Industry Committee on Feb. 5th, 2007

[Richard French]

Mr. McTeague, you're referring to the proposed order in council. There are basically two tests, but it's clear that the one test is the one that constitutes the body of the innovation. Basically, that test says that where there are three facilities-based telecommunication providers, including one mobile wireless provider, which are independently owned and which offer residential local exchange services throughout the market, then that market can be forborne. That is the test.

The business test is slightly different, and perhaps I may, just in passing, note that we're troubled by the draft business test, which we feel will leave us with very substantial questions as to how we're going to implement it. I'll just note that in passing.

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

If I happen to have, as my earlier question alluded to, 5% of the market and the other one has 95% of the market and wireless is simply making its foray, that would be accepted under that test, 95%, 5%?

[Richard French]

Yes. With the greatest respect, the market is not a market for stand-alone services. More and more, the market is a market of packaged services. So what I want to do is this. I want to get cable, I want to get high-speed Internet, I want to get my television, and possibly my wireless from the same company. That is the nature of the business, because you're going to incur customer acquisition costs. Instead of incurring them for one stand-alone product and the revenue stream that's attached to the single stand-alone product, you're going to get three products and three revenue streams associated with that. So more and more, the consumer is going to be looking at packages.

It is, I think, intuitively obvious that at the moment the major cable companies have a television product and the major telephone companies do not have a television product. So I suggest to you, respectfully, that though the market share may appear very impressive, the major entrants, the major cable companies, are well equipped to compete in this marketplace.

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

Then why is there the decision on local forbearance? It almost sounds as if you're supporting what the government is doing.

[Richard French]

I'm not here to support either. I'm trying to provide you with as many facts as I can, and I don't wish to try to persuade you of the validity of one point or another.

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

Then, Mr. French, perhaps you could give us a description of this new bundled market. What is that percentage across Canada today in the urban-rural settings, and do you have a market breakdown from region to region?

[Richard French]

I can only give you the breakdown in terms of the voice-over-Internet product. And let's be clear that we're talking about five companies--Cogeco, Vidéotron, Rogers, Shaw, and EastLink. EastLink's product is not a voice-over-Internet product, but it has a very high competitive market share.

In the areas served by these major cable companies, we're looking at a market share in August of last year of 11.8%. That market share in December 2004 was 3.5%. That's a dramatic change, sir. So that's the kind of growth of that competitive market we're looking at.

Now, it has occurred under the current regulatory framework.

[The Chair, Conservative, James Rajotte]

Mr. McCallum, did you want to go now?

[John McCallum, Liberal, Markham—Unionville, ON]

No, I won't go.

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

In light of the order in December, you've had consultations with the Competition Bureau on how to settle this regulatory imbroglio. That's my word, so you can obviously change that. How's that coming along?

[Richard French]

I haven't been directly involved in those discussions, but you'll be hearing from Sheridan Scott, and I think she's probably in the best position to give you the response. From our point of view, it's been extremely educational, because we've been able to access a lot of competition economics expertise that we didn't have ourselves, and that's been very helpful.

Beyond that, I'm not sure exactly how much more precise I could be, because, as I say, there will be and there remain ambiguities resulting from the fact that the two laws were not written with a view that they should intermesh perfectly, and therefore they do not intermesh perfectly. Therefore legislative amendments would be helpful.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. Shipley.

[Bev Shipley, Conservative, Lambton—Kent—Middlesex, ON]

Thank you, Mr. Chairman.

Thank you, Mr. French, for coming out.

I have just one comment on principle. In terms of regulations and regulatory legislation, would you make a comment to me on where you stand in terms of regulations? Do you support that regulations need to be put in place for pretty much most things? Or do we wait to determine through a process that we have regulations, knowing that there are areas out here in which there likely aren't going to be problems, and then regulate those if there is a problem? Or do we just lay out the regulations right off the bat?

[Richard French]

Mr. Shipley, I want to say first that the interpretation of our act suggests that we do not have, in relation to telecommunication rates and services--and John will correct me if I'm wrong--the option of saying let's wait and see what happens. We have, in fact, an ex ante regime in our act.

If you ask me more generally, I can only say to you that there are 11 members of the commission. They each have an opinion. I'm not allowed to express my own, and I don't want to try to express theirs.

[Bev Shipley, Conservative, Lambton—Kent—Middlesex, ON]

Okay, I have a comment about regulations. There's obviously been some discussion about the reason we're here. They need regulation and the minister's direction. In terms of regulations, do you have a comment about where regulations will enhance or deter or have no impact on competition?

[Richard French]

I'm sorry, could you help me with that?

[Bev Shipley, Conservative, Lambton—Kent—Middlesex, ON]

I guess I'm just asking whether the more regulatory the legislation is, the more negatively that affects competition.

[Richard French]

Here's the counterintuitive reality: Nowhere in the world has competition in a former monopoly telecom system--and they were all former monopoly telecom systems--ever occurred without policy initiatives to foster that competition in the early stages. The discussion and debate right now are on how soon you walk away from those pro-competitive initiatives. They're very counterintuitive.

It's a bit like the airline industry or the railway industry. You've historically had these network industries where competition cannot be fostered without a public policy that creates access for the competitor to facilities owned by the former monopolist. The real question is when you stop doing that. The answer is that we don't know, and there's never been a simple conclusion to that in any country in the world.

As the regulator backs away, there's controversy. Right now we're going through an intense one of those periods. It's extremely important, I think, to recognize that we're talking about network industries that formerly had, under government policy, 100% of the market. The things you do to foster competition in those former monopolies are not the things you do when you're policing competition for soap flakes or cars. It's a different problem.

[Bev Shipley, Conservative, Lambton—Kent—Middlesex, ON]

In my riding there are more rural small towns. In terms of telephone, there's some concern being raised by some people--I have not necessarily heard it--that some of the small companies won't be able to compete. You talked a little bit earlier about the three-by-three test, or the test for protection. Can you tell us a little more about how we can have some assurances that those small companies, most of them independent, will be protected in our small rural communities?

[Richard French]

I can't give you an answer, but I'll give you two answers. I'll try to make it short.

One point of view--from a rural operator who has 4,000 to 12,000 customers and competes with Telus, SaskTel, Bell Canada, or Aliant--is why would I invest to bring my network and organization up to the capacity where I can offer voice-over-Internet protocol when, under the minister's proposed order in council, Bell Canada, Aliant, or SaskTel, my incumbent competitor, is immediately forborne and can immediately compete, targeting my customers? He'll know exactly when someone leaves his network, and he'll phone that person and make an offer. His financial capacity and his organizational capacity are hugely larger than mine, so why would I even try, under those circumstances? That's what you're going to hear from the small cable companies.

My second answer is inspired by a certain notion that the business is going to packages. You're not going to survive with a single stand-alone communications offering. You'll need to have, at a minimum, high-speed Internet, television, and telecom. These companies will need to have that or they will not succeed in the marketplace, because the television companies are going to roll out their television products.

If these companies find themselves at a sub-economic scale where they don't have the organizational wherewithal to meet the challenge of a multi-product offering, they should probably make the rational decision to be consolidated into a larger company.

So those are the two answers. Where you sit on it depends a lot on your feelings and your notion on the role of the state.

Mr. Chairman is telling me my two answers are long enough. Thank you.

[The Chair, Conservative, James Rajotte]

Merci.

We'll go to M. Crête.

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

Thank you, Mr. Chairman.

Mr. French, why did the CRTC not choose to fully follow the guideline, or the position, of the minister and not allow full competition, as the minister recommended? Why did you, instead, retain the progressive rule of 25% of the market? Under section 34 of the Telecommunications Act, are you required to adopt regulations when there is no competition, or for any other reason?

[Richard French]

Following the important process that I described earlier, the CRTC had a very lively internal debate.

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

Very lively?

[Richard French]

Very lively in the sense of very active, very intense.