Changes in copyright laws are changing the Internet and how people use it around the world. This has become increasingly so since 2008, when the Recording Industry Association of America (RIAA) and International Federation of Phonographic Industries (IFPI ) set on a quest to make “ISP and intermediary responsibility” the law of the land in one country after another.

The idea that ISPs should be legally required to block access to websites that facilitate illegal downloading and file sharing as well as cut-off the Internet connections of those who use such sites is not a new idea but one that has been around since the 1990s, but politically impossible to implement. Now, however, as the IPFI states approvingly in its 2010 Digital Music Report, “the mood of change is clearly reaching governments” (p. 3).

Indeed it has. Since the IPFI and RIAA began their worldwide drive, Britain, France, Sweden, Australia, Ireland, South Korea and Taiwan have all adopted new copyright laws in which “intermediary responsibility” and three strikes rules play a starring role. These issues are currently coming to a head in the U.S., where Congress is considering two bills that would extend intermediary responsibility well beyond ISPs, websites and hosting services to include advertisers, search engines and financial intermediaries (i.e. banks and online payment services): the Protect IP and Stop Online Privacy acts.

The most recent convert to the copyright maximalist faith is New Zealand. Its new Copyright (Infringing File Sharing) Regulations, 2011 kicked into gear in September. It’s core features include a three-strikes law that sets out a sequence of progressively more punishing measures: notices, the possibility of a fine of up to $15,000 for repeat offences, and cutting off the Internet accounts of repeat infringers.

In the past few weeks, the Recording Industry Association of New Zealand (RIANZ) delivered its first batch of notices of infringement to four of the biggest ISPs in the country: Telecom, Vodafone, Orcon and TelstraClear. They’ll be sent to Internet subscribers as soon as the ISPs sort out who has to pay what for the delivery service.

The notices target 75 IP addresses on behalf of Universal Music, but one serious question in this is just who does an IP addresses belong to: individuals, a household, an office, or some other unit of organization? Until this issue is cleared up, whole households risk being removed from the Internet on account of one person in it who has run afoul of laws governing just one aspect of life online.

Yet before Universal Music and the RIANZ entered the scene, New Zealand’s ISPs had already noticed something else: a steep drop in international peer-to-peer Internet traffic. It was like somebody clamped down on the country’s Internet connection to the outside world.

Orcon — one of the major ISPs involved — noted that its international p2p Internet traffic had fallen by ten percent. As the second biggest type of data traffic behind streaming video from websites like YouTube, the decline in p2p Internet traffic has been significant.

This is not the first time this has happened, and some argue that it is a recurring and expected pattern. When Sweden implemented its new Intellectual Property Rights Enforcement Directive (IPRED) in April 2009 Internet traffic plunged thirty percent overnight (see here). The outcome left Swedish copyright lawyer Henrik Pontén delighted:

“The majority of all internet traffic is file sharing, which is why nothing other than the new IPRED law can explain this major drop in traffic . . . . This sends a very strong signal that the legislation works”.

Indeed, from the view of the music and entertainment industries, “virtually all P2P content is illegal”, as the IFPI baldly declares in its most recent Digital Music Report, (p. 14). Therefore, suppressing it is both justifiable and a deliberate aim of the new copyright rules. As New Zealand’s Ministry of Economic Development put it, the new law is all about “stopping illegal peer-to-peer file sharing such as sharing movies via BitTorrent”.

Supporters of this approach argue that the ‘graduated response’ approach to piracy achieves its goals “without unduly impacting individual liberties”. The majority of Internet users stop infringing after receiving notices from their ISPs (see here)

These are deeply problematic claims, however. Among other things, they blithely ignore the fact that p2p serves many other purposes than just facilitating traffic in ill-gotten media content.

To take just a few examples, the band Nine Inch Nails uses p2p to offer free downloads of their music. Akamai uses it to create ‘content distribution networks’ for entities like Netflix, Facebook and Amazon that run parallel to the Internet so as to relieve congestion on the telecoms carriers and ISPs networks. The CBC used it in 2008 to deliver an episode of  Canada’s Next Great Prime Minister via BitTorrent; the BBC still uses it for its iPlayer service.

P2P also underpins ancient pre-web 1.0 Internet functions such as Internet Relay Chat, the nasty bits of 4chan, and the privacy enhancing, authoritarian-fighting Tor protocol that has been used in the “Arab Uprising” and by the hacktivist group, Anonymous, alike. In the olden days, media content regulation was seen as more heavy-handed and less respectful to free speech concerns than structural rules that applied equally to all; today, app-specific regulation that deliberately targets specific Internet uses now stand in a similar place in relation to free speech and other democratic values.

App-specific regulation is destined to be fraught with overkill.  While their supporters claim that the “graduated response” and digital intermediary strategy have only a minimal impact on individual liberties (see here and here), a recent UN Internet & Human Rights minced no words when it argued exactly the opposite point of view:

“. . . [C]utting off users from Internet access, regardless of the justification provided, including on the grounds of violating intellectual property rights law, [is] disproportionate and thus a violation of article 19, paragraph 3, of the International Covenant on Civil and Political Rights” (p. 21).

Article 19, by the way, is the article setting out freedom of opinion and expression rights.

Beyond multiple uses of p2p, and freedom of expression values, others raise an economic argument to the effect that RIAA/IFPI-style copyright laws are broadband Internet development killers. Ericsson’s resident intellectual and policy wonk, Renee Summer, made this point in regards to New Zealand’s plans, warning that “the new rules could slow down consumer demand on the Government’s ultra-fast broadband network”. The point was also made with respect to Sweden back in 2009, when John Karlung of the ISP, Banhof, made the connection this way:

“Half the Internet is gone. If this pattern keeps up, it means the extensive broadband network we’ve built will lose its significance.”

The idea that new copyright laws are broadband Internet killers is appealing yet it may be too early to reach this conclusion because most countries have not carefully tracked the impact. Moreover, the Swedish case muddies the waters because a half-year after the new law was introduced, traffic levels climbed back to their original levels.

Whether this was because people simply returned to their old ways or the steep rise in bandwidth hungry TV and entertainment content (e.g. Netflix, LoveFilm, etc.) being delivered online is still an open question. Yet in all cases, significant changes had occurred nonetheless.

First, ISPs are now in the business of regulating information flows and user behaviours, rather than being neutral points of access to the Internet. Second, people modified their Internet use, adopting a slate of new tools — encryption, anonymity, and other means of circumventing the new rules – that reflected a tilt away from the open Internet towards a more closed system.

Changing people’s behaviour is not too be taken lightly and moving control from the edges of the Internet and putting it deeper into its central nodes by way of ISPs and an expanding array of intermediaries is no more palatable in the 21st century than fifteen years ago when first trotted out in the teeth of fierce resistance. Thus, we need to look beyond the careful stage-managed introduction of new copyright rules to carefully assess their impact on the Internet and the ever-widening range of what we do online.

Today, all eyes should be on New Zealand.

Telecom-Media-Internet Politics in Canada: Evidence, Theory & Ideology

We are at a fundamental turning point, a constitutive moment when decisions taken now will set the course of developments across the telecom-media-Internet ecology for years, maybe decades, to come. We’ve just finished one set of hearings, and two more are on the immediate horizon: the CRTC’s hearings on Usage-Based Billing that begin Monday, July 11 and its upcoming so-called ‘fact finding’ hearings on Over-the-Top/new media.

In an interesting and helpful post today, Peter Nowak argued for 7 fundamental guiding rules for telecom issues in Canada, by which he meant the full gamut of issues right across the TMI (telecom-media-internet) spectrum. They are very useful guides and starting points for discussion, and easy to remember to boot. They are:

  1. Ditch Usage-Based Billing
  2. Don’t regulate new media/over-the-top (OTT) services (e.g. Netflix)
  3. Strengthen Net Neutrality
  4. Turf Foreign Ownership Restrictions
  5. Spectrum Set Aside for New Players
  6. Don’t Regulate Cross-media market power (aka vertical integration)
  7. Plan ahead for ‘shared networks’.

I find these very useful starting points; perhaps because I agree with most of them wholeheartedly (1, 2, 3, 5). Others I’d endorse with some caveats (4). Some I would expand on greatly (7). Others I would reject completely because they lack any basis in evidence, history or theory (6).

In terms of foreign ownership, Nowak proposes to drop all of the current limits on ownership of telecoms industries in Canada. He suggests that doing this will increase ‘real competition’ in the market by adding new players. This is not an uncommon position and in my view, its goal of increasing competition is basically a good one. Michael Geist and Mark Goldberg, each in their own way, make much the same point.

There are at least three or four problems, some of which I’ve outlined in another recent post, however, with this notion of dropping foreign ownership, although I am, to repeat, not against the idea in principle. First, there’s a good chance that we could drop the rules and nobody would come. These times are not those of the high-tide of foreign investment, in case anybody has been sleeping under a rock for the past few years.

Second, even if new investment does occur, this doesn’t necessarily mean that new competitors will enter the market. It’s more likely that they’ll just take over one of the incumbents, thereby switching the ‘title’ to the underlying telecom property but not doing anything at all to increase the market, unless the new owners turn out to be better than the current ones.

This is exactly the point made by a recent report by the C.D. Howe Institute. Despite its exuberant support of the idea that all foreign ownership rules across the telecoms-media-Internet board should be dropped, the Howe report was forthright that this would probably not result in more competitors. Instead it would lead to something much woolier: “performance gains” (p. 3).

Good luck assessing that, I’d say. Like “beauty”, performance would mostly be subjective and in the eyes of the beholder. Besides, with all of the existing telecom and broadcast players clamouring for less information disclosure, less regulatory oversight and less transparency, as they did one after another during the vertical integration hearings, how could we possibly know whether this nebulous objective was achieved?

Third, Nowak’s piece is couched in the idea of being a “pragmatic” set of proposals, rather than one that dogmatically sticks to what he sees as the right or left of the political spectrum. Thus unlike the Howe Report’s suggestion to drop foreign ownership rules across the board, he argues that if an integrated telecom-media player wanted to sell to foreign investors, say a US telco like AT&T or Verizon or, just as likely, a private equity group, then Bell Media, for example, would have to sell off its television interests, e.g. CTV (and 28 specialty channels, 28 local television stations and 33 radio stations, although he doesn’t spell that out).

Quebecor would have to do the same with respect to TVA, for example, and its extensive holdings of newspapers and magazines. Rogers would do the same with CityTV, 17 specialty channels and stable of magazines, while Shaw would have to part with its assets in television (Global) and specialty channels (Corus). Fat chance that’ll happen, I’d say.

Moreover, because there is a much broader range of media involved than just telecoms and television due to the fact that the ‘big four’ vertically-integrated media companies (VIMCos) (Bell, Rogers, Shaw, Quebecor) also all have, in different combinations, extensive holdings in radio, newspapers and magazines, it’s not going to be so easy to simply hive of telecoms from television. Indeed, with newspapers and magazines swaddled in their own bundle of tax and investment incentives designed to shore up Canadian ownership, unravelling this stuff will be messy and complicated.

To my mind, this part of the proposal not might have been as fully thought through as it could have been. The C.D. Howe Institute report at least has the virtue of purity and clarity: drop the barriers on everything, telecom, broadcasting, media in general.

Fourth, a very significant problem and one that strikes deeply at whether we want to further allow our culture to be ‘securitized’ and ‘militarized’, US telecom-media-Internet companies and investment capital comes with a lot of national security baggage, particularly so in the telecoms-media-Internet space. Their operations are subject to the Patriot Act and US telecom providers and ISPs have shown a propensity to cooperate with national security agencies in a very murky zone outside the rule of law and without cover of authorized warrants in ways that subsequent courts have found illegal (here, here, here and here).

Microsoft’s acknowledgement in Britain this past week that all U.S. companies like it, whether they admit it or not, are subject to the Patriot Act, was the first real candid acknowledgement of the extra-territorial reach of U.S. national security policy when it comes to matters of the information infrastructure. As Gordon Frazer, managing director of Microsoft UK, admitted, data stored in the cloud was well within the reach of the PATRIOT Act.

The acknowledgement came in response to a question posed by ZdNet journalist, Zack Whittaker. Whittaker asked,

“Can Microsoft guarantee that EU-stored data, held in EU based datacenters, will not leave the European Economic Area under any circumstances — even under a request by the Patriot Act?”

No, Fraser explained, “Microsoft cannot provide those guarantees. Neither can any other company”.

Tying networks, servers, the Internet and everything else in Canada that runs through and on top of these facilities to US national security policy is to sell out fundamental principles regarding open media, transparency and a networked free press for the feint hope that we might achieve a modicum of more competition than we have now, and even then, not ‘real competition’, but rather the kind of newfangled Schumpeterian ‘innovation economics’ pushed by the C.D. Howe report.

But let’s move beyond the issue of foreign ownership to Nowak’s sanguine approach to vertical integration, an approach that I also find problematic. Why? Because he offers no evidence, lessons from history, or theory to support his case.

This is problematic because current evidence shows that concentration across the spectrum of telecom-media-Internet services in Canada is high, in absolute terms, and relative to comparable international standards. I offered a snapshot of this evidence in an easy-to-digest form in my Globe and Mail column last week.

I’ll repeat that here for convenience. In Canada, the ‘big 4 VIMcos’ — Bell, Shaw, Rogers, Quebecor (QMI) — account for:

  • 86 per cent of cable and satellite distribution market
  • 70 per cent of wireless revenues
  • 63 per cent of the wired telephone market
  • 54 per cent of Internet Service Provider revenues
  • 42 per cent of radio
  • 40 per cent of the television universe
  • 19 per cent of the newspaper and magazine markets
  • 61 per cent of total revenues from all of the above media sectors combined.

These numbers are not trumped up in the slightest, and in fact on the matter of the Internet and television services they are actually lower than those offered by the CRTC because of the different methodologies we use. Nowak doesn’t refute these numbers; he just doesn’t deal with them.

Theory tells us that media concentration, for which vertical integration is just one manifestation, embeds a bias for trouble in the ‘structure of the media’. Tim Wu, in the Master Switch, gets things right when he sets up the simple premise that it is important for regulators to curb the potential for companies to leverage power and resources across the three main layers of the telecom-media-Internet system: networks, content/applications and devices.

In theory, I think he is right and, based on the current and historical record, strong measures are needed to prevent companies from leveraging control over any one of these three layers — networks, content, devices — to curb competition and diversity in any other layer.

Nowak is clearly aware of the connection in this regard and he hopes that his first and second principles — ditching UBB and leaving ‘new media’/OTT untouched by regulators — will take care of vertical integration problems by removing the ability of Bell, QMI, Rogers and Shaw from using bandwidth caps and the pay-per Internet model to basically undermine the viability of rival online video distribution services (AppleTV, GoogleTV, Netflix, etc.) that they see as a threat to their own broadcast services. I think that these are important steps, but insufficient to deal with the full range of ways in which leverage across the three layers of the telecom-media-Internet system can be used to hogtie competitors and stifle the fullest range of voices and expression possible.

This is not just hypothetical potential, either, but rather documented by case after case of examples where either access to content or to networks is deployed in the strategic rivalry between less than a handful of players in oligopolistic markets. And when highly capitalized Netcos such as Bell own much smaller content companies like CTV, they have every incentive to use the latter to shore up the position of the former.

The recently completed vertical integration hearings at the CRTC were replete with example after example of this, from network companies such as Telus, SaskTel, MTS Allstream and Public Mobile as well as media content companies, whether the CBC or smaller production companies like Stornoway Productions.

These examples are not just limited to Canada either, but global in scope. They are behind the recent detailed regulatory framework put into place in the US by the FCC and Department of Justice that blessed the merger between Comcast and NBC-Universal, but not before taking comparatively stern steps, especially by Canadian standards, to ensure that NBC-Universal content could not be locked up or used by Comcast to the disadvantage of rivals in the broadcasting business. Furthermore, Comcast was also required to make its television and film content available to Internet competitors and ‘online video distributors’ (OVDs), a new category designed to cover services such as Netflix, Hulu, AppleTV, and so on, and to adhere to open Internet requirements generally.

Other countries such as Australia, Belgium, Britain and New Zealand have dealt with their own experience of networks being used to trample competition and diminish the range of voices and expression possible by going even further to set up rival ‘unbundled’ open networks (Australia) or by mandating ‘structural separation’ between incumbents’ networks (layer 1) and other layers (services, content, devices) in the system. In an important post yesterday, Bill St. Arnaud also talks about the development of networks that are essentially based on pick and choose access to capabilities and functionalities that respond flexibly and recursively to  user generated communication and information needs

The problem, thus, is one that is buttressed by evidence, by theory and by global experience. In light of this, robust measures rather than a sanguine approach to vertical integration is most definitely needed.

And to bring this to a close, the issues raised by vertical integration are not the consequence of innovative, new industrial arrangements or newfangled theory, but rather deeply entrenched historically and indeed endemic to situations where those who control the medium (networks) are also in a position to control the messages (content) flowing through those networks.

Thus, in the first decade of the 20th century in Canada, the Canadian Pacific Telegraph Co. and Great North Western Telegraph Co (the latter under ownership control of Western Union) had exclusive distribution rights for the Associated Press news services in Canada. As part and parcel of the telegraph companies’ bid to buttress their dominance in the highly lucrative telegraph business against a couple of smaller rival upstarts (the Dominion Telegraph Co in Canada and Postal Telegraph Co. in the US), the Canadian Pacific Tel. Co. and Western Union-backed Great North Western Tel. Co. offered one of their premier set of clients — newspapers across the country — access to the AP news service at a very cheap rate. In fact, they gave it away “free”. Sound familiar? (observant readers might also note the persistent recurrence of ‘network infrastructure duopolies’, too)

The AP news service was so cheap because instead of paying the cost for both the news service and the telegraph charges for delivering it from one place to another, Canadian Pacific Tel. Co. and Great North Western Tel Co only charged newspaper subscribers the ‘transmission costs’ for the AP service. The content, under such arrangements, was ‘free’. Of course, this was a real boon to established members of the press and to AP, while it also helped to stitch up the companies’ lock on the telegraph business.  It was a menace to rival news services and a competitive press or telegraph system, however.

The fly-in-the-ointment was that any competitor news service was at a huge disadvantage because its subscribers had to pay the ‘transmission costs’ plus the cost of the news service. Thus, when Winnipeg-based upstart, the Western Associated Press, tried to set up a rival Canadian news service to that of the Associated Press in 1907, it found it’s opportunities blocked at every step of the way because there was simply no way its subscribers could pay two costs — transmission and for the news service — while the AP service was essentially given away free after subscribing newspapers paid the telegraph companies their fees for distribution.

As one muckraking journalist W. F. Maclean wrote in the Toronto World,

“attempts on the part of public service companies [the telegraph companies] to muzzle free expression of opinion by whitholding privileges that are of general right cannot be too strongly condemned.”

The matter found its way before one of the long-lost predecessors to today’s CRTC, and one of the first regulatory bodies in the country, the Board of Railway Commissioners. Canadian Pacific Tel. Co. came out swinging, arguing that the BRC simply had no authority over the news services or to compel it to separate the costs of the news services from transmission costs.

Times were different then, it seems, and the BRC didn’t wilt one bit amidst the hot-heated rhetoric but blasted back that it was compelled by  law to insure that rates were “just and reasonable” and that unless transmission rates were separate, explicit and equitable “telegraph companies could put out of business every newsgathering agency that dared to enter the field of competition with them” (BRC, 1910, p. 275).

The upshot was separation of control over the wires from control over the news business. The regulator had all the authority in the world it needed to break up the ‘double headed news monopoly’.  It is a lesson that the CRTC and everybody else interested in ensuring that we oversee the creation of the most open media with the maximum range of voices and creative expression possible should pay close attention to.

Of course, the modalities of communication have changed tremendously and we now live in age of information abundance rather than scarcity, but as Tim Wu’s Master Switch and the mounting evidence before our very eyes attests, the basic logic of leveraging content and networks to confer advantages on one’s own operations whilst driving others into submission, if not out of business altogether, is alive and well.

This is a basic and easy-to-grasp point, and until we firmly implant it at the heart of the structure and regulation of the telecom-media-Internet system, we will continue to forgo the economic, political, cultural and personal benefits of the most open network media system possible and which further the goals and values that define a free and democratic society.

On that score, Nowak is right, these are not ‘left’ and ‘right’ issues. They are issues, principles and values of concern to all who take the precepts of liberal capitalist democracy seriously and who see in the status quo a condition that is badly lacking by even that non-ideological/utopian standard.

Source:

Board of Railway Commissioners (BRC). (1910). The Western Associated Press v. The Canadian Pacific Railway Company’s Telegraph and the Great Northwestern Telegraph Company of Canada. In Sessional papers of the Parliament of Canada. Ottawa: J. De Labroquerie Tache, Printers to the King’s Most Excellent Majesty.
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