Fake Competition: Forcing telecoms to share their networks with small ISPs

Commentary, Frontier Centre, Public Sector, Uncategorized

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. A decision by the CRTC will force telecoms to give ISPs acccess to their network at the same speeds they offer their own customers.

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.