Fake competition

Imagine if you were the owner of the only fully equipped garage outlet in a small town and some government regulatory agency ordered you to rent your premises a few hours a day, at a predetermined tariff, to other local mechanics.

The agency, judging that your “market power” is too dominant, justifies its decision on the need to foster “competition” in garage services in your area and thus bring about better services and lower prices to customers. When you decide to buy the latest tool, the agency orders you to share it with the “independent” mechanics to prevent their being at a disadvantage.

Anybody will instinctively see why such a situation is not only unfair and inefficient, but also based on a totally distorted view of competition. If you can only compete because you have a privileged access to resources belonging to your competitor, that is not real competition. And despite the seemingly pro-market jargon, it has nothing to do with free markets.

That’s precisely what’s wrong with a decision announced by the CRTC, Canada’s telecommunications regulator, on Aug. 30.

For the past decade, it has required that companies owning the telecommunications infrastructure such as Bell and Telus share some of it with alternative Internet service providers (ISPs). These small providers lease digital lines, repackage the service and sell it under their own brand. They account for about 7% of the market.

The telecoms, however, have been investing billions of dollars in their fibre network and in new technologies and have been able to offer connections at increasingly higher speeds, a capacity which they understandably are not keen to share, especially at the same mandated tariffs.

The CRTC ruling, which follows a previous similar decision that the government asked the CRTC to reconsider, will force the telecoms to give ISPs access to their network at the same speeds as the services they offer to their own retail customers. To compensate for the billions invested, they will be able to raise their tariffs by 10%, a wholly arbitrary number that cannot possibly reflect a variety of market conditions.

Cable companies are also subjected to the same regulation, but for technical reasons, ISPs prefer to deal with the telecoms. In its ruling, the CRTC ordered cable carriers to make it easier for ISPs to interconnect with them.

Granted, telecommunications firms and garages are not in the same game. For decades, the former enjoyed a legal monopoly in traditional telephone services, which only began to be broken up in most developed countries in the 1990s. To offset this domination, regulators then tried various ways to promote competition, including by preventing telecoms from making their services cheaper and by forcing them to open parts of their networks at advantageous rates to the new entrants.

Because networks are a lot more complicated to set up than a garage and have to connect everyone at once to be of any use, this was supposed to enable the newcomers to provide telephone and Internet services without having to replicate an infrastructure throughout a whole territory. It was always understood, however, that these measures would lose their raison d’être in a market that became truly competitive as new entrants invested in their own infrastructure.

This is not what has been happening with the so-called alternative or “independent” ISPs. A decade later, their infrastructure is still marginal, their market share has been falling, and their business model is entirely dependent on an easy and cheap access to the telecoms’ networks.

This model has no future unless the regulator increases its control over the private telecommunications networks and effectively turns them into a public utility, as Bell and the other incumbents were two decades ago. As the head of the Canadian Association of Internet Providers, Tom Copeland, recently told the Canadian Press, “I’ve always said government needs to be looking at this type of infrastructure the same way we did the railway, the road system in the country, hydro, water, sewer.”

The CRTC has no mandate to go in this direction and was asked instead by a 2006 government policy direction to rely as much as possible on market forces when it makes its decisions. In its ruling, it recognizes that as technologies and markets evolve, mandated access will eventually be phased out when there is “sufficient” competition among wireline-, wireless-, and satellite-based Internet services. But how does one define sufficient competition?

The CRTC’s static definition is based on the number of players. By propping up the small ISPs, it claims that competition increases and customers’ interests are better protected. In reality, competition is a complex market process in constant flux, not something that can be ascertained by a head count.

There have never been so many ways to connect to the Internet. Although it is more expensive than other services, satellite Internet is available across the country. Bell, Telus and Rogers have recently introduced their Internet sticks and stations connected to their wireless network. And nobody knows which technology will appear in the coming years that will revolutionize the sector. That maintains competitive pressure on all the players and forces them to keep on their toes, no matter how many or few there are.

Instead of actually relying on market forces and getting out of the way to allow real competition, the CRTC has decided to keep alternative ISPs on artificial life support on the basis of a misguided definition of competition. But just like the garage owner forced to rent his premises, this makes the real competitors less profitable and less efficient, thus harming the interests of the very consumers it claims to protect.

Michel Kelly-Gagnon is President and CEO of the Montreal Economic Institute. Martin Masse is fellow at the MEI.


FP Letters: Small ISPs offer real competition
National Post, p. FP-17 / Mel Cohen, September 15, 2010

Re: Fake Competition, Michel Kelly-Gagnon and Martin Masse, Sept. 9

On Sept. 9, the ivory-tower intellectuals of the Montreal Economic Institute (MEI) came to the defence of Bell and Telus and railed against the CRTC’s decision to protect consumers and promote competition.

Unlike the CRTC — which based its analysis on facts — the MEI put forward a silly argument comparing local telephone networks to local garages. If the MEI intellectuals can’t tell the difference between networks that have been built up over many decades with monopoly-guaranteed profits and a local car garage which can be built in a couple of months, then what do they understand? Not telecommunications.

Here are some facts instead of fantasy.

Canadians pay 33% more than consumers in the United Kingdom for mid-range broadband Internet services and 50% more for high-range broadband services. This is because in the U.K. OpenReach (the local network division of the U.K. telephone company BT) has to provide competitors with even better quality and cheaper access to its local network than the CRTC wants Bell and Telus to provide Canadian competitors. And yet, OpenReach is profitable and U.K. consumers are reaping the benefit of strong competition. No problems there.

Canada was an international leader in the Internet a decade ago when smaller competitors held a 50% market share. Now that the telephone and cable companies have divided the high-speed Internet market between them — a duopoly with a 94% residential market share — Canada has fallen to the middle of the pack, or worse, according to international studies. That’s what telco-cable fake competition does for Canadians.

And finally, wireless is not a substitute for wireline Internet services — as was admitted by both Bell and Telus at the CRTC hearing. George Cope, the president of Bell, told the CRTC wireless would likely always lag wireline “just because of spectrum constraints and technology development.” No magic bullet there.

The MEI intellectuals want to protect the record profit levels of telephone and cable companies in the name of bogus “market forces.” The CRTC wants to protect Canadian consumers by means of real competition and real market forces. I think Canadians can tell who is on their side.

Mel Cohen, president, Distributel Communications, and executives from 13 other companies.


Small ISPs still fake
National Post, p. FP-11 / Michel Kelly-Gagnon and Martin Masse, September 21, 2010

Re: FP Letters: Small ISPs offer real competition, Mel Cohen, Sept. 15

Mr Cohen accuses us of not being able to tell the difference between networks belonging to monopolies and local garages. That’s funny because we took a couple of paragraphs explaining that very difference in the article. What Mr Cohen does not want to see are the similarities that we can perceive if we use logic and economic theory.

Perhaps we should have used a different analogy, one between a local garage and a small IPS. Both can indeed be “built in a couple of months.” Which is why the “competition” offered by small ISPs is not a real one, but a fake one based on mandated access to the networks of larger companies. Only facilities-based competition can bring real market change, and small ISPs have not, and will not, build theirs as long as they can rely on that mandated access.

Mr Cohen proves one of our points with his example from the UK: OpenReach was created by functionally separating the network infrastructure of BT and regulating it as a sort of public utility. In the strange world of the small ISPs, “real market forces” will emerge from a tighter bureaucratic control over the telecommunications industry. We can sympathize with them, since they won’t be able to survive without it.

Finally, although it may be true that wireless (or satellites for that matter) will continue in the foreseeable future to lag wireline, that’s no reason to conclude that wireless “is not a substitute” for wireline Internet services. It’s like saying that the new electric cars being developed are not a substitute for traditional ones with a combustion engine because they can’t go as fast and as far without being recharged. That’s nonsense. One of us lives in the countryside and uses a wireless station to connect to the Internet, and it surely looks like the same Internet that everyone else is connecting to.

These wireless services at least derive from real investments in real networks. Which is a lot more than can be said for the services offered by small ISPs.

Michel Kelly-Gagnon is President and CEO of the Montreal Economic Institute. Martin Masse is fellow at the MEI.

Back to top