Regulatory issues facing Canada's telecoms market

16 October 2012 | Gareth Willmer


A relaxation of rules on foreign ownership and Bell’s proposed takeover of media company Astral Media have ensured Canada’s otherwise uncontroversial telecoms market has been thrust into the headlines. Gareth Willmer explores whether the market is on the brink of a major regulatory overhaul.

 


Bell’s proposed C$3.4 billion takeover of Astral Media has piled further pressure on the Canadian regulator CRTC. The move has prompted well-documented opposition from a number of the nation’s carriers, including Telus, Quebecor, Cogeco and Eastlink.

All are united in their belief that the takeover would create an over dominant player, limiting choice and raising the cost of content for consumers.
 
A week-long CRTC hearing took place on the takeover in September, with opinions contributed by many industry competitors and players. The regulator expects to reach a decision on whether to approve the deal in November and it will also require approval from the nation’s Competition Bureau.

Some rivals are concerned that the acquisition could increase Bell’s control over the communications market and give Canadians fewer media and telecoms options, as well as result in higher prices.

Rivals like Telus argue that Bell would havean “unprecedented” concentration of market power in the broadcasting sector.

A spokeswoman for Canadian consumer organisation OpenMedia voices concerns about telecoms companies owning both content and distribution methods. She says Bell already owns a large amount of content that would be enhanced by a takeover and “as an ISP has a strong incentive to restrict access to the open internet”.

David Fuller, chief marketing officer at carrier Telus, says that the company has never really believed that “vertical integration”, or the convergence of telecoms, media and internet content and infrastructure under single ownership, promises significant benefits of scale to telecoms carriers and broadcasters.

“Our strong preference at Telus has been to invest our resources and cash in network infrastructure, services and in improving our client experience, and I think our market performance has shown this to be the right strategy,” he adds.

Chris Peirce, chief corporate officer at Manitoba-based carrier MTS Allstream, says he believes there will either be a need for the regulator to slow the trend towards vertical integration or put a robust regulatory framework in place to deal with it. Peirce highlights that a process akin to the vertical integration on the telecoms and media side is also emerging as a potential issue on the data centre side.

There have been moves by incumbent local exchange carriers (ILECs) to acquire independent data centre providers, which he says has led to some access restrictions for other carriers and ultimately to a lower level of carrier choice for businesses. “This is a significant competitive concern that we believe the government should be cognisant of,” he says.

On the opposing side, Robin Constantin, VP of sales at market leading ILEC, Bell Canada, argues that from a regulatory perspective there is already a full range of safeguards in place that apply to Canadian vertically-integrated carriers and rules to ensure that other carriers have access to the company’s advanced networks.

“The key is that these regulatory rules and safeguards encourage competition, investment and innovation, and we believe the best way to achieve this is through reliance on market forces whenever and wherever possible,” he says.

Constantin adds that Bell is a key player in the country’s vertically-integrated market and has a major interest in enhancing its ability to compete in the multi-screen retail market: “We believe the acquisition of content – and making it available as broadly as possible, whether over our own platforms or those of other service providers – is also critical if we are to compete effectively with online content providers out there.”

Long-term competition?

Beneath the headline debate on vertical integration lies further discussion on long-term competitive sustainability in Canada. Some market observers and players highlight that there is a need to further open up the wholesale market, which could become more of an issue if the competitive shape of the market changes.

Although the country’s internet and mobile markets are competitive, Lawrence Surtees, an analyst with research company IDC, believes its wholesale segment is one of the last to be opened up and the regulatory framework has tended to deal with things at a retail level and based on market forces.

“This can cripple competitors if it’s not policed,” he says. “On the face of it, you can look at lots of competition, but there is a different set of issues about long-term sustainable competition and the broader historical picture. If you want to sustain competition, you need checks and balances.”

The spokesperson for OpenMedia contends that prices for wholesale access are high, while Surtees points out that wholesale revenues are flat.

The CRTC’s new Communications Monitoring Report, published in September 2012, shows that telecoms wholesale revenues stood at C$3.7 billion in Canada in 2011. This changed little from figures in the previous few years and represents less than 10% of overall telecoms revenues.

And while the CRTC refers to 10 large companies that dominate the telecoms industry, resellers were responsible for just 2% of revenues last year.

MTS Allstream’s Peirce agrees that there is a need for clear and mandated wholesale access for competitors to access and transport fibre networks controlled by incumbents, particularly as carriers move from legacy to IP networks.

He says Canada’s regulatory framework is keeping pace to some extent, but that the last mile for broadband access has not always been offered at a reasonable unbundled rate.

This situation is of interest to MTS’s Allstream division, which runs a 30,000km nationwide backbone fibre-optic network that it supplies to businesses and requires last-mile access from ILECs in a number of areas.

“A review of the mandated competitor wholesale access framework is scheduled for 2014, but we’ve said that’s too late and we need it now,” says Peirce. He says this is partly due to the CRTC determining in 2008 that mandated access on some higher-speed legacy access networks could be phased out from March next year. However, Peirce believes this timeframe either needs extending or access to IP needs mandating.

He continues that both the Canadian government and regulator have stated quite clearly in recent years that a “vigorous” wholesale market is crucial to competition and adds that moves committed to ongoing regulation are therefore necessary.

Could functional separation be on the horizon?

Surtees points out that the vast size and particular geography of Canada makes it hugely daunting to provide near-ubiquitous broadband, meaning that mobile becomes important for broadband provision in areas without coverage – all of which could be helped by wholesale interconnection.

He says the nation could benefit from the structural separation of incumbents, pointing to models in the UK such as BT’s Openreach wholesale division.

Yet functional seperation does not appear on the horizon anytime soon. Indeed, Lynne Fancy, director general of competition, costing and tariffs at CRTC, says such attempts would raise major complications – in part due to the fact that no single provider offers services across the whole nation.

Fancy stresses that wholesale is “a big priority” for the regulator and points to the CRTC’s stated intention in its three-year work plan until 2015 to review the methods used to establish wholesale prices in 2013 and 2014.

Meanwhile, Bell’s Constantin argues that developments in the market prove that wholesale regulation is not even entirely necessary. He points out that Bell already has a mature business model in place for wholesale services with firm commitments to network sharing and stringent codes of conduct, including meeting the wholesale needs of other service providers on commercially
viable terms.

“Canadian regulators have been increasingly relying on market forces in recent years to achieve policy objectives, a direction we fully support,” he says.“If there is room for improvement, it is in the need for more reliance on market forces and, ultimately, almost the complete removal of wholesale regulation.”

He adds that “in fact, with the CRTC reviewing wholesale internet regulation in 2014, this is the time to think about forbearance. We now actually have three “pipes” into the home – cable, telecoms and wireless – so why do we even need wholesale regulation?” He says the rapid expansion of 4G by multiple carriers further undermines any argument for continued wholesale regulation.

The great foreign ownership debate

One move that could enhance competition in the Canadian market is changes to its laws on foreign ownership. The government decided earlier this year to relax the laws, paving the way for players with less than a 10% share of Canadian telecoms revenues to be fully acquired by foreign players.

Previously, non-Canadian entities have been unable to own more than 46.7% of the voting shares in a carrier in combined direct and indirect stakes.

Predictably, there are again contrasting points of view on the foreign ownership manoeuvre. Peirce says MTS Allstream has long argued in favour of lifting restrictions on ownership: “It’s the right move for the economy and a very important step in terms of opening Canada up to competitive investment.”

In relation with this, the company has just announced a wide-ranging strategic review of its Allstream business over the coming year and said in a press release that the foreign ownership move allowed the company to consider a “full range of alternatives that could be undertaken to further enhance Allstream’s growing competitiveness”. It is unclear whether this will ultimately result in a sale, but it opens up the options.

Peirce says the market share restriction of 10% is an important first step, especially as smaller players are impacted by restrictions on foreign ownership in a way that does not affect larger carriers and capital is not always available to them from Canadian sources. However, he says MTS Allstream would not have opposed the removal of restrictions for all telecoms carriers.

Telus’s Fuller says the company has asked that the Canadian government does not discriminate against established domestic players of a certain size. “The recent liberalisation of foreign ownership limits was a positive first step, but something of a trade-off,” he says. “Fully lifting restrictions for all carriers would finally put Canada’s telecoms industry on a level playing field with our global peers.”

And Bell’s Constantin says the government’s decision to relax restrictions for only some and not all carriers “raises a number of concerns” and is “an asymmetrical approach to regulation of a critical important industry.”

He adds that the ability of large foreign carriers to buy or build their own facilities in Canada again calls into question the whole rationale for wholesale regulation.

Meanwhile, Surtees believes the relaxation of foreign ownership laws will not have a significant structural impact on the Canadian market, given that the government has chosen the conservative 10% market share option.

The rules, however, could to some extent open up the market ahead of the 700MHz spectrum auction next year. The government is also trying to encourage new competitors by applying a spectrum cap.

Fuller says that already “the reality is that the wireless industry is, without question, one of the most competitive markets in Canada. You would be challenged to find another consumer market that invests more in technology advancement, advertising, promotions and channels.” Constantin points out that there are no less than five wireless providers and up to 11 different brands available in several major cities.

Opening up rural Canada

The government is also putting measures in place ahead of the 700MHz auction to attempt to ensure that rural Canadians can access advanced services. The CRTC says that general rural communications options are opening up in areas like the far northwest, where there were previously only single service providers.

Canadian operators Ice Wireless and Iristel have just entered into a multi-million dollar contract with Huawei Canada to provide 3G and wireless broadband services to northwestern rural and remote communities by the end of 2013.

The CRTC’s Fancy highlights that there are additionally many different funded programmes to roll out broadband to remote communities, exemplifying the extensive government and provincial backing for a backbone network stretching throughout Alberta.

While there remains a general consensus that healthy competition exists in the Canadian market today, many exercise caution that this will remain the case going forward.

“We are at a very important juncture,” says Peirce. “There are currents at play that will have an impact over the next few years and I hope they will be pro-competitive. It will be important for both regulatory and policy makers to recognise that the need for appropriate regulation is as urgent as it ever has been.”