In November, 2008, the Canadian Radio-television and Telecommunications Commission (CRTC) denied a request from the Canadian Association of Internet Providers, which wanted Bell Canada to cease its network “traffic-shaping” practices. The CRTC decided that Bell’s measures did not violate the law and were not discriminatory since the company applied the same policies to both wholesale and retail customers.
However, the CRTC has decided to examine the broader issue of traffic management by Internet service providers — and thus indirectly to tackle the issue known as “net neutrality.” This proceeding will include a public hearing that is scheduled to begin in July. Bill C-398, submitted by the NDP, raises similar issues and will also be discussed at the House of Commons in Ottawa.
In my view, consumers should be free to choose the Internet price and service combinations that best suit their needs rather than have the government legislate in the development of an industry as volatile as the Internet. Using regulatory power to apply the “net-neutrality” principle to pricing strategies would be misguided because this concept masks new constraints on the management of telecommunications networks.
There are many facets to the net-neutrality issue, including pricing and broadband allocation, which are central. Proponents of net-neutrality call for government intervention and regulation to prevent broadband providers from prioritizing or interfering with the data that flows in their networks. On the other hand, broadband providers are arguing that even though they continue to invest in their networks, their customers would still be affected by congestion during peak periods in the absence of traffic management measures. Other large networks face the same type of issues. New applications (video streaming and VoIP, among others) require a high quality of service assurance, making a more reliable network necessary.
Defenders of active management argue that the Internet has historically been completely unregulated and that imposing government legislation would be the end of the Internet as we know it; private networks have freely and openly accepted the universal Internet standards because it is in their (and their customers’) best interest to do so, not because it is required. They worry that network neutrality regulation could stifle new investment and innovation in broadband networks: Making it illegal for broadband companies to offer a diversity of choices would destroy incentives to invest continually in improved Internet bandwidth, quality and security. Net-neutrality legislation would unnecessarily regulate a free and competitive market when there is no real evidence of consumer harm.
Most networks share some common characteristics: uncertain demand cycles with peaks on narrow time intervals, cost structures weighted toward fixed costs, a significant peak demand and a significantly uncertain market development pace (new products and services, new competitors, new technologies, changes in customers’ behaviour). These characteristics have major implications.
First, investments in network development are quite risky. Second, the efficient use of limited network capacity as well as the profitability of network maintenance and development rest on the implementation of proper pricing strategies, expressed in terms of menus of multi-part prices and conditions. Third, differentiated time-based quality of service contracts offer a way for network operators and service providers to differentiate their products and services from those of their competitors. This differentiation strategy is the key to avoid the otherwise expected marginal cost pricing trap: Outlawing this strategy will drive prices to marginal costs, below average costs, turning socially valuable investment proposals in network maintenance and development into money-losing schemes, to the detriment of all.
In light of the above, the most socially efficient network maintenance and development strategy would be to let competition play its role: Let network owners and operators as well as service providers differentiate their offerings and price them the way they choose. Customers would benefit from more diversified offers by selecting the ones best suited to their needs. In such a competitive context, network operators and service providers would routinely aim to satisfy demand for Internet services most effectively while simultaneously aiming to manage the growth in peak demand.
It is to the advantage of consumers to allow competing vendors to experiment with various price and service combinations. From this discovery process, a portfolio of winning offerings will emerge. As long as competition is present and sufficiently intense, and assuming the level of information available and provided to consumers enables them to make informed choices between the various offerings, regulation of price schemes is neither necessary nor desirable as it would stifle innovation and obscure the best offerings and pricing schemes.
From an economic point of view, policies that would restrict the ability of broadband providers to manage their networks are likely to do more harm than good. Regulation of prices and offerings, products and services, has generally resulted in higher costs and lower benefits, especially when competition is present. The complexity of market dynamics poses particular problems in emerging industries. Instead of adopting regulations that could induce unwanted harmful effects, it is preferable to mandate the Canadian Competition Bureau to investigate when there is evidence of abuse or unlawful actions from broadband providers.
The development of Canadian competitiveness in telecommunications should not be damaged in the name of hypothetical fears of short-term prejudice. Eroding the property rights of broadband providers will reduce their incentive to invest in capacity building or in network upgrades. This will lead to a decrease in performance and relatively more expensive Internet services.
Marcel Boyer is Vice President and Chief Economist of the Montreal Economic Institute. He is also the author of Is net neutrality economically efficient?