Industry Committee on Feb. 8th, 2011

[The Chair, Conservative, David Sweet]

Good afternoon, ladies and gentlemen.

Bonjour à tous.

Welcome to the 55th meeting of the Parliamentary Standing Committee on Industry, Science and Technology.

We have three organizations with us. I understand that you've been advised that you have five minutes per organization for opening statements. Is that correct, gentlemen?

We are having three meetings on this specific issue. Just before we get to the witnesses and questions, I want to ask committee members, for the benefit of the research staff, because they'll obviously have to do the work, if they're going to desire a report after these three meetings.

Could I get some input from some of the members?

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

We do plan to have one, yes.

[The Chair, Conservative, David Sweet]

Okay.

Is that agreed?

[Some hon. members]

Agreed.

[The Chair, Conservative, David Sweet]

All right. Before us, then, ladies and gentlemen, we have, from TekSavvy Solutions, Rocky Gaudrault and George Burger.

Next we have Matt Stein, of Primus Telecommunications; and as an individual, Jean-François Mezei, telecommunications consultant, from Vaxination Informatique.

I'll begin, then, with TekSavvy. Gentlemen, you have five minutes. Go ahead.

[Rocky Gaudrault, Chief Executive Officer, TekSavvy Solutions Inc.]

Thank you, Mr. Chairman, for the opportunity to address the committee today.

Accompanying me is George Burger, adviser to TekSavvy.

We're here to speak to an issue that has galvanized the Canadian people to a remarkable degree: usage-based billing. However, we would also like to frame UBB in the context of a far greater issue, which, if unaddressed, will have long-lasting, adverse effects on Canada's ability to (a) provide its people with a first-rate, affordable Internet experience, and (b) ensure that the Canadian digital sector is able to innovate in the most dynamic industry.

I started TekSavvy in 1998, initially providing web-hosting services in Chatham, Ontario. My brother Marc, an engineer, joined in 1999, and my third and last brother, Eric, joined three years ago after ending a distinguished nine-year career as a naval lieutenant in the Canadian Armed Forces.

Since 1998, TekSavvy has built its customer base and has expanded its services into voice-over-Internet phone services and residential and business Internet services. We are now a major business in Chatham, with over 100 dedicated and skilled employees in offices in Toronto and Sudbury.

TekSavvy has become a Canadian leader as an Internet service provider. We rank as Canada's number one ISP on DSLReports.com, and we have for the last six years running.

Mirko Bibic, spokesman for Bell, has said that we ride on its networks. In fact, we purchase access to telecom and cable backbones, all in accordance with regulation, and we pay substantial amounts--tens of millions of dollars--at CRTC-set wholesale rates, to companies like Bell for that access. Sadly, despite its market dominance, Bell's key objective is to minimize competition to maintain its pricing power.

Mr. Bibic's predecessors made similar arguments 20 years ago when they tried to stop the introduction of competition in long distance services. At the time, Canadians paid $1.50 per minute for a call between Toronto and Montreal. Today such calls are pennies, if not free, and suppliers still profit.

This fight is no different. If Canadians lose, we'll be paying the equivalent of $1.50 per minute for good for Internet usage that costs pennies.

[George Burger, Advisor, TekSavvy Solutions Inc.]

We have prepared three charts that show, with dismaying clarity, where Canada stands among 30 OECD countries. We submit that this is clear evidence that the existing competitive framework has failed. The only reason, perhaps, that the recent public outcry did not arise earlier and in greater volume is because most Canadians do not know what they are missing, nor do they realize how costly our inferior service actually is.

In the first slide, Canada is shown as 23rd in terms of what Canadians pay for broadband.

In the second slide, Canada ranks 25th in terms of the speed available to consumers, key to optimizing the Internet.

On the subject of UBB, Bell's arguments centre on light users subsidizing heavy ones, preventing congestion and the need to restrain Internet usage generally.

The third chart shows that all OECD countries except Canada and Australia reject usage caps across the board. Seventeen countries have no bandwidth caps at all. Almost no other country shares Bell's views.

On the subject of UBB, the committee and the public have heard much about the imposition of UBB on wholesale customers like TekSavvy. It has, indeed, been charged to Bell's retail customers--people such as you--for years. We have no problem with what Bell wishes to charge its customers; however, Bell continues to seek to impose UBB on ours as well.

There is no economic justification for this legitimized form of price fixing. When Bell says it seeks a level playing field, that means it wants to force all Canadians to pay exorbitant prices for bandwidth, far beyond the cost of supply, and it wants to keep all the benefits.

The CRTC itself acknowledged that there is little cost-related justification for incremental pricing based on usage. In addition, heavy bandwidth users do pay more because they take more expensive packages, so the cross-subsidy argument is without merit.

Absent in underlying cost, UBB is clearly a punitive tax on usage, where the tax enriches Bell shareholders at the expense of Canadian consumers.

The ostensible reason for the tax is to constrain the growth in bandwidth usage. The chairman of the CRTC himself spoke about disciplining Canadians' use of the Internet. Almost unique in the world, UBB is nothing more than an effort to substitute social engineering for social networking.

The impact of UBB across the board is obvious. Canadian consumers pay unjustifiably high amounts for Internet usage; Canadians are forced to resort largely to conventional television content, such as Bell's newly acquired CTV, while the rest of the world flocks to the Internet-based content like Facebook, YouTube, and Netflix; and without increased demand for bandwidth, there will be little motivation to invest in infrastructure, killing innovation. Indeed, Bell's capital expenditures in relation to revenues ratio has fallen for three years straight.

[The Chair, Conservative, David Sweet]

Thank you, Mr. Burger. The time is up. Your five minutes are gone.

We'll now go over to Mr. Stein for five minutes.

[Matt Stein, Vice-President, Network Services, Primus Telecommunications Canada Inc.]

Thank you, and good afternoon.

My name is Matt Stein, from Primus Canada. I'm the vice-president of Network Services.

I am pleased to have this opportunity to provide Primus Telecommunications Canada's views on the matters under consideration. Before I comment specifically on those matters, I'd like to take a brief moment to provide some details about Primus. I believe this will assist in providing an understanding of the foundation upon which Primus' views are built.

Primus is a full-service telecommunications provider that operates across Canada. We provide competitively priced and high-quality telecommunications services, including telephone, wireless, and Internet services to over a million Canadians.

In addition to our high-value service offerings that assist in disciplining market rates, we also have a history of innovation. For example, in 2004, Primus became the first to offer a national voice-over-IP telephone service. Today, Primus' telephone customers benefit from our patented Telemarketing Guard service, which, provided free of charge, stops well over a million unwanted telemarketing calls per month from reaching our customers. In fact, this unique Canadian-invented technology is in the process of being licensed for international use by other telecommunications companies worldwide.

In regard to Internet services, Primus provides Internet services across Canada using wholesale access services, as well as Primus' own network, which stretches across five provinces and is capable of reaching over 20% of the Canadian population.

In 2006, Primus became the first in Canada to broadly deploy high-speed DSL technology, known as ADSL2Plus. Primus uses unique Internet traffic management practices on its network that ensure that Primus customers receive high-quality Internet service at all times, yet address capacity and congestion issues as they arise, when they arise, without throttling or unnecessarily impacting users' experience. This is regardless of whether the customer is an early adopter, a heavy user, experimenting with the Internet, or just simply checking their e-mail.

We believe that Primus' innovative and differentiated service offerings represent the very competition that the government wants and are beneficial to both the Canadian market and consumers.

Turning to the issues at hand, we believe that forcing all competitors to offer similar, if not the same, Internet options as the incumbent telephone and cable companies will limit the ability for Primus and other competitors to provide innovative and differentiated services to Canadian consumers.

To date, Internet service providers have been permitted to determine how to price their services, whether to implement usage-based billing, and if so, determine the appropriate thresholds and the rates that will apply over the threshold. If incumbent telephone and cable companies are permitted to impose their retail usage-based billing frameworks on their wholesale access services, all of these aspects are removed from the control of competitive ISPs, or Internet service providers.

It's clear that consumers benefit when market forces are allowed to work in the retail market. All competitors should not only be permitted, but encouraged, to create new and innovative services to meet the changing needs of Canadian consumers.

In contrast, competition and market forces are stifled when competitors are required to mirror the offerings of the large incumbents.

As a market participant, Primus is at all times willing to pay a just and reasonable rate to obtain the wholesale access services that we use as a component to provide our Internet services. To date, the rates for these services have been based on genuine costs plus a reasonable markup to ensure that the incumbent telephone company is fully and fairly compensated. However, the usage-based billing rates applied by incumbents on their retail services are not based on cost. They are expensive by design. They are expensive to disincent heavy Internet use. Accordingly, imposing these rates on wholesale services represents a fundamental and inappropriate change in the pricing of these services.

Primus wants the ability to continue paying reasonable rates for the wholesale access services it utilizes to provide Internet services and continue offering differentiated and innovative services that respond to the needs of Canadians.

Canadians have enjoyed an Internet market with many choices. Some Canadians have taken the choice offered by competitive Internet service providers like Primus. Some have not. But even those who did not make that choice are relying on you to make sure that option remains. Without it, we would all have to live with low caps and excessive usage charges.

Thank you for inviting me today. I look forward to your questions.

[The Chair, Conservative, David Sweet]

Thank you, Mr. Stein.

Now over to Monsieur Mezei, pour cinq minutes.

[Jean-François Mezei, Telecommunications Consultant, Vaxination Informatique, As an Individual]

Thank you, Mr. Chairman.

I am a self-employed Canadian. Unlike the guys with big business, I'm as small as it can get, but I'm affected by all of this, which is why I'm here.

The UBB presented by Bell Canada is not about the user-pay model; it's really about controlling adoption of new applications. Right now you're seeing early adopters, and those are the small statistics we are seeing from Bell, but Bell wants to prevent that from spreading.

The regulatory symmetry that Bell has been talking about and that the CRTC has accepted prevents choice. Without choice, people can't choose another ISP, because they're all going to be the same. That's a very important aspect that needs to be dealt with.

As Mr. Stein said, they're not based on cost. They were asked during the proceedings to justify this. They said they would not go on a cost basis. They're purely arbitrary rates. I don't think anyone in this country can justify arbitrary rates that have to fit with subsection 27(1) of the Telecommunications Act, which says that every rate has to be fair and reasonable. We can't measure that it they're arbitrary.

More importantly, they're designed to be punitive rates. The word “punitive” was used in the proceedings. In one of the early cable filings back in 2000, they admitted that part of the goal was to slow their investment in capacity because it would slow the growth in demand. That's a question the nation needs to ask.

The rates set by Bell are also not relative to congestion. Bell has argued that this is purely a congestion issue, but they actually charge more for people who have lower speeds, and these lower speeds generate less congestion. So it should be the reverse. Questions need to be asked. This was approved by the CRTC, but we don't know why.

The GAS rates, as they now stand, before UBB, are already profitable to Bell. They're not fixed rates. They have variable components, and I will go through them next. So the whole basis of Bell's argument falls.

On the next page of my brief I have a graph that shows the architecture of the GAS versus Bell's retail and IPTV. The GAS shares very little with the Bell retail ISP business. They're really two separate blocks. They only share the last mile aggregation, and that last mile aggregation is a raw data pipe that has no ISP features in it--none whatsoever. It's a raw data pipe. The regulation should be limited to that aspect only.

I also show the scope of the regulation beyond. When you introduce UBB, you put a regulatory scope that goes from the residence all the way to the connection to the Internet, which GAS does not provide at all. That has to be said. It has to be repeated.

First of all, it's not a resale service. We've heard the word “resale” used even by the chairman of the CRTC. It's not a resale. What they're offering has nothing in common with Bell Sympatico, or whatever it's called this week.

Applying symmetrical measures for services that are different makes no sense. There should be no aspect of an ISP retail service that should be applied to the GAS rate, because that rate is not an ISP service. So symmetry for those two services makes no sense.

In terms of GAS, we often hear Bell say that GAS is a fixed rate. GAS has two components: the GAS component, which is a fixed rate; and the AHSSPI component, which is a variable rate. It's capacity based. The more users you have, the more AHSSPI capacity you buy. The more AHSSPI capacity you buy, the more you can put through. If your users are more hungry, then you buy more AHSSPI.

The best analogy for this is the restaurant business. There is a lettuce wholesaler, and there is a fancy restaurant that buys a little bit of lettuce and an all-you-can-eat buffet that buys a lot. Nobody subsidizes anyone. They all buy their lettuce at the same price and everybody makes a profit. The buffet has a business model that it can work with and be profitable, and the high-end restaurant will make some money as well.

In closing, on the following pages of my brief, I've provided different regulatory scopes to show where the regulations should apply and where they have attempted to apply them, and the mess it has created.

[The Chair, Conservative, David Sweet]

Thank you, Mr. Mezei.

Because we have two groups of witnesses, that means we have limited time, so we'll go with five-minute rounds.

We'll begin with the Liberal Party and Mr. McTeague.

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

Thank you for your excellent presentations. Mr. Mezei, I read your previous presentation to the CRTC.

I'll allow TekSavvy the opportunity to have Mr. Van Kesteren ask them a question, but to all of you here, the word “television” will not exist in 10 to 20 years. There is an explosion, if you will, in video influence. This will require--I think, Mr. Stein, you used the term heavy Internet use--greater, richer content, which means more bandwidth, more storage. The choke point, not just politically and from a consumer and innovative perspective, but also from what we have seen in the last week, appears to be that whoever controls the bandwidth can now control regulation, price, and how the fate of your companies will be determined. Given that we are going to be seeing a rapid change towards things like television apps, video computer devices, video display surfaces--which we may have touched on a little earlier--video projection systems, video content, holography, and video gambling for some governments, how do you see Canada's future in a circumstance in which a handful of players can determine who gets on at what price?

I'll leave that with you, Mr. Stein, and perhaps we can go right across--Mr. Gaudrault, Mr. Burger, Mr. Mezei.

[Matt Stein]

In the past number of years, we have seen the network usage of our customers go up 50% year after year. I can't think of any other kind of consumption rising at that rate. The applications you talked about are the source and cause of this. There are major changes afoot that have been going on for a few years. And that rate is going to accelerate. It is not going to flatten out in the short term. I see that as very concerning.

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

Mr. Gaudrault and Mr. Burger.

[Rocky Gaudrault]

Everything that we've seen today and that we're going to see tomorrow will change in a way that is difficult to predict. Can we say with certainty that it will be a much larger use environment? Almost absolutely, yes. The world is changing in a way that is becoming content rich. With more people online, and more people who are educated on its uses and benefits, we can't help but go there. So things like usage-based billing will absolutely cripple that.

[George Burger]

I have to thank you for that question, because it goes to the part of our talk that was unfortunately cut off.

I'm taking the latter part of your question, which was what will happen if all these various elements are in the hands of a few people. I can tell you that the future is somewhat here in Australia. Australia is one of the few countries in the world with a higher concentration of content delivery and content ownership than Canada's, but it's not much greater than Canada's. It's hard to look at these proceedings completely in isolation. For example, we need to look at what's going on with BCE buying CTV. When these duopolies get their hands on all of the content in this country, it makes it difficult to control the gatekeepers of what we watch and how we watch it. I think that's the most important element of these proceedings that I'm asking this panel to consider. It seems as if the minister himself has already taken pains to consider this matter. Attention should be paid to the competitive framework so that this trend does not lead us to where Australia is now.

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

It appears that we're moving to one digital pipe in every single home across the country. And it would be a concern, obviously, of the Liberal Party that that would be controlled by one individual.

I have one more question--and we have to go very quickly. Mr. Mezei.

[Jean-François Mezei]

I will take a little different twist to this. Many countries have already done in Europe.... If your last mile, where control resides with a very few people, is regulated to be open, then everybody has access to it.

If you go back a few years, there was something called Bell Nexxia, which was a wholesale group separate from Bell retail. Bell Nexxia had no problem increasing sales, because it increased its profits. It didn't have a conflict of interest with its retail competitor. Regulation doesn't need to be wide; it needs to be focused. If you have that last mile open, everybody can use it, and it will grow.

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

Is it fair to correlate the cost of bandwidth with gigabyte cost charges of $1.50, $2.50? What does bandwidth cost, and what is the demand now that the CRTC has apparently tried to impose sanctions? I need to know the numbers, because to the Liberal Party it amounts to nothing less than a giga-tax or giga-gouge.

[Matt Stein]

I'll try to answer this.

Nowhere else in the networking industry do you pay for access to pipes like this by the gigabyte. So the question, unfortunately, starts with the presumption that you could put a price on a gigabyte.

If you had to, you would make it in the few cents, easily less than 10¢, range. Unfortunately, it's just the wrong way to show the cost of a gigabyte. As for how people price a gigabyte, that's market forces.

[The Chair, Conservative, David Sweet]

Thank you, Mr. Stein. Sorry, the clock always marches on here, as it does everywhere.

Monsieur Cardin pour cinq minutes.

[Serge Cardin, Bloc, Sherbrooke, QC]

Thank you, Mr. Chair.

Bell Canada and the CRTC have in the past set a sale price between Bell Canada and its sellers, in terms of dollars per gigabyte of data. Bell Canada makes a substantial profit on each gigabyte of data sold. Before the advent of...

[The Chair, Conservative, David Sweet]

Just a moment. We don't have any translation right now. We just want to make sure that we get some translation.

Monsieur Cardin, go ahead. I will credit you a few seconds.

[Serge Cardin, Bloc, Sherbrooke, QC]

Before the advent of usage-based billing, the reseller was free to resell gigabytes purchased from Bell Canada in the form of Internet services, at its own discretion. Do you think the CRTC decision allows Bell Canada to double bill the gigabyte sold to Internet resellers?