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:
- Ditch Usage-Based Billing
- Don’t regulate new media/over-the-top (OTT) services (e.g. Netflix)
- Strengthen Net Neutrality
- Turf Foreign Ownership Restrictions
- Spectrum Set Aside for New Players
- Don’t Regulate Cross-media market power (aka vertical integration)
- 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.
As I normally do, this post largely replicates my column for the Globe & Mail today with the addition of a few more links so that you can follow up on things that I refer to. I was at the opening of the hearings today and plan to be there a few more times this week and next. I’ll have more to report in a few days.
Altogether, seventy-eight different parties filed interventions with the CRTC. There are 50 scheduled to give presentations over the next two weeks. You can find all of the links to the briefs and studies filed with the CRTC by the companies and other intervenors here.
The CRTC’s hearings on vertical integration began Monday. For the next two weeks this means that the four major vertically-integrated media companies in Canada – Bell, Shaw, Rogers and Quebecor – could face tough questions about whether they have the clout to dominate telecom, media and Internet services across the country and, if so, what should be done to curb that potential?
The hearings were scheduled last November after the CRTC approved cable giant Shaw’s $2 billion take-over of bankrupt Canwest Media’s television assets (27 television stations, the Global network, 30 specialty cable and satellite channels). It was given added impetus after Bell’s $3.2 billion deal to acquire CTV and the A-channels was given the green light in March.
There is every reason to be skeptical about these hearings given that they are a classic case of “bolting the barn door after the horse has already left the stable”. It is also CRTC approvals all down the line that have allowed integrated media conglomerates to become the norm to begin with.
In the U.S., media conglomerates have become the exception (Comcast/NBC-Universal) after the disastrous AOL Time Warner merger, the collapse of the ‘old’ AT&T, break-up of Viacom-CBC, and so on. Indeed, vertical integration is in retreat in almost every other developed capitalist democracy.
We should also remember that Bell attempted – and failed— to extend its reach from the medium to the message from 2000 to 2006 by taking-over CTV, CHUM, and the Globe & Mail. The fate of Canwest was worse. Yet, we seem to be stuck in a time warp, with CEOs, Cabinet Ministers and the CRTC singing in unison that media conglomerates are all the rage, for much the same reason that they did back in the 1990s.
Be that as it may, Bell, Shaw, Rogers and Quebecor Media Inc. (QMI) do exemplify the trend in Canada. They are the ‘big four’ and the hearings are all about them. They stand at the apex of a set of telecom, media and Internet markets that have grown greatly from $42 billion in revenue in 1998 to $73 billion today (in constant 2010$).
The real issues, however, are not about the sheer size of the ‘big four’, but their market power. Between them, Bell, Shaw, Rogers and QMI control:
- 86 percent of cable and satellite distribution
- 70 percent of wireless revenues
- 63 percent of the wired telephone market
- 54 percent of Internet Service Provider revenues
- 42 percent of radio
- 40 percent of the television universe
- 19 percent of the newspaper and magazine markets
- 61 percent of total revenues from all of the above media sectors combined.
That, by any standard measure of concentration, constitutes a highly concentrated market.
The fact that Bell, Shaw, Rogers and Quebecor stand as gateways to so much raises concerns that they will give undue preference to their own services rather than serve as open gateways to the maximum range of entertainment, communication, knowledge and news possible. In this regard, more is a stake than anti-competitive behaviour, because the range of expression available in a society is a barometer of the quality of freedom of expression and democracy in it. None of the ‘big four’ waxes much about this, however, insisting as they do that the laws of normal economics should be the only measuring rod of value.
To be sure, the ‘big four’ are hardly the only players in town. There is also an important second tier of a dozen or so smaller players that have stuck to their knitting in just one or two media: Telus, MTS, SaskTel, Cogeco, Bragg/Eastlink, the CBC, Astral, Postmedia, Transcontinental, Power Corp, Thomson/Globe & Mail, Torstar and Brunswick News. Then there is a third tier made up of the thousands who fill in the nooks and crannies of the media universe: Wikipedia, the Mark, media workers, star journalists, opinion leaders, blogs, your best friend, personal websites and so on.
The position of all these parties turns on where they sit. To the ‘big four’, to the extent that there’s ever been a ‘golden age’ of media, the picture just presented is it. Thousands upon thousands of actors, big and small, making it nearly impossible for any single entity to exert excess influence over it all.
According to Bell’s hired-gun, University of Alberta economics professor, Jeffrey Church, “vertical integration is beneficial for consumers”. According to him and other briefs filed by the big four, consolidation is good for consumers and Canada because:
- it reflects efficiencies, spurs competitive innovation and is a global trend.
- telecom, media and Internet markets in Canada are “highly competitive”.
- our ‘small media economy’ needs a few deep-pocketed ‘national champions’ to compete globally and invest heavily in innovation at home.
- instances of harm are mostly imaginary and few and far between.
- it helps keep “consumers . . . within the regulated system” (Shaw, p. 4)
The collapse of media conglomerates elsewhere, the evidence of market power above, and the fact that Canada has the eight largest media economy in the world, after France and Italy, and just before South Korea and Spain, should raise an eyebrow or two about claims one through three. Claim four is false (see below), and the last one repugnant.
Many in the second tier and ‘nooks and crannies’ of the media also challenge these claims. Telus, for instance, argues that the harms are real, not prospective. Buying program rights, for example, from CTV, the Comedy Network, TSN and two-dozen other channels, it argues, became a whole lot harder, and more expensive, after Bell Media took them over.
Access, a cooperatively run cable-system-cum-Internet provider in Saskatchewan raises similar concerns. Those that have content, but not distribution networks – Astral, CBC, media workers – make a similar case, but point to how control over networks rather than programming rights can cause real world harm.
Periodic squabbles between Quebecor and Bell highlight much the same point, with Quebecor’s SunTV hobbled in equal measure by self-inflicted wounds and its inability to sign an acceptable ‘contract for carriage’ with Bell. Just last week, the CRTC declared that Bell’s decision to move Shaw’s ‘Cave TV’ service into the upper stratosphere of its offerings conferred an undue preference on channels Bell owned, and ordered the change to be reversed. If these pitched Goliath versus Goliath battles are regular occurrences, we can only imagine the problems that David – the little guy – is having.
While Bell, Shaw, Rogers and QMI operate their own online video services, they assert that congestion problems require them to manage traffic through usage-based billing and bandwidth caps, although such measures cripple rival online video distributors such as Netflix, Apple TV, GoogleTV, and so on. Netflix, for instance, downgrades its services relative to standards elsewhere, and bitterly complains about having to do so, all the time. Smart and savvy telecom guys like Jean-Francois Mezei and rabble-rousing groups like Open Media are convinced that such practices are a deadweight on creativity, innovation, freedom of expression and an open internet.
For the public, the practices just listed and networks that are under-developed and over-priced by global standards constitute subtle yet pervasive constraints on how we use and experience the emerging networked digital media. Stubbornly, Canadians lean against the wind and remain heavy Internet users, downloading and uploading to and from Youtube, virtuously contributing to Wikipedia, and watching porn at rates that rank at the very top by global standards.
All this, too, despite the fact that, as Shaw’s brief repeatedly states, the industry and regulators are one when it comes to the goal of keeping “consumers in the existing broadcasting system”. We can only imagine what things might be like if they strove for the maximum freedom of expression possible, rather than only “as much diversity as practicable”, as the CRTC put it in its 2008 Diversity of Voices decision.
Ultimately, the problems of fully-integrated media conglomerates are congenital, not imaginary. They run hand-in-hand with media history the world over and until we accept that, we’ll have to continue settling for scraps off the table as regulators let the ‘big four’, I mean, the market rip.