Industry Committee on Feb. 12th, 2007

[Kirsten Embree, Counsel, Fraser Milner Casgrain LLP, Canadian Association of Internet Providers]

Thank you, Mr. Chairman.

Thank you very much for inviting us here today to speak to the committee.

My name is Kirsten Embree. I've been asked by the Canadian Association of Internet Providers to appear before you today to address the subject of telecommunications deregulation.

The Canadian Association of Internet Providers, or CAIP, as we call it, is one of Canada's largest Internet industry associations, representing both large and small commercial Internet service providers, or ISPs, as well as companies and other organizations that are involved in the industry of Internet service provisioning.

Almost all of CAIP's members are independent ISPs, which means that they are not affiliated, as a result of their ownership, with either the incumbent telephone companies or the incumbent cable companies. As a consequence, CAIP's perspective on the issue of telecommunications deregulation is a unique one. It is one very much oriented towards the experience of new entrants in the market, who must compete with some very large and very well-financed incumbent operators.

Before providing you with our views on the subject of telecommunications deregulation, we thought it might be helpful to give you a brief snapshot or overview of the Canadian Internet services market.

In 2005, the revenues that were generated from the provision of Internet services in Canada reached $4.5 billion, which represented an 8.8% increase over the $4.2 billion generated in 2004. In 2005, the number of households with Internet access subscriptions reached eight million, which represents 64% of all Canadian households. As for the number of households with high-speed Internet access, this number reached 6.4 million households, or 51% of all Canadian households, up from 43% in the previous year.

At first blush, these statistics appear to paint a very rosy picture of the Internet services sector, but the reality of competing in this market is very different, and we are quickly coming to the point where we need to think about whether Canada has taken the right steps to promote competition and customer choice in this market segment.

In the CRTC's 2005 telecommunications monitoring report, there is a table that shows residential Internet subscriptions by type of Internet access provider. We have taken that table and turned it into a pie chart in order to demonstrate more graphically what is happening in this segment of the market.

For the record, our analysis indicates that 54% of all Internet subscribers in 2004 subscribed to the cable companies' high-speed modem service, 42% subscribed to the telephone companies' high-speed DSL services, and only 4% subscribed to the high-speed services of an independent ISP.

In the brief time remaining, I'd like to share with you some of CAIP's thoughts on what we believe has gone wrong with deregulation in the Internet services market and why our members hold such a paltry share, 4%, of that market.

As you may know, the CRTC decided to forbear from regulating the retail Internet services of the incumbent phone and cable companies in the late 1990s. Unfortunately, there was no comprehensive regime in place at that time for independent ISPs to gain access to all of the underlying facilities and services that are needed in order to provide high-speed Internet services to their own end-user customers.

The cable companies' wholesale cable modem service was only tariffed a couple of years ago, notwithstanding the fact that they had launched their own high-speed services more than ten years ago, and the phone companies have either avoided filing tariffs for their wholesale ADSL services or have priced those services so high that independent ISPs have found themselves in a classic margin squeeze.

Competitors need access to essential underlying facilities and services at cost-based rates and without the exorbitant markups that the incumbents will always choose to charge, absent the regulatory oversight of the CRTC. We urge you to take this into consideration in your committee deliberations and to also take a more holistic approach to the issue of telecom deregulation, just as the telecom policy review panel has done, in order to avoid patchwork regulatory fixes that only create problems down the road.

[The Chair, Conservative, James Rajotte]

Thank you very much, Ms. Embree.

We'll now go immediately to Mr. Piercy.

[John Piercy, Board Member, Canadian Cable Systems Alliance]

Thank you.

Good afternoon, everybody. My name is John Piercy. I am here representing the Canadian Cable Systems Alliance. I am a CCSA board member and chair of the CCSA's telecom regulatory committee. I am also president of Mountain Cablevision in Hamilton, Ontario, a CCSA member company.

CCSA represents over 90 small independent cable companies operating in all regions of Canada. Our member companies are generally family-owned businesses serving small and rural centres.

CCSA member companies are the only potential facilities-based competitors in virtually all the markets they serve. These companies have very serious concerns with the draft order.

Let me explain those concerns. The order, as currently drafted, would allow the incumbent telephone company to apply for forbearance as soon as a second facilities-based competitor enters the market. A cable company will satisfy that test as soon as it offers telephone service. The incumbent telephone company would then qualify for forbearance in that market. At that time the local cable company will have few, if any, telephone customers. Even so, the incumbent telephone company will immediately be able to make targeted offers to those customers who indicate an intention to switch to the competing cable company.

The draft order also proposes to eliminate the win-back rules immediately upon its coming into force. With the win-back rules removed, the incumbent' s special offers would be targeted only to those customers who inform the telephone company of their intention to move to a competitive service. Most of the telephone company's customers would not receive these offers. Few of those customers would experience lower prices or new service offerings.

In no other business does a competitor have to inform the dominant player that one of its customers is discontinuing service. In the telephone business, however, the competitor almost always has to request the dominant player to transfer the customer's telephone number before it can serve that customer.

During the number porting process, the incumbent telephone company could target the transferring customer with a better offer before the customer has had chance to try the competitor' s service. While that practice currently violates agreed industry standards, we know that it happens. Without the win-back rules in place, there is little prospect that a competitor could prove when the win-back offers actually begin.

If this order remains as currently drafted, many of our members will not enter the market; the business prospects will be just too bleak.

Our recommendation to the minister is quite simple: retain the market power test for all markets outside the ten identified in the draft order. Once the incumbents can demonstrate, using the Competition Bureau's current test, that they no longer have market power, they should be forborne from regulation. Win-back restrictions should be kept in place until forbearance has been granted in a particular market.

Such an approach would ensure sustainable facilities-based competition in small markets across Canada. If the order is not revised, not only will residential customers not have access to competitive offerings, but small and medium-sized businesses in these communities will not have access to them either. They will continue to pay the higher prices they have always paid, and their plight may well worsen. Without a viable base of residential customers, our members will never be able to launch a sustainable competitive telephone service that can be made available to local businesses.

The changes that we propose would maintain the streamlined regulatory process and increased reliance on market forces, while fostering sustainable competition in markets where otherwise there would be none at all.

l look forward to your questions.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Piercy.

We'll now go to Mr. McTeague, for six minutes.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Mr. Piercy, thank you very much for that. I think you've spoken--as have you, Madam Embree--to the concerns we have expressed here on this side.

I understand clearly that the proposals you're making are not to protect your own industry, but in fact to enhance competition. You may have just heard from the previous witness, who was one of the panellists who wrote the telecom policy review. Absent in that was a pretty substantial chunk of their recommendations, which we considered to be some of the safeguards. Having seen the report and having had some time to discuss it, are you pleased with that report? Are you, to say the least, concerned that the minister has seen fit to take a very different direction?

[John Piercy]

Actually, I think the report was a great report, and I'd like to see the whole thing implemented. I think that would truly put us to a truly competitive marketplace in which a lot of people could succeed and a lot of small businesses could make money.

I think the trick, though, is that you can't do pieces of it. I heard Hank say to give it a couple of years and see what happens; my small member companies, in a couple of years, will be out of business. We have the same problem with the Competition Bureau. I heard that they said they could do a really quick review and prep a case in five months. Well, to a small cable operator, five months could be the difference between living and dying.

We need to have some balance here. We need some ability for the small guys to get into the market and to invest the money that they have to invest to get into that market. There has to be some leveling of the playing field, because right now it's stacked up against these guys, and they're going to struggle to get in.

[The Chair, Conservative, James Rajotte]

Mr. Brison.

[Scott Brison, Liberal, Kings—Hants, NS]

I suppose it would be contingent on the market, but in a town of say 5,000 people, what would be the scale of investment required in that kind of market by a cable company in order to move into the telephony market? I know it's a difficult thing to do, but perhaps you could give an idea of what the risk would be.

[John Piercy]

Actually, it's an easy thing for me to do, because we've launched our telephone service in Hamilton. We have a base of about 40,000 subscribers, so you can scale that up and down. We spent more than $10 million getting into that business. A lot of plant upgrades needed to be done; a fair bit of system development needed to be done; we had to find a partner, because we couldn't do the switching ourselves—we couldn't afford it. If you use that as a measure, for a sub-10,000 base you're looking at somewhere between $2.5 million and $3 million worth of investment that needs to be done.

[Scott Brison, Liberal, Kings—Hants, NS]

Would you have made that investment under the rules proposing no restriction on win-back and the mere presence test in terms of forbearance?

[John Piercy]

It wouldn't be my call. It would have been the call of the owners of our company. Unfortunately, I'm not one of them. But I don't think they would have gotten into the market under those rules. They were scared when getting into the market under the 25% rules. We thought that sounded too small.

[Scott Brison, Liberal, Kings—Hants, NS]

And the notion that due to technological advancements the incremental investment to enter telephony in a local market is not material isn't actually accurate: it does cost a fair bit of capital investment to make that transition.

[John Piercy]

Yes, I think the “not material” side of it depends on how big you are: $2.5 million to a Bell Canada is not material, but $2.5 million to a guy who has to borrow it from the bank and has to say “We think the rules are going to be okay and we don't think they're going to beat us up when we get there”.... It's a material number, at that point.

[Scott Brison, Liberal, Kings—Hants, NS]

I wanted to ask you a question about broadband. Significant parts of the country are not yet served by broadband, in rural and small-town and remote communities. A part of TPRP's report recommends to “immediately commence a program to ensure that affordable and reliable broadband services are available in all regions of Canada, including urban, rural and remote areas, by 2010 at the latest”. What would be the actions of government that you could see helping to facilitate that? There's been no discussion from the government on this, but what would be the role of government to help foster it?

[Kirsten Embree]

There are some programs in place right now to help underwrite the cost of broadband rollout. But it's true, there are a number of areas of the country that don't yet have broadband Internet access and are in desperate need of it.

I'm not really qualified to speak about what we ought to do to fix that problem, but what I can tell you is what the independent Internet sector faces. They would very much like to address that market and are doing so, using innovative new technologies such as point-to-point wireless, fixed wireless services, and even some mobile. But they also need access to underlying facilities on economic terms and conditions, cost-based rates—

[The Chair, Conservative, James Rajotte]

I'm sorry, Mr. Brison, but with the time, we have to move on.

Monsieur Crête.

[Scott Brison, Liberal, Kings—Hants, NS]

Can I just—

[The Chair, Conservative, James Rajotte]

No, I'm sorry, Mr. Brison.

Monsieur Crête.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Thank you, Mr. Chair.

Mr. Piercy, you talked about this in your presentation, but can you or Mr. Embree tell me whether it's possible to bring into effect what concerns local telephony or the order you're suggesting without the reform as a whole taking place? Or must the entire framework absolutely be put in place before corrective action is taken?

I know that the minister has until April 6 to decide whether to act or not. He might do something with regard to local telephony only. Perhaps he might agree to the action being taken comprehensively in the east.

I'd like to know all your views on that subject.

[Kirsten Embree]

I think our response is very easy. You have to fix the wholesale regime first. You have to implement all of the TPRP's recommendations before you start taking a piecemeal deregulatory approach to retail markets, such as the local exchange services market.

[John Piercy]

I would agree with Kirsten. I think you need to have a balance here. You can't just take a third or a half of the report and say that's good enough and the other half will come in two or three years. I think you need to have a check and balance in it. There are issues around wholesale access that need to be addressed; there are issues around quality of service parameters on those accesses that need to be addressed. There are many things that need to be addressed.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

If the minister implements the direction as stated or takes your comments into consideration, how do you see your two associations in two years? What will happen to the members of your associations?

[Kirsten Embree]

As I explained during our presentation, our members now hold only 4% of the high-speed residential Internet market. We used to hold 64%; however, as I said, the problem is that from the date that high-speed services were introduced by the telephone companies and the cable companies, we did not have a comprehensive underlying regime for wholesale access to facilities and services by competitors. We've fought and struggled for the past eight years to get that access. We're still fighting. During the intervening years, our market share has declined to the now 4%.

I think it's fair to say that we need to address some other problems first before we start deregulating more in the retail market.

[John Piercy]

On the small cable side, I think what's going to happen is that a lot of the small cable operators who are just about to launch and will probably proceed with their launch may find themselves driven out of the telephony market. That would hurt them economically; it might force them to sell their companies, because they might have no other option to settle the debt they just got into to get into the market.

Many of the smaller operators will just continue to operate their current set of services and over time will probably dwindle as competition passes them by, because they won't be able to invest the money to get into the market.

I think the biggest issue is what's going to happen to the people who are in those small towns that don't get the competitive service.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Will it be possible to see a situation — somewhat absurd, I would say — in which the giant in a region would seize virtually the entire market, while the small player would be on the verge of collapse, which would mean we would be going back to a regulated service? The result would be a game in which competition would be very artificial because the big company would be virtually forced to keep the small one alive, at least artificially. Is that a situation that can occur, or do you simply think that small businesses will ultimately be wiped out?