Industry Committee on Feb. 26th, 2007

[Prof. Michael Geist]

The TPR report recognized the issue of net neutrality and raised it as a concern, and it talked about the concern particularly around blocking content and applications. If you're looking for justification from the report, it's already in there. As long as we take a full approach in terms of trying to deal with all the issues recognized by the TPR report, there's every reason to move forward on the issue.

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

Regarding spam e-mails, you stated that you worked on a committee that had almost gone so far as to recommend a bill .

Did you in fact table with the government a study report calling for legislation to oversee this sector? What were the main components of the proposed legislation?

[Prof. Michael Geist]

The national task force on spam was struck by the Minister of Industry, who at that time was Robillard. We presented our report to Minister Emerson, at that time recommending a bill and recommending the specific kinds of provisions that one would find in an anti-spam bill. My understanding is that the department did work on putting a bill of that sort together in response to the task force report, but didn't move forward due to the change in government.

[The Chair, Conservative, James Rajotte]

Briefly please.

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

Regarding spam e-mails, what are the consequences of not having legislation?

[Prof. Michael Geist]

I think there's real concern there as well in Canada. Network providers are finding now that at certain times of the day, upwards of 90% of their traffic is now spam. There are huge costs involved, and if one takes a look at the anti-spam legislation in many other countries, there are lawsuits being launched against Canadian-based spammers in the United States because we don't have the kinds of provisions in Canada that would allow people to go after Canadian spammers. Given how close some of the U.S.-based spammers are to the Canadian border, there's every reason to believe that many of them may well move into Canada, and Canada will become a haven for spammers unless we take action.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go now to Mr. Carrie.

[Colin Carrie, Conservative, Oshawa, ON]

Thank you, Mr. Chair.

Mr. Church, when the telecom review panel made the report, they said there was a certain sense of urgency. The minister has been criticized about cherry-picking certain parts of the recommendation. In the report, it says about the implementation:

The Panel suggests that the government should implement its recommendation in two phases:

- In the first phase, the government should issue policy statements endorsing the development of a national ICT adoption strategy as well as the implementation of a new regulatory framework, and take steps to reform the policy-making and regulatory institutions. In addition, it would use its powers under the Telecommunications Act to issue a policy direction to the CRTC to interpret the policy objectives of the Act in a manner that is broadly consistent with major reforms recommended in the Panel's report.

- During the second phase, recommendations requiring changes to existing legislation should be implemented.

I was wondering, in your opinion, do you think the minister's approach is cherry-picking, or do you think he has taken a reasonable approach to implementing the TPRP's recommendations?

[Prof. Jeffrey Church]

I guess I would say that it was a fairly reasonable approach.

I think there have been a number of decisions that the CRTC has made in the last two or three years that are incompatible with a view of how markets are and how the competition from cable and digital telephony is evolving. It seems to me to make sense for the benefit of consumers that the government moves now and deals with the CRTC in both the short run and hopefully the long run, and that we will see some reform to the Telecommunications Act.

[Colin Carrie, Conservative, Oshawa, ON]

If we, as a government, were dragging our feet...this industry seems to be quickly changing. How would it affect the industry internationally if we just slowly move forward instead of taking the sense of urgency to get things moving?

[Prof. Jeffrey Church]

When you're thinking about things internationally, are you thinking internationally in terms of how our firms are able to compete internationally, domestically--domestic firms that are exporters--or are you thinking about the telecom industry in particular?

[Colin Carrie, Conservative, Oshawa, ON]

The telecom industry in particular. We heard from SaskTel, for example, that they've got contracts around the world. I see it that we're here in Canada, Canadian companies. If we can get our own companies really solid for world competition, I see this is going to be more competition over the years internationally. If we just drag our feet and don't move forward, how is that going to affect our companies internationally?

[Prof. Jeffrey Church]

One of the tenets that we've learned I think in the last 15 years, primarily based on the work of Michael Porter, is that the more competitive your domestic industries are, the better you do in export industries, because their skills get honed, so to speak, in the internal competition. One of the things the CRTC's approach was doing is that you were not allowing the ILECs to compete.

[Colin Carrie, Conservative, Oshawa, ON]

You mentioned the government can make errors sometimes. We have this 25% rule, and even with our witnesses over the last month, some of them say, “The 25%, we're not sure; it should 20%, 15%, 30%.” Everybody has a different opinion on it.

If the government makes a lot of these errors, how will it hold back our industry internationally? You know about the new test--it's based on infrastructure. Would you say it's a more reasonable test, based on infrastructure?

[Prof. Jeffrey Church]

The problem with the 25% test is that it's based on the wrong market definition. It's based on these very large, 86 local forbearance regions. The problem with it is you can have competition start to happen in one area.

For instance, in Alberta right now, Telus has a problem in Fort McMurray. They face very severe competition from Shaw, but Fort McMurray is in a very large local forbearance region, and before they can hit the 25%, they're going to lose a substantial amount of the market share in Fort McMurray. So the problem with those regions, the way they've been defined by the CRTC, is that they don't reflect where competition actually comes from. Therefore, it makes it far too slow to have forbearance. It takes too long, because you have to lose very high market shares in a region in which there is competition before you can reach the 25% for the whole region. The market definition used by the CRTC is wrong.

[Colin Carrie, Conservative, Oshawa, ON]

Do you have recommendations for the government to help improve the implementation of new regulations and perhaps speed it up even further? Is there anything you can think of?

[Prof. Jeffrey Church]

I do have two quibbles with the minister's order. If your model is based on the world that you're going to have these two competing networks and that these two competing networks have these very low costs--they have high sunk costs, they have low costs--it's a winner-take-all kind of competition, where you're moving to a world where you've got two broadband pipes. If I can convince you to get access on my broadband pipe, then I get to provide you with everything that goes down that pipe: television, high-speed Internet, digital telephony; you name it, it's going down my pipe. That's another reason, coming back to the Honourable Member Dan McTeague's point, which was that this is a different kind of industry, why you have a winner-take-all at each geographic location. You're going to have strong competition to be that provider of those services in that bundled competition.

Coming back to the nature of the question, I worry about what “throughout the geographic area” means. That's not very well defined.

The other thing that bothers me is that on those quality-of-service indicators, some of them are still related to the old hybrid model, which we know is not very effective. They're worried about unbundling loops and how quickly you unbundle loops and all that. The cable company doesn't need the unbundled loop to compete.

[Colin Carrie, Conservative, Oshawa, ON]

Right. Okay. Do you have any experience with the win-back rule? Good idea, bad idea? What do you think of it?

[Prof. Jeffrey Church]

The win-back rules are interesting, because in theory, the story that's told makes lots of sense. They say they lose a customer, and the ILEC can identify that customer and they know exactly who it is they've lost. If they can charge any price above their cost, it's better to charge that price, no matter how low it gets, to win that customer back.

[Colin Carrie, Conservative, Oshawa, ON]

You know that's actually not legal. You have the retail part of it and the service. My understanding from the ILECs is that if they lose a customer and they're informed at the service area, they're not allowed to give the name to the retail.

[Prof. Jeffrey Church]

But they know they've lost a customer. They're not sending a bill to 136 Hawkdale Circle any more, and they used to. That's a theory that's told by the cable companies. But in actual fact, for the win-back to work the way they think it's going to work, it's not clear to me that it's necessarily a concern.

What would happen if this happens? It assumes that the ILEC can win back the customer cost. There's no customer retention cost. The cable company goes and spends all this money to acquire the customer, and then the ILEC comes along and cherry-picks the customer back, and then the cable company goes bankrupt because it doesn't recover its customer-specific costs.

One of the things that the CRTC and the cable companies I don't think are very clear on is how much of those customer acquisition costs are common costs across all customers, in the sense that they're an advertising thing, and how many in fact are specific and sunk to a given customer, which is what they would actually lose. It might just well be that cable modem, which cost $100, and the cable truck, which cost $50. Maybe that's all we're talking about that they would lose on their customer picking.

The other thing we would expect to happen is that if you knew I went to the cable company and got win-back very quickly by the ILEC, everybody on the block would do the same thing. They'd say this is a great deal to get a low price. Switch, and then wait for the win-back to come. So in fact they're not going customer by customer; everyone would get the benefits of the lower price.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Church.

We'll go to Ms. Mathyssen, please.

[Irene Mathyssen, NDP, London—Fanshawe, ON]

Thank you very much, Mr. Chair.

Again, I apologize that I'm a neophyte. One of the things I heard in speaking to a small competitor was the fear that big companies like Bell Canada would use their customer knowledge and all of the money at their disposal to effectively compete in a very unfair way, and perhaps even drive them out of the market. Is that something that you think is a legitimate concern?

[Prof. Jeffrey Church]

In general, I think it's not a legitimate concern to have an ex ante prohibition against Bell and other ILECs from being able to lower their price.

The question you have to ask is, it going to be effective and is it going to be profitable? Yes, they could spend all this money. Yes, they could drive these guys out of business by giving the service away. But why would they do that unless it was profitable? There are lots of reasons to think in this industry why it would not be profitable. The most important reason to think it wouldn't be profitable is--suppose you did that. Suppose you lowered your price and you drove the cable company out of the business. The only reason it becomes profitable is if you can then re-raise your price back up, to recover the money you lost when you were preying. The cable companies costs are very low. To drive them out of business, you're going to have to lower your prices a long way.

But then as soon as you go to raise your prices, Vonage and the other VoIP guys are available right now on your broadband Internet, so you can't raise the prices. So you have lost all of this money for no effect. The incentive for Bell and the other ILECs to prey on an ex ante basis seems to me a very low probability.

[Prof. Michael Geist]

I would only note that the scenario I just heard described really does rely heavily on Vonage and some of these other third-party providers coming forward.

That's one of the reasons why net neutrality advocates are so concerned, because if you're creating a system whereby you're really looking to these third-party providers as a critical component in terms of the overall competitive marketplace, there is an incentive built in for the cable company, as we've already seen in other ISPs, to try to block access to those services because they've got the customer built in, and the technology makes it easy to ensure that you can keep Vonage out if you really wanted to.