One of the messages that came out of the federal budget that has been lost in the noise around foreign ownership was the government’s commitment to some form of national digital strategy. For all of us involved in various aspects of the digital economy, from carriage to applications and from IT to culture, this is great news. But arriving at consensus around a coherent digital strategy will be a huge task. In some respects, that task becomes harder as it gains political currency, because of the political need to often boil down complex issues into simple goals or targets.
Take, only one of countless digital economy issues to consider such complexity; in this case broadband expansion. The FCC goal of 100Mps for 100 million households which underlies its National Broadband Strategy provides a good starting point. As an aspirational goal it’s catchy but what does it really mean? We can hopefully all agree that unless you have advanced broadband infrastructure, it is difficult support a digital economy. That seems a reasonable assumption and a good starting point to build a digital economy upon. But what is the thinking behind 100Mps? And how do you define it? And should we differentiate between the consumer markets and business use in setting our targets? To the latter point the answer has to be yes because productivity improvement starts in the business and institutional sectors. So for this piece I am focusing on the needs of the consumer sector and what is needed there to create digital markets.
As a target 100 Mps sounds good. It’s a big round number and compares to the triple digit Mps services available in Korea or Japan, both countries with the population densities that make such a target more achievable. But is an absolute number the right way to set a target as opposed to building on what is required to ensure good quality service? First question is what do consumers want or need 100Mps for (recognizing in the IP world more is always a good thing)? And how much are consumers willing to pay for it? This is a critical question to address if public funding is involved or if regulatory favors/sanctions are to be bestowed on those that hit the target.
Right now there is some suggestion that take up for 100 Mps in Japan or North Korea is not great. That is hardly surprising in the consumer space since there is very little today that can’t be done legally with less capacity. The most common high bandwidth applications tend to be in the realm of entertainment. Yet, the vast majority of consumers that download and stream media or play games can get by on a fraction of that speed. In fact there is evidence when it comes to usage of video online North America leads in consumption no matter that its networks are often criticized as inadequate. This is not a defense of the status quo, the demand for capacity is insatiable, which is why telco, cable, wireless and satellite providers are currently spending billions of dollars to increase capacity.
One of the public policy reasons often given for moving to a 100 Mps universe is to extend the benefits of health care through remote diagnosis or distance education. This again is a lofty goal but it is unclear how this would work. In the health care sector is there any money for funding remote diagnostics infrastructure out of current budgets? And if there is, big if, do all households need to be connected to super capacity networks or is the object to link community care centres where public health practitioners (nurse, paramedics) can support doctors that are remotely linked. Practically speaking much household remote diagnostics does or may require little bandwidth. The more important target may be to enable doctor’s offices and institutions with higher bandwith to enable a more efficient health care system .If that’s the ultimate public policy goal, then it may be easier to target and cheaper to build than upgrading all households to 100Mps.
Is 100 Mps per second a realistic short term goal given North American, particularly Canadian, geography? The best way to deliver dedicated 100Mps to an individual customer is likely through fiber. And the only way to deliver fiber to the home is to spend $10s of billions upgrading networks. Even if that is done, big if given return on investment, there will not be a significant fiber build out in rural Canada in the forseeable future. It is safe to assume that even in many communities there is no business case for 100 mps over fiber outside of very dense population groupings (like apartment complexes). As population density decreases the economics to support 100 Mps quickly disappear.
It is important to consider what we all mean when we talk 100Mps. Cable has 100Mps services in the market today but the current DOCSIS 3 products are shared. So if multiple subscribers in a neighborhood are using the network real speed is much less than 100 Mps. In order to keep increasing speed cable has to reduce the number of channels dedicated to TV (a difficult proposition when all channels are going HD) or move to a switched video model and build out fiber even further.
In wireless the FCC is banking on LTE to deliver the future of broadband .But like cable wireless operates on a shared spectrum basis and unlike cable is constrained by the amount of spectrum available. That is why the FCC wants to claw back as much as 500MHz from other spectrum users particularly broadcasters. That’s a plan that is likely to be met with litigation from broadcasters. In any event there is a point in the video world where wireless is less suitable than fiber/cable/broadcast satellite for distribution. That is why broadcasting has shifted from over the air to these types of broadcast distribution.
It would be a mistake to assume that the public internet, in either a wireless or even wireline mode, will become a better substitute for mass media than the infrastructure built to deliver such content. Convergence yes but full substitution no. So if we assume that the internet will not be the principle delivery vehicle for all HD/3D content is the requirement for 100Mps legitimate ,at least in the medium term; particularly on wireless?
Lots of challenges, but the billion dollar question remains as to who pays to achieve the goal? It is hard to imagine government can afford to spend billions of dollars to build these networks, so it must rely on the private sector through incentives or suasion. And it will find itself in a conundrum if subsidies/tax incentives are not technologically neutral. If the emphasis is on suasion, then what is the regulatory contract to ensure an obligation to invest is met by a reasonable opportunity to achieve a return on investment? That contract has always been the basis of public utility regulation and no one I have read has an explanation of how to guarantee a reasonable opportunity to earn a return on investments in high cost/risky venture if a market is competitive.
North America has a very high rate of inter-modal infrastructure competition and that is not likely to change back to a monopoly like environment any time soon. Hopefully most people still see infrastructure competition as a better model than a monopoly for sustaining long term innovation.
DSL, fiber, cable, wireless and satellite can all deliver broadband at a variety of different speeds and performance characteristics depending on geography and number of users online. This is not a bad thing. For instance in rural and remote areas satellite may be the only viable way to deliver broadband. While new satellites due to launch in 2011 may deliver as much as 5 Mps download, satellite will never deliver 100 Mps on a wide scale basis. That does not mean that the availability of such service would not be a major step forward, nor something that is not eligble for tax support or subsidies to broadband simply because it cannot achieve a 100MPs per second goal. Surely in unserved areas the policy goal is adequate broadband rather than a speed that today most consumers have no need for.
So there you are. Just a few of the tough questions policy makers are stuck with on just the broadband front. And even if we could magically wave a wand and enable 100Mps to all households, it’s arguable that household penetration would not jump significantly because household penetration is already very high, and speed and capacity are not the only factors limiting penetration. Digital literacy and poverty are, as, if not more, important challenges to address in building a broadband based digital economy. Not to mention increasing the investment pool, improving the intellectual property regime and supporting the cultural products that travel through the pipes or over the airwaves.
Monday, March 15, 2010
Friday, March 5, 2010
Foreign ownership liberalization should benefit Canadians not speculators
In today's Financial Post I was stunned to read comments from unamed industry observers that more foreign ownership was required in Canada's wireless business, but only enough to ensure that certain carriers can avail themselves of liberalization, while other, incumbent Canadian carriers, would be restricted. That makes no sense . If you believe in liberalization and want the benefits, you don't restrict it so only a small group of investors benefit.
The specious reasoning behind such anonymous and self serving sophistry is, according to said unamed observers, that if the ownership rules were removed on a fair and equitable basis for all carriers, then US carriers like Verizon might only invest in incumbents and thus nothing would change in the market. That is absurd and ignore issues of scale. Sounds like just a different spin on protectionism to me. Like an idea that speculators looking for a quick flip of license might contrive rather than good public policy.
First let me make an important caveat on the issue of foreign ownership. TELUS does not oppose the removal of foreign ownership restrictions on Canadian carriers, including on our cable competitors, as long as the rules of the game are applied fairly and equally to all. Conversely we take deep exception to rule changes that would put Canadian companies at a disadvantage relative to global competitors. We can't imagine any other country in the world that would introduce legislation that discriminates against its own enterprises. Unlike so-called unamed sources, we have been explicit and public on our views as recent as this week in the Post.
The proposal for asymmetric treatment is transparently self-serving and economically irrational. If foreign investment is considered necessary to lower prices, increase investment or stimulate innovation then a partial adjustment won't get you the results you want. Arguably it is hard to see exactly how more foreign investment will create better platforms in wireless than Canada has now as a result of over $7 billions spent on wireless in the past two years. However, irrespective of that, asymmetric tinkering only distorts competition and investment.
In terms of investment we would note that of over 600 carriers world-wide, only 17 operate the latest 3G plus networks. Canada now has 3 of those 17 networks. Only 2 other countries (Finland,Hong Kong) have as many as 2 and our major trading partners like the US currently remain a generation behind when it comes to the most advanced infrastructure. And no country we are aware, other than Canada has three carriers offering the iconic iPhone.
Competition and billions of dollars of investment in new networks, new devices and lower prices has already resulted in a new model where every major market in Canada will be served by at least 4 or 5 deep pocketed players;at least 4 or 5. Do the math.
First we start with Rogers,Bell and TELUS nationally. That is 3. Add Wind the Orascom (80 million subscribers world-wide) backed new entrant that was granted a mulligan when it comes to foreign ownership ,so it already has its own playing field. That's 4 in major markets outside Quebec. No problem because media giant Quebecor is building for a mid-2010 launch in that province. So back to 4 again. In Alberta and BC cable giant Shaw is quietly preparing its own launch, expected again by 2011. So that's 5 in western markets when you add in Shaw and Wind. In Sakatchewan and Manitoba the local phone companies dominate the market and have more share today than Rogers,Bell,TELUS combined .So that's at least 4 depending on what Wind and Shaw do. In Southern Ontario it’s at least 6 when you add Public Mobile and Mobilicity to the mix. And in Atlantic Canada 4, once cable provider Bragg decides to build with the new spectrum it has acquired. That's is a lot of carriers for a country the size of Canada; in fact for virtually any country in the world. And it's clear from marketing activity the market has become increasingly dynamic.
In such an environment it is fair to ask what the problem is, since it is not the state of our networks or the number deep pocket providers ready to compete. Some argue it has to do with relative price and penetration as measured by the OECD. Now some may suggest that a data report that often places the US as higher-priced than Canada may have flaws. And that penetration may be lower because local phone service is flat-rated and subsidized in Canada making it the best deal in the OECD (if you can trust OECD data). Regardless of the validity of past data in 2010 the key issues are already being addressed in Canada by: adding to the number of competitors in Canada (done) and by building better and globally compatible networks (done).
Moreover if the issue is scale and removing barriers to creating a North American market then the object to deliver consumer benefits would seem to rest with creating larger players not smaller ones. We can support liberalized rules or not. As to whether the tradeoff for foreign investment would increase investment (given we already have superior networks) and innovation, given the loss of head offices or domestic jobs, is a tough question and one government must address carefully . As we assume it is doing.
However it is crystal clear is that creating an asymmetric environment, where new entrants can more easily flip their licenses is of no real benefit in terms of innovation, productivity or consumer choice. Whatever your point of view on foreign ownership, a model that restricts liberalization to a small group of speculators is not real competition by any measure .
So we will support full liberalization if that is deemed to be in the public interest and have said so, but we cannot support a regime that allows a few speculators to benefit so they can more easily flip their license.
Perhaps the last word should go to a note I saw today from Vince Valentini at TD Newcrest
And lastly on the potential rule changes themselves. Obviously nothing definitive has been proposed by the Government yet, but some suggest that a two-tiered approach is possible, with new entrants getting preferred treatment over incumbents. Really. Let me get this straight. The populist Conservative party is going to enlist the support of the Liberal party to vote in favour of a new Telecom Act that will deliberately harm Canadian telecom companies, which pay material taxes and employ hundreds of thousands of Canadians, in order to help global giants like AT&T and T-Mobile make money in this country. Voters could have a very tough time with this proposition, and we suspect that the courts would have something to say about it if one or more of the incumbents were to challenge the legality of a system that provides unfair treatment to one set of competitors versus another.
The specious reasoning behind such anonymous and self serving sophistry is, according to said unamed observers, that if the ownership rules were removed on a fair and equitable basis for all carriers, then US carriers like Verizon might only invest in incumbents and thus nothing would change in the market. That is absurd and ignore issues of scale. Sounds like just a different spin on protectionism to me. Like an idea that speculators looking for a quick flip of license might contrive rather than good public policy.
First let me make an important caveat on the issue of foreign ownership. TELUS does not oppose the removal of foreign ownership restrictions on Canadian carriers, including on our cable competitors, as long as the rules of the game are applied fairly and equally to all. Conversely we take deep exception to rule changes that would put Canadian companies at a disadvantage relative to global competitors. We can't imagine any other country in the world that would introduce legislation that discriminates against its own enterprises. Unlike so-called unamed sources, we have been explicit and public on our views as recent as this week in the Post.
The proposal for asymmetric treatment is transparently self-serving and economically irrational. If foreign investment is considered necessary to lower prices, increase investment or stimulate innovation then a partial adjustment won't get you the results you want. Arguably it is hard to see exactly how more foreign investment will create better platforms in wireless than Canada has now as a result of over $7 billions spent on wireless in the past two years. However, irrespective of that, asymmetric tinkering only distorts competition and investment.
In terms of investment we would note that of over 600 carriers world-wide, only 17 operate the latest 3G plus networks. Canada now has 3 of those 17 networks. Only 2 other countries (Finland,Hong Kong) have as many as 2 and our major trading partners like the US currently remain a generation behind when it comes to the most advanced infrastructure. And no country we are aware, other than Canada has three carriers offering the iconic iPhone.
Competition and billions of dollars of investment in new networks, new devices and lower prices has already resulted in a new model where every major market in Canada will be served by at least 4 or 5 deep pocketed players;at least 4 or 5. Do the math.
First we start with Rogers,Bell and TELUS nationally. That is 3. Add Wind the Orascom (80 million subscribers world-wide) backed new entrant that was granted a mulligan when it comes to foreign ownership ,so it already has its own playing field. That's 4 in major markets outside Quebec. No problem because media giant Quebecor is building for a mid-2010 launch in that province. So back to 4 again. In Alberta and BC cable giant Shaw is quietly preparing its own launch, expected again by 2011. So that's 5 in western markets when you add in Shaw and Wind. In Sakatchewan and Manitoba the local phone companies dominate the market and have more share today than Rogers,Bell,TELUS combined .So that's at least 4 depending on what Wind and Shaw do. In Southern Ontario it’s at least 6 when you add Public Mobile and Mobilicity to the mix. And in Atlantic Canada 4, once cable provider Bragg decides to build with the new spectrum it has acquired. That's is a lot of carriers for a country the size of Canada; in fact for virtually any country in the world. And it's clear from marketing activity the market has become increasingly dynamic.
In such an environment it is fair to ask what the problem is, since it is not the state of our networks or the number deep pocket providers ready to compete. Some argue it has to do with relative price and penetration as measured by the OECD. Now some may suggest that a data report that often places the US as higher-priced than Canada may have flaws. And that penetration may be lower because local phone service is flat-rated and subsidized in Canada making it the best deal in the OECD (if you can trust OECD data). Regardless of the validity of past data in 2010 the key issues are already being addressed in Canada by: adding to the number of competitors in Canada (done) and by building better and globally compatible networks (done).
Moreover if the issue is scale and removing barriers to creating a North American market then the object to deliver consumer benefits would seem to rest with creating larger players not smaller ones. We can support liberalized rules or not. As to whether the tradeoff for foreign investment would increase investment (given we already have superior networks) and innovation, given the loss of head offices or domestic jobs, is a tough question and one government must address carefully . As we assume it is doing.
However it is crystal clear is that creating an asymmetric environment, where new entrants can more easily flip their licenses is of no real benefit in terms of innovation, productivity or consumer choice. Whatever your point of view on foreign ownership, a model that restricts liberalization to a small group of speculators is not real competition by any measure .
So we will support full liberalization if that is deemed to be in the public interest and have said so, but we cannot support a regime that allows a few speculators to benefit so they can more easily flip their license.
Perhaps the last word should go to a note I saw today from Vince Valentini at TD Newcrest
And lastly on the potential rule changes themselves. Obviously nothing definitive has been proposed by the Government yet, but some suggest that a two-tiered approach is possible, with new entrants getting preferred treatment over incumbents. Really. Let me get this straight. The populist Conservative party is going to enlist the support of the Liberal party to vote in favour of a new Telecom Act that will deliberately harm Canadian telecom companies, which pay material taxes and employ hundreds of thousands of Canadians, in order to help global giants like AT&T and T-Mobile make money in this country. Voters could have a very tough time with this proposition, and we suspect that the courts would have something to say about it if one or more of the incumbents were to challenge the legality of a system that provides unfair treatment to one set of competitors versus another.
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