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.
Executive Director and General Counsel, Public Interest Advocacy Centre
No, we filed that and—
Independent
Executive Director and General Counsel, Public Interest Advocacy Centre
Yes, we endorsed it, and it went forward to the panel.
Independent
André Arthur Independent Portneuf—Jacques-Cartier, QC
On the same issue of deregulation, did you get the same answers or opposite answers?
It all depends on who pays for the survey, doesn't it?
Executive Director and General Counsel, Public Interest Advocacy Centre
No, not necessarily. I have seen the recent survey that's been filed from Ipsos Reid by the telephone companies, and I've noted the fact that only 14% were aware of the different changes and the fact that one of the key questions has 100 words of introduction before it gets to the individual questions. But be that as it may, it probably stands for what it stands for.
The TRP survey is also interesting on a number of different points. In favour of the general position that we've advanced, there are substantial majorities that look upon the government as having a big role in the idea of regulation of telecommunications. At the same time, there is support for the idea that telephone companies and cable companies should be treated exactly the same by government regulation.
February 26th, 2007 / 4:25 p.m.
Independent
Independent
Conservative
The Chair Conservative James Rajotte
Thank you very much. That concludes our first session here.
I want to thank you, Mr. Janigan, and you, Mr. Munro, for coming in and stating your views and answering our questions. If you have anything further to submit, please do so to the clerk and we'll ensure that all members receive it. Thank you very much for your time.
We will suspend briefly for two or three minutes and ask the next two witnesses to come forward to the table.
Conservative
The Chair Conservative James Rajotte
Okay, members, let's find our seats, please, as quickly as possible. We will start our second session immediately.
We have with us two individuals. This is our academic panel in this study. We have, first of all, Professor Michael Geist, a professor of Internet law at the University of Ottawa. Welcome, Mr. Geist.
Secondly, we have Mr. Jeffrey Church, a professor at the University of Calgary.
We'll start with you, Mr. Geist, for up to five minutes of statement, and then we'll go to Mr. Church for a five-minute opening statement.
Welcome, gentlemen.
Prof. Michael Geist Professor of Internet Law, Ottawa University, As an Individual
Good afternoon, and thank you very much for the invitation.
I am a law professor at the University of Ottawa, where I hold the Canada research chair in Internet and e-commerce law. I am also a syndicated weekly columnist on law and technology issues for the Toronto Star and the Ottawa Citizen. I served on the national task force on spam in 2004-05 and sat on the board of the Canadian Internet Registration Authority, CIRA, which manages the dot-ca domain in Canada, for six years, from 2000 to 2006.
I'd like to briefly discuss three Internet issues that I think have a direct link to telecommunications regulation: network neutrality, broadband access, and spam.
Let me start with net neutrality, an issue that has been generating an increasing amount of attention in recent months and was the subject of a brief question and answer when the minister appeared before your committee last week.
While the definition of net neutrality is open to some debate, at the core is a commitment to ensure that Internet service providers treat all content and applications equally, with no privileges, degrading of service, or prioritization based on the content’s source, ownership, or destination. Several concerns are often raised in the context of net neutrality. The first is the fear of a two-tier Internet.
We know that as providers build faster and faster networks, there is reason to believe they will seek additional compensation to place content on a fast lane and leave those unwilling to pay consigned to a slow lane. While consumers, of course, already pay for different speeds, we're talking about something different here. We're talking potentially about a world in which, let's say, Chapters can't compete in the online book space because its content is on the slow lane while Amazon is paying and is on the fast lane.
It's an Internet where U.S. television shows and movies zip quickly to consumers' computers because the U.S. studios have paid to be on the fast lane, but Canadian content and user-generated content creep along in the slow lane. Or, potentially, it's even an environment where two-tier health care is replicated online, where some health care providers have their content zip along on the fast lane, with those unwilling to pay consigned to the slow lane.
That's a vision of the Internet that may well become a reality. In the U.S., major telecommunications companies such as Verizon and BellSouth have talked about just that sort of activity, while in Canada, Vidéotron has publicly mused about the potential for a tariff for the carriage of content.
The second concern is that ISPs will block or degrade access to content and applications they don’t like, often for competitive reasons. In the U.S., one ISP, Madison River, blocked access to competing Internet telephony services.
Here in Canada, we have had Telus block access to a union-supporting website during a labour dispute, and in the process blocked more than 600 other websites. We've had Shaw advertise a $10 premium surcharge for customers using Internet telephony services, opening the door to creating a competitive advantage over some of those third-party services. And we have Rogers currently degrading the performance of certain applications such as BitTorrent, which is widely used by software developers and independent filmmakers to distribute their work.
In response to this, there has been growing momentum for net neutrality legislation, provisions that would require ISPs to treat Internet content and applications in a neutral fashion so that the opportunities afforded to today’s Internet success stories such as Google, Amazon, and eBay will be granted to the next generation of Internet companies, along with the millions who contribute content online. The U.S. Congress debated such legislation last year, and just in December, AT&T agreed to net neutrality conditions as part of its merger with BellSouth, under pressure from the Federal Communications Commission.
Note that the net neutrality legislation concerns have grown due to at least two problems in the Canadian market. The first is a lack of competition. Canadian consumers have limited choice for broadband, which is typically limited to cable or DSL, or frankly neither in many communities. A viable third provider running their own market rarely exists. A second concern is a lack of transparency. When Rogers degrades the performance of some applications, they rarely disclose the practice. In contrast, some ISPs in other countries identify precisely how they treat all forms of content and applications.
Finally, on the net neutrality issue, last week the minister indicated that he was still studying the issue. I think it is critically important to note that Canada is already active on the net neutrality policy issue on the international front. The OECD is currently working on a report titled “Internet Traffic Prioritization”. Given our active participation at the OECD, I must assume that Canadian officials are participating in the drafting process. According to a recent draft that I have seen, the OECD has acknowledged concerns associated with anti-competitive conduct, the prospect of hindering access to information, and the privacy implications of monitoring content that travels through ISP networks.
Moreover, it notes that robust competition can help mitigate these concerns, but Canada is not cited as a country with the competition to counterbalance any competitive concerns.
If I may, I'd like to comment quickly on two other issues in addition to net neutrality. The first is the issue of broadband. We increasingly recognize the critical importance of broadband or high-speed access. Whether for communication, commerce, creativity, culture, education, health, or access to knowledge, broadband access represents the basic price of admission. Canada was once a leader in this area. In the late 1990s, we became the first country in the world to ensure that every school from coast to coast to coast had access to the Internet. Soon after, we launched a broadband task force to develop a strategy to ensure that all Canadians had access to high-speed networks. In the years since that task force, our global standing has steadily declined. Many European countries have eclipsed Canada in broadband rankings, and the TPR panel undertook a detailed analysis of the Canadian marketplace with the goal of identifying whether the market could be relied upon to ensure that all Canadians have broadband access. Their conclusion is that it would not. The panel concluded that without public involvement, at least 5% of Canadians, hundreds of thousands of our fellow citizens, will be without broadband access. We need a broadband implementation strategy.
Finally, over a 12-month period in 2004-05, I served on a national task force on spam, alongside representatives from every major stakeholder group, including telecommunications companies, cable companies, the marketing association, ISPs, and consumer groups. The unanimous conclusion was that Canada needs anti-spam legislation. Our current legislative framework, which includes telco laws, privacy laws, and the Criminal Code, is simply ineffective. With virtually all of our major partners having enacted specific anti-spam legislation, we risk becoming a haven for spammers. Moreover, the costs of a growing deluge of spam are being borne by small businesses, network providers, our educational institutions, and individual Canadians. Legislation alone will not solve the problem, but neither will the issue be solved without it.
Thank you.
Conservative
Prof. Jeffrey Church Professor, University of Calgary, As an Individual
Good afternoon. I'd like to thank the honourable members for the opportunity to appear before you today.
I'm a professor at the University of Calgary in the Department of Economics, and also a fellow of the Institute for Advanced Policy Research at the University of Calgary, where I coordinate the markets institution and regulation working group. I have some expertise, having been involved in the telecom wars for at least 12 years, typically as part of the Competition Bureau's telecom team. I was there in 1995-96 as the T.D. MacDonald Chair in Industrial Economics—I happen to have theoretical expertise in network economics—and that was when we were figuring out decision 97-8.
I'm here to talk to you about a couple of things in my opening statement. The first is that when we think of the order by cabinet on overturning the local forbearance decision, there are two issues we have to be aware of.
The first is the institutional context of this decision. In general, for a minister to overrule the regulator has very undesirable implications. On the other hand, if the regulator has made a decision that is sufficiently out of touch, or inefficient, or harmful to consumers, then we have to ask, “How did we end up with a regulator who would make such a decision?” In that case, there are just fundamental problems at the CRTC and with the Telecommunications Act.
The second issue, of course, is assessment of the CRTC's forbearance decision framework and those four key elements.
To understand some of the dissatisfaction I would have with the CRTC's decision framework, you have to recognize two interesting things about this decision. The first is that the nature of the proceeding is all about downward price flexibility. It's about the incumbent local exchange carriers, the ILECs, being allowed to reduce their prices. The existing regulatory regime makes it either impossible or unprofitable for the ILECs to lower their prices to meet competition.
The second issue that dominated the proceedings was the incentive for anti-competitive conduct. That's related to this issue of the lowering of the prices by the ILECs. The worry was that there would be anti-competitive conduct by the ILECs. That worry is whether the dangers are sufficiently legitimate that we should have ex ante prohibition on the behaviour of the ILECs or whether we should have an ex post approach.
The second issue, which I think is probably more important to Canadians, but which was certainly second in the list of things that went on at the hearing, is the question of when competition is sufficient to replace regulatory constraints on the ILECs' market power. What we mean by that is, when is competition sufficiently developed that we can reduce the caps on the prices, so that instead of a regulator holding prices down, competition is sufficient to hold the prices down?
The point of the proceeding was to come up with an expedited process that was administratively simple. When you think about administratively simple processes, what you have to take into account is errors.
There are two things you have to worry about in terms of errors. You have to worry about the probability that you're going to make an error, which is that you forebear when you shouldn't have forborne or you don't forebear when you should have forborne, and you should worry about the costs of those errors. You should take into account the probabilities that your decision framework is going to result in error, and you should also think about what the cost of those errors might be.
The second thing to think about in terms of that proceeding is that we've had this IP revolution; we've had convergence. The old, hybrid model that the CRTC has tried to create, coming out of decision 97-8, simply doesn't work. It's irrelevant; it was an experiment that has failed. We now have competition between networks, and the CRTC needs to institute a regulatory framework that recognizes the competition between networks and the importance of the launch of digital telephony by the cable companies.
Concerning competition between unregulated broadband networks, the old model simply did not work. It was a nice experiment to try, but it was very hard to get it right. We tried very hard to get it right. The CRTC bent over backwards to try to support the CLECs under the old model. It doesn't work.
The CRTC in this decision was very much worried about anti-competitive behaviour. They thought about the conditions for forbearance and in doing so made the conditions for forbearance, in my opinion, far too difficult. What they did is adopt the CTCA's argument to have very large geographic regions. If you have those very large geographic regions based on a high market share threshold, you're going to delay or potentially eliminate the possibility for forbearance.
The market definition principle that the CRTC used is fundamentally at odds with good competition policy and good economics. The 25% threshold is also irrelevant, if you think about competition between competing networks. The role market share plays in assessing the nature of competition is to ask, if one firm tried to raise their prices, what would happen to their customers? If you have two competing networks and one firm tries to raise their prices, the question to ask is, how easily can those consumers switch to that second network? Is there capacity available on that second network? Does the second network have low prices?
In that respect, when you have competition between two networks that are offering very similar services, the market share measure that is relevant is market share in capacities--in terms of how many broadband pipes or access to the telephone network there are into that house or that location.
In general, I would say that the minister's order is a welcome and refreshing change to what the CRTC had proposed. I note that the price ceiling remains, so what the decision or the order allows is for the incumbents to have some downward price flexibility. That downward price flexibility will benefit consumers, it benefits the ILECs, and it stops protecting the cable companies.
There are three things about the minister and the bureau's test that are interesting. One is that it's a step away from what the ILECs have traditionally argued for. I've spent 10 years fighting the ILECs. They have always argued that it was enough for potential competition if we lowered the barriers to entry. That was enough to deregulate. Finally, now, we have a test that is based on actual competition. Not until the cable network is available and supplying digital telephony, which has been shown to be equivalent to the ILECs, is there going to be deregulation.
There are three things about the minister's test, which is essentially, as far as I can see, the bureau's test, that are very controversial, and I'd be happy to answer questions about. The first is, in general, we would think that two is not enough for competition. We've heard this duopoly problem--two is not enough. Well, sometimes two might be enough, especially when the trade-off is between imperfect competition and imperfect regulation. You might want to look at the characteristics of that industry to see that this is a case of when two might be enough.
The second thing I'd be happy to answer questions on is the potential for tacit collusion or coordinated conscious parallelism. When we get this nice cozy duopoly, why do we think they won't act like a monopolist?
The third thing, of course, is the ex ante. Why do we think there may not be such strong incentives for anti-competitive behaviour? The ex ante costs of prohibiting this anti-competitive behaviour are very high, and an ex post approach, after we actually realize it and do a fact-based incentive to see if it actually happened, may be a preferable approach.
Thank you, Mr. Chairman.
Conservative
The Chair Conservative James Rajotte
Thank you very much, Mr. Church.
We'll go to Mr. McTeague, for six minutes.
Liberal
Dan McTeague Liberal Pickering—Scarborough East, ON
I want to thank both of you for being here.
Mr. Geist, I take your last comment with respect to spam. I had a bill that didn't quite make it as far as I wanted it to, but that's probably because there are just so many good issues out there, and this one, as a whole, is one that intrigues.
Mr. Church, I have had a little bit of experience with the Competition Act. I've had a little bit of experience as well with the CRTC, in an earlier period, but I've also noted in your comments that nowhere have you made reference to the TRP report. You talked about the limitations of the CRTC in its existing way of looking at these new emerging technologies. If I heard you correctly, you said it is possible to have two competitors at the end of the day.
In that kind of scenario, sir, when we're trying to increase competition, why would you take the position that simply having two competitors is good enough? The scenario that we've seen, and we've seen this in other industries, is that often, depending on rationalization and efficiencies or if something should happen down the road, it is conceivable that one of the two may in fact quit. We also know that when it comes to wireless, which is the third option, Canadians aren't very well served by that right now.
With your experience, in your estimation, why didn't the government proceed first with the issue of wireless before proceeding headlong into ignoring the TRP report or choosing selectively only parts of it? Why has this not factored into your comments here in this presentation before this committee today?
Professor, University of Calgary, As an Individual
Sorry, would the honourable member...? I'm a little uncertain about the nature of the question. Right at the end there you said something about why didn't the government proceed with wireless.
Liberal
Dan McTeague Liberal Pickering—Scarborough East, ON
Why do you believe the government didn't proceed with other licences with respect to spectrum—
Professor, University of Calgary, As an Individual
Okay, I just needed clarification.
Liberal
Dan McTeague Liberal Pickering—Scarborough East, ON
We have three players. There's talk of others. I think one witness, Chair, talked about Virgin coming in. We know they're a reseller for Bell Canada. I'm wondering why you didn't see this as a need for greater competition.
If I'm hearing you correctly, I'm a little disturbed by what appears to be a concern that you've dismissed, that two competitors can do the trick. That puts us back to where we were 10 years ago.
Professor, University of Calgary, As an Individual
We had two competitors 10 years ago in telecom?
Liberal
Professor, University of Calgary, As an Individual
Yes, but now we have two wires going into a home that actually have similar kinds of services. They have a broadband platform with services that compete against each other. Right?
Liberal
Professor, University of Calgary, As an Individual
Ten years ago we had cable going in and we had telephone on one.