NORTH AMERICA SPECIAL: Turf war in rural Canada

Efforts to improve connectivity in Canada’s Northwest Territories have sparked an unlikely turf war, pitting a clutch of local startups against an incumbent operator that had been enjoying a state-approved monopoly for decades.

It is bigger than Spain, France and Germany put together, more than half of its entire population live in its only city, it sees temperatures whipsaw from -50C to 30C and it gave us the actress Margot Kidder, better known to a generation of film buffs as Lois Lane, Christopher Reeve’s love interest in the Superman films of the late 1970s.

Welcome to Canada’s Northwest Territories, a 1.2 million sq km wilderness that stretches from the 60th parallel towards the North Pole: a vast swathe of tundra that boasts, in addition to the city of Yellowknife, just four towns, two settlements and one village, with a total population of just over 44,000. For every man, woman and child living in the Northwest Territories, there are 40 living in the Sahara Desert.

For the most part, smartphones do not work. The concept of “five nines” service reliability is quite literally poles away and apps that most people now take for granted – such as mobile banking – do not function, because internet links time-out long before pages get a chance to load. As far as video is concerned, let’s just say that the concept of “on-demand” streaming needs a little tweaking when it can take more than half a day to download a thirty-minute television show.

While there is a pressing need to provide the first nation populations of the Far North with fast and reliable internet services, other factors are also at play, not least the drive to exploit a massive bank of mineral resources that lie under the remote wastelands. As Rob Barlow, CEO of WireIE explains, demand for long-haul fibre is starting to rocket.

“With all this development, we need infrastructure – we can’t afford to wait for the military to show up and establish a communications link in the event of a major incident. We need high speed connectivity and we need it now,” he says. Barlow’s firm is involved in several projects to replace legacy copper wire – which is particularly susceptible to moisture and is degrading fast in the challenging climes of rural Canada – with fibre or microwave. And he is not alone.

Taking the fight to the incumbent

Moves to drag the Northwest Territories into the digital age have sparked one of the most unlikely turf wars that the wholesale segment has seen for many years.

It all started in 2011, when Northwestel, a subsidiary of Bell Canada and the sole provider of fibre and microwave networks linking Canada’s inhospitable north to the south, asked regulators for permission to hike charges by as much as $2 per line in order to finance a network upgrade. So disappointed was the Canadian Radio-television and Telecommunications Commission (CRTC) at the service levels that Northwestel was offering, that the regulator not only vetoed the request outright, but decided to throw the market open to competition. In May 2012 the monopoly was broken up for good.

Sensing a sea change among commissioners, SSI – a local Yellowknife-based internet services provider – filed a new complaint, alleging that Northwestel’s wholesale connect rates were anti-competitive and discriminatory. In particular, SSI claimed that the incumbent was charging almost five times the rate for wholesale bandwidth that it was charging its own retail customers, and anything from 13 to 30 times the rate it would charge for wholesale access in the south. Northwestel denied the allegation.

But in February this year, the CRTC delivered another blow to the incumbent when it approved a new set of wholesale tariffs that in some cases were as much as 80% lower than those that Northwestel had lobbied for [see box below].

And Northwestel is still not out of the woods. Later this year, the Commission is expected to rule again, this time on whether a proposed modernisation plan, aimed at enhancing wireless and high-speed internet services, goes far enough to appease the CRTC’s earlier scathing criticisms of the carrier’s ageing and underinvested network.

If hearings this summer between regulators and Northwestel at the aptly named Midnight Sun Conference Centre in downtown Inuvik (population 3,500) are anything to go by, the incumbent is about to face a whole new set of challenges.

Icy conditions
The issue is somewhat clouded, because Northwestel’s parent originally tried to link a new investment plan for the Far North – a catch-all term that includes the territories of Yukon and Nunavut, as well as the Northwest Territories – to a proposed acquisition of Astral Media. The carrier promised to spend an extra $40 million on fibre roll-outs in the region, including the extension of an important link in Yukon between Stewart Crossing and Dawson City, if the CRTC approved the acquisition.

When the commission blocked the deal, Northwestel scrapped the extension, infuriating local government officials in the process. Slamming the move at the hearings, the Yukon Government said that it was particularly concerned at the “conditional nature” of Northwestel’s commitment to the Far North. An official from the neighbouring territory of Nunavut went even further, calling the plan a glorified maintenance schedule.

Life is undoubtedly hard in Canada’s Far North. Would-be network operators must cope with months of extended darkness, extreme weather conditions, a very short construction season, limited and costly power and transportation services and a veritable plethora of new complications arising from climate change.

And that was the relatively easy bit. With almost thirty years of trading behind it and a raft of subsidies that amounted to – at the last count – at least $20 million a year, Northwestel has managed to build out network connectivity to 96 communities.

That might sound a touch underwhelming, but consider this: the company operates in an area the size of India, some of those 96 communities have fewer than 50 people living in them and in total the company boasts just 166,000 subscribers. But even that is not the remarkable thing: of those 96 communities, 31 can only be reached by air and 12 can only be reached by road for five months of the year, utilising frozen rivers that are turned into ice highways. Moreover, it is impossible to connect a total of 39 of those communities to the network by either microwave or fibre, leaving highly expensive satellite connectivity as the only alternative.

And yet, as Northwestel CEO Paul Flaherty explains, customers want high-speed internet access, and they want Skype and YouTube… in fact, all the trappings of the modern digital age.

“They want it not just on their desktops, but on their tablets and – crucially – they want it for the same price that their counterparts in the south pay,” Flaherty explains.

The redundancy issue

Bell Canada does not break out earnings for Northwestel, but buried deep in a set of regulatory papers dating back to 2011 is a line suggesting that the Far North unit managed to double its income to $69.3 million between 2007 and 2010.

Just exactly how Flaherty managed to pull that off in such challenging conditions is essentially the subject of the CRTC’s modernisation review. Announcing the initiative back in 2011, Leonard Katz, vice-chairman of telecommunications at the CRTC, famously lambasted Northwestel for failing to provide basic operational services, a lack of innovation and a poor service record that led to crippling and debilitating network outages.

“We are disappointed that Northwestel has not made a greater effort to improve its services,” he said.

Now Flaherty is fighting back. Under the four-year revamp plan, 83 of the 96 communities currently served by Northwestel will be upgraded to 4G, 63 communities will get new switches and 57 of the 58 communities that can be reached by fibre or microwave will get a wholesale connect service, effectively opening the way for rivals to compete with the company using its own network backbone. But that is still not enough for some critics.

“Northwestel has shown itself to be disinclined to co-operate with other parties, very resistant to change and fiercely loyal to a monopolistic business model,” explains Margaret Hollis, Legal Counsel for the Government of Nunavut.

The problem, she continues, is that the carrier has no real plan to deal with the current need for broadband in the Far North, let alone the explosive growth that analysts widely forecast for the region.

“We need more bandwidth, more backbone and more connectivity. Whatever you want to call it, we need it and in massive amounts,” she says.

Hollis wants more than just superfast connectivity – she argues that Northwestel is obliged under the terms of its subsidy agreement to maintain a minimum level of service reliability. And that means building redundancy into the network.

But redundancy is a complex issue in the Far North. Flaherty recently completed a $10 million redundant fibre ring between Hay River in Northwest Territories and Fort Nelson in Nunavut – a build-out that has drastically reduced the number of fibre cuts affecting key centres such as Yellowknife, the capital of the Northwest Territories, and Whitehorse, the capital of Yukon.

But where do you draw the line? Should operators be required by regulatory authorities to build redundancy into a spur that might serve as few as 700 people? What about communities of 50 people or less? And does the need for redundancy on those links that are served only by satellite require the commissioning of another satellite, at the cost of several hundred million dollars?

“Obviously, the more redundancy we have, the better, and I know the desire would be to have more redundancy… but I think we have done a good job in getting the balance right,” Flaherty told commissioners at the recent hearings.

The company invested $40-50 million in connecting Whitehorse to the south and that was after surveyors had spent months finding the easiest possible route. To do that a second time – via a considerably more challenging route and without the prospect of any additional revenues – would be a big ask.

“In terms of the cost of creating redundancy for every single community, we’re talking hundreds and hundreds of millions of dollars,” he said.

Yet Flaherty’s current roll-out already risks creating something of a postcode lottery for 4G throughout the whole of rural Canada, not just north of the 60th parallel. Drive two hours west out of Ottawa along the Trans-Canada highway, for example, and you hit a small community called North Frontenac, population 1,900. The sleepy township – which is entirely free of light pollution and draws budding astronomers from all over Canada with the promise of unrivalled views of the night sky – is as south as south can be in Canada, yet it does not have a cellular network. Drive three days and two hours north west of Ottawa and you hit Yellowknife, which already has 4G coverage.

More importantly still, Yellowknife is hooked up to Northwestel’s wholesale offering, which means that upstarts such as SSI and Ice Wireless can piggyback on its north-south backbone to build out their own local access networks. When it comes to the Far North, the entry barrier to new players is not so much in the local area network, but in the long-haul backbone. Now that Northwestel has been ordered to open that up to rivals, new competition should follow.

“In my view, there really is no longer any barrier to entry – in the larger communities in the north, we are headed for a state of more internet competition,” Flaherty proposes.

Race to the north
Recent moves appear to support his conviction. Last month, Ice Wireless signed a deal with Huawei for network equipment that will allow the carrier to upgrade its cellular network, first to 3G and then to 4G, within the next few months. Maged Bishara, VP of operations at the company, said it would use the platform as the basis for a major push into Yukon and Nunavut. The move chimes with a push into the Far North by Ice’s parent, Iristel, which started offering VoIP services to communities in each of the three territories this summer.

Given the complexities of the relationship between the CRTC and Northwestel, these are indeed encouraging signs. But the regulator can take comfort from other initiatives, too. For example, when commissioners are done reviewing Northwestel’s modernisation plan, they will have time to address another rural build-out, the so-called “Deferral Account” project. Under the initiative, a number of Canadian telcos – including Bell and TELUS – were ordered to spend over $420 million from their deferral accounts on extending broadband to hundreds of rural communities.

Early phases of the rollout included some remarkable engineering feats, not least what was at the time the largest high-speed microwave link over water. The 115km link, designed by TELUS, connected Haida Gwaii (also known as the Queen Charlotte Islands) to mainland British Columbia. TELUS is working to connect virtually all of the 159 rural communities in British Columbia that the CRTC mandated it to connect ahead of an August 2014 deadline. What comes next is something of a mystery, as Marlon Marcial, a senior marketing manager at TELUS, explains.

“There will likely be another regulatory review, at which time the commission may or may not require us to go back and bolster minimum capacity requirements, from 1.5MB to possibly 5MB. While that is currently pure speculation, considering the growing broadband demands of rural communities, it is certainly feasible,” Marcial says.