Evidence of meeting #47 for Industry, Science and Technology in the 39th Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was competition.
A recording is available from Parliament.
4:50 p.m.
Professor, University of Calgary, As an Individual
What I find interesting about this is if you think about it, we're regulating the telephone companies because we're worried about market power. We're worried that they'll charge high prices above costs to consumers. Right?
4:50 p.m.
Liberal
4:50 p.m.
Professor, University of Calgary, As an Individual
Why do we regulate them? Why do we have this economic regulation that controls their prices, if it's not to control their market power?
4:50 p.m.
Liberal
Dan McTeague Liberal Pickering—Scarborough East, ON
You had experience working with long distance. It was very successful. What we were worried about was someone using an existing monopoly to drive the price below acquisition to prevent other new competitors from coming in--a proposal that, obviously, we thought on this side made sense.
4:50 p.m.
Professor, University of Calgary, As an Individual
I'll answer the wireless question first, and then I'll come back and answer the relation question.
The wireless question is interesting, in the sense that it's my opinion that wireless is not in the market; wireless is not a competitor. If you were a hypothetical monopolist of all wireline accesses to a particular location, you could raise the price above 5%. Wireless would not stop you from raising the price. You could exercise market power if you had access to all of the wireline pipes into a location. So wireless is not in the market.
If you're asking me, does issuing more licences affect the question about competition between the cable companies and the telephone companies, I would say no.
4:50 p.m.
Liberal
Dan McTeague Liberal Pickering—Scarborough East, ON
The condition is that one of them could be wireless, as two existing wired land lines and one wireless.
4:50 p.m.
Professor, University of Calgary, As an Individual
In my estimation, wireless is a nice kind of comfort there. It's a comfort blanket, but the real competition has to come from the cable company and from the telephone company on the wireline side. That's where the competition has to come from. That's the question about predation, and whether we should be worried about predation.
When you're thinking about these concerns about predation, there are two policy approaches. One policy approach is to say that we have very high priors, that we think predation is going to happen. We think there's a high incentive for it to happen, and we think it's very likely going to happen and be successful.
So you have to ask the question, is it going to be profitable for the ILEC? And will it be successful in terms of creating their market power? Will they be able to drive their prey out of the market?
4:50 p.m.
Liberal
Dan McTeague Liberal Pickering—Scarborough East, ON
Mr. Church, maybe a third, the ability to prove another criminal test.
4:50 p.m.
Professor, University of Calgary, As an Individual
I'm saying when you're thinking about this ex ante, and if you're going to have an ex ante provision against it, you have to take into account whether you think it's actually going to happen. If you have a really high belief that it's going to happen, then you should have an ex ante approach.
On the other hand, if you think it's very unlikely that it's going to happen, then it makes more sense to say, all right, we're not going to constrain the ILEC, we'll let them have the downward pricing flexibility. And if they actually engage in predation, we'll have an ex post approach.
4:50 p.m.
Professor, University of Calgary, As an Individual
So the question is—
4:50 p.m.
Professor, University of Calgary, As an Individual
So the question to ask is, what are the characteristics in this industry that should inform your priors about whether the probability of predation is high or low ex ante? Those considerations, in my opinion, suggest that it's very unlikely that the ILECs will prey the cable companies out because the cost of the cable companies are sunk, they need telephony to participate in the competition between bundles, and it's not going to pay off because you can raise the price. If you try to raise the price, there are VoIP guys who would enter.
4:50 p.m.
Liberal
Dan McTeague Liberal Pickering—Scarborough East, ON
Mr. Church, the scenario you're presenting is one where it is a potential that you will only have a cable company and a telephone company. Where is the incentive for them to compete against each other in your scenario, where it's possible to have only those two as competitors, at the end of the day, in the most dramatic of markets across Canada?
4:50 p.m.
Professor, University of Calgary, As an Individual
I think that's a very good question. You have to ask, why in this situation would two be enough? In other markets we might think that two is not enough. You have to remember that you're comparing. We've got an imperfect regulator for imperfect competition.
We have to ask ourselves, are there characteristics of that market that suggest that the imperfect competition is not going to be so bad that two is so bad? The answer I think is really clear. The nature of the cost characteristics in this industry is that you have very high fixed sunk costs and very low incremental variable costs. Those kinds of industries with those kinds of characteristics lead to very extensive and strong price competition.
4:55 p.m.
Conservative
4:55 p.m.
Bloc
4:55 p.m.
Conservative
4:55 p.m.
Bloc
Paul Crête Bloc Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC
Mr. Geist, I'd like to congratulate you on your presentation on net neutrality.
This minister was asked a question about this very matter in the House and his response was extremely vague. How much time do we have to react to this situation to avoid seeing an Internet haggling situation develop? What are the ramifications of not having legislation in place for 2007 or for the next two to three years? What will the consequences be of government inaction on this front?
4:55 p.m.
Professor of Internet Law, Ottawa University, As an Individual
Thanks. I think that's a good question.
I think the experience we're seeing is that, as time goes by, there are more and more examples. When people were talking about net neutrality a year or two ago, we didn't have the Vidéotron example, we didn't have the Shaw example. We were uncertain about Rogers' activity in terms of some of its package shaping. What we are seeing occur on a pretty consistent basis is that the providers themselves are experimenting with a range of different activities.
This is in an area that is moving incredibly fast, without question. YouTube was an unknown a year ago and yet has developed quite rapidly. With the kind of consolidation we're seeing, the growth of user-generated content and the need for Canadian content online, I think we do run the risk, if we don't act soon, of finding ourselves stuck in an environment where we do have this two-tier Internet.
Further, I think if one takes a look at what happened in the United States, AT&T was willing to voluntarily agree to these terms because as part of a merger it made a lot of sense to give on a net neutrality issue. If we're going to deregulate in the marketplace, now is the time to ensure a net neutrality provision is included.
4:55 p.m.
Bloc
Paul Crête Bloc Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC
Give me some examples of what this will mean for small Internet services providers that develop small software applications or interesting access tools, as opposed to those who purchase these Internet services. How will this impact our society's culture and creativity?
4:55 p.m.
Professor of Internet Law, Ottawa University, As an Individual
I think it can have an enormous effect. In many respects, this is really where the fight is. The worst-cast scenario is that the Googles and the Amazons and the eBays pay and leave everybody else unable to pay, because the fees are simply too high.
I think that in a Canadian environment we've seen an enormous opportunity, from a cultural perspective, in recent years. With user-generated content, many smaller players have the ability to use the network to suddenly find audiences where previously they were unable to do so. But I fear that they may lose some of those audiences, or at least lose the ability to reach those audiences, if they are consigned to a slow track while those who are in a position to pay--broadcasting companies and others--ensure that their content reaches the end-user in as fast a manner as possible.
4:55 p.m.
Bloc
Paul Crête Bloc Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC
Failure to legislate this area has consequences. The people who come out ahead will be the ones who will control the Internet in the absence of legislation.
Is there an urgent need for legislation? What would be the main components of this legislation?
5 p.m.
Professor of Internet Law, Ottawa University, As an Individual
I think it's opportune at a minimum, given that there's a move towards deregulation. It's the sort of thing we know the large providers are anxious to obtain. A net neutrality provision as part of that would probably be seen as a worthwhile price to pay as part of the broader deregulation.
In terms of the kind of provision that we might look to, I think the AT&T-Bell self-merger conditions provide a pretty good definition of what's involved and a pretty good starting point for what we might consider. There's no question that there needs to be debate, but we need to move beyond what the minister last week characterized as merely studying the issue and towards trying to develop such a provision. We need to recognize that even at the OECD level they're actively involved in this context, as is the Canadian government, presumably, in dealing with it. We need to see that happening at a domestic level as well.
5 p.m.
Bloc
Paul Crête Bloc Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC
Therefore, this should be an integral part of reform of local deregulation. It could be a bargaining condition for agreeing to competition. However, access should be guaranteed.
