The Legal Side Of Gaming’s Digital Revolution

Writing about video games isn’t all about sitting on the couch in your underwear and staring at a TV for hours on end. There are those rare occasions when those of us who do it get out and actually, y’know, talk to people involved in games.

Such was the case this week at the Montreal International Games Summit. I listened to and chatted with a great range of people across the whole spectrum of the industry, from writers and programmers to executives and even recruiters.

I’ll have more on MIGS over the next little while, but today I wanted to share one of the more interesting conversations I had. I interviewed Maxime Gagne, a lawyer from Heenan Blaikie who represents video game developers. Many wouldn’t think a conversation with a lawyer would be fun, but given how quickly video games are changing thanks to digital distribution and interaction over the internet, Gagne is covering some particularly poignant areas.

This rapid change was the topic of a presentation he did at MIGS. I chatted with him afterward about it, as well as the legal aspects of free-to-use services such as Facebook and Canada’s controversial copyright legislation, Bill C-11. Here’s an edited transcript of the interview.

How would you boil down your presentation to its essence?

The first big aspect that needs to be looked at in the context of the end user license agreement is the ownership of the game itself, which can include the ownership of player generated content. With digital distribution that’s really taken a whole new meaning. You have even through retail a few games that allowed user to go online and interact with each other but [so many now] have the ability to upload content and enhance the game, it’s really changed the way we have to license those games.

Also, when you’re looking at the end user license agreement you have to take into account all the consumer protection laws, the laws regulating access by minors – whether it’s advertising to minors or your game is rated for a certain audience – and of course in most online games either the developer or the distributor will collect data with respect to the users, whether it’s purchase patterns or to sell that data for advertising or for the purpose of establishing an audience. That data needs to be managed. What I see more and more is the outsourcing of that data, which poses problems too and people are not aware of that.

What we’re looking at broadly is an increasingly complex set of rules that regulate the game industry and the conduct of the gamers and their interactions with the game. From both the developer’s and the consumer’s standpoint it’s getting increasingly complex, that’s for sure. That’s where we step in. Lawyers oftentimes make the process more complex or less complex. My role as a lawyer is to play on both ends and sometimes take the role of the player and look at the license and say, “Can I understand any of this? Is it reasonable in a certain manner?” I keep reinforcing it with my clients that even though you’re drafting this agreement, you can’t just write anything in there, you can’t write all the rights in for yourself. You can’t get unlimited assignment of representations because it’s not the way it works.

Do you play games yourself?

I do. I’m not an avid gamer, but yes I do.

The obvious question is, how enforceable are end user license agreements (EULA) given that virtually no one reads them?

I agree with you, but there are ways to make them enforceable. One of the ways that I personally favour are the summary statements of the rights and obligations of players. Twitter, even though it’s not a game, has an interesting example of this. If you go on the Twitter website, even though they have a full-length license agreement, they have a summary that tells users in clear language what they’re allowed to do and what they’re not allowed to do. Often times, even though that’s being followed by a very long license agreement, if the basic principles are made clear to the end user right off the bat, then you have a much greater chance of having an enforceable EULA. I always say to my clients, if it’s important to you, make it clear and summarize it.

Also, it looks simply but often what you’ll see is that the EULA will pop up on the screen and you already have the “I agree” button even though there are 77 pages that you don’t have to read to click it. If at the very least you can demonstrate that the player had to go through the entire license before clicking “I agree,” in most circumstances it will be enforceable. That being said, there are rules in respect to unconscionable contracts that are unfair to the user. Within the frame of mind that most EULA are consumer contracts, courts will tend to favour consumers over developers in the interpretation of those EULAs.

Did you ever see the South Park episode about Apple’s EULA, where one of the characters inadvertently agreed to have his mouth sewn to someone else’s rear?

No, but that’s hilarious. That’s basically it. I would tend to think those kinds of situations could never happen. If there are such things as unfair provisions, the courts will strike it down, which is why from a developer’s perspective, well-crafted survivability clauses are a must but I won’t bore you by going into that.

Are we headed towards all games having EULAs, or could each platform – like Xbox, or iTunes – just aggregate them as one on behalf of developers?

They could definitely aggregate it by platform but the problem with EULAs is its becoming excessively complex. Every game has its own type of content that will be input or uploaded so yeah, you could aggregate it, but then you’d end up with a EULA that’s 177 pages long. And then the question is, do you really expect anyone to go through 177 pages of legalese? I personally wouldn’t recommend it to a client because the information the end user is looking for is lost in a mass of information. You have to make it easy for the player to retrieve information. It would become overly complex.

But isn’t the problem also that if players have more EULAs to read, they’ll probably read fewer of them?

Yeah, but on a case by case basis that’s more or less would have an impact on the enforceability. There’s such a rule in contracts that you can’t claim ignorance. If you’re presented with a document and you decide not to read it, you can’t just claim ignorance, you’re bound by it. If you’re a developer and you’re able to establish that the contract was presented to the person and he had a reasonable chance of going through it and agreeing to the terms, then technically if all other provisions are valid in the contract, it should remain enforceable. So yeah, it is true in practice. As more and more EULAs are flourishing through the digital distribution channels, people will read them less and less. But then again, the reality is even through regular retail outlets people don’t read the fine print. It comes to the lawyers and judicial side of things to make sure there are clear statements for the users that they can understand. That’s always been a problem with contractual law and it doesn’t really change with digital distribution.

One of the things you said during your presentation is that if you’re not paying for a product, chances are good you are the product. Can you expand?

It is the reality of the web and most free games. You have to realize that developers are looking for revenue streams. They’re in a business just as you and I are in a business and if they’re not making revenue directly from payments from the players, they’re making revenue otherwise. That otherwise in many cases is selling consumer data. That can be done, it’s not a problem, but it has to be clear to the user whenever that information is collected. That consent has to be clear and right at the beginning before I purchase the game because later on it’s not valid, so I have the option to opt in or out. People have to realize that there’s not much that comes for free in life. If you’re playing a free game, you’re paying for it in another way.

So people who complain about things like Facebook violating privacy, do they just not understand that?

There’s more and more concern about the realm of privacy and people are not realizing that those companies are making an investment in developing a platform that they use for free. There has to be a way for them to be able to generate revenue so they can enhance that platform and keep it available. Yes, I don’t think people realize the costs to having access to that platform is that, that they can sell not necessarily information that will render you identifiable as an individual, but they’ll take your information in aggregate. They’re selling advertising like that. There’s an increased awareness of what privacy is and what personal information is, but then again, you can’t have your cake and eat it too. If you’re going to have access to those services and take advantage of them, then part of the deal is you relinquish some information.

The copyright bill, C-11, also came up during your talk. You said it will be good for game developers. Can you expand?

Digital rights management is good news for developers in a sense that DRM in Canada is not protected. If you break DRM you could be found in violation of the EULA, but there is no statutory provision that will make you liable for a fine, for example. That would come into place in the new act. It is a good move for developers. That said, users have been really outraged over the user DRM, mostly to regulate the use of and transfer of their license. For example, if you have a game on one platform and then you sell your X-Box and you want to transfer that game, in some cases you won’t be able to do it. DRM will prevent you from doing that. From the consumer’s perspective, it may be seen as a setback.

What I’m hopeful about with the protection of DRM is that it will be used to locate the actual copies of games and make sure that they’re traceable. The problem we have now and why we don’t allow copying, in most cases, of video games is that you can make one copy or five, six, seven, 10 and you can decide to distribute them. As a developer with the DRM, which are basically technological tracking systems, I can see that you’ve taken your copy and just transferred it to another platform. I’m hoping that with that tracing being possible, the developers will allow users more and more to transfer their games. Right now because it has no protection, DRM isn’t being used to its full capacity to enhance the rights of the users, which they could do. Tha’s a misunderstanding people don’t often see in DRM. Right now because there’s so much piracy, it’s primarily used to prevent copying.

There’s the suggestion that C-11 should have an exception to the lock provision, where people could break DRM for their own private use. Some say that such an exception would make the rule itself pointless. What do you think?

I haven’t seen the exception but there could be ways that it’s crafted that wouldn’t necessarily make it pointless. It would allow private copying but still prevent the uses that are technically restricted to the author of the work, meaning distribution or public performance of the work. That would still be considered infringement. You could break the DRM and make a private copy but you can’t break the DRM and make 160 copies and sell it. It doesn’t render the provision pointless, it just makes clear that there are certain limited uses that you’ll be able to do.

So you’re not in favour of one approach or the other? Private copying could be enabled by the digital locks or by the non-infringement exception, right?


So it’s potentially good news either way?

The DRM is not necessarily a move that’s coming out of nowhere. There are international treaties for the protection of intellectual property that require protection of DRM. Canada was not in compliance with those treaties so it’s a move that’s also being forced by international organizations. Whether those standards are good or not for developers and distributors, that’s a debate that’s been going for quite a while. So we’re not just trying to mimic what the States are doing.

Critics of C-11 have said the DRM protection isn’t required by treaties such as WIPO and that it’s just being pushed by U.S. entertainment companies. Are they just interpreting the treaties differently?

I do see it definitely as a response to the criticism that we’ve had from the United States, but with that said, that’s not the only reason why we’re moving towards it.

Structural Separation: Not Just For Marriages Anymore

Liberal MP and tech critic Marc Garneau really kicked opened a can of worms a few weeks ago when he hosted an online chat to discuss the digital issues Canadians are concerned about during this election. Garneau, chatting with University of Ottawa professor Michael Geist and Open Media’s Steve Anderson, made a number of promises during the hour-long chat (you can read the transcript here).

Perhaps the most important – definitely the most surprising – was his statement that the Liberals support functional separation of telecommunications companies. In plain English, that means they are in favour of effectively splitting companies such as Bell and Rogers into two units: one side would manage the phone and internet networks owned by the company while the other would sell associated services to customers.

Many telecom companies will argue they already have this sort of separation, although they often willfully confuse it with simple accounting separation – where different units are tracked separately –  so there’s no real point to it. However, functional separation usually requires separate staff in each division and is often the first step toward operational or structural separation, which are more severe. Full-on structural separation usually means the network-management unit must be spun off into its own separate company that is not owned by the parent. So Bell or Rogers, for example, could technically lose ownership of their networks if Garneau or other supporters wanted to seriously move down this path.

The idea behind splitting up companies in this way is simple. The separate network unit sells fair and equitable access to that network to all comers, including small independent internet service providers as well as the parent company’s own retail ISP division. This way, everyone has access to the same network and can compete on things like prices, speeds, monthly usage limits and so on. Big companies such as Bell and Rogers thus lose their network-owning advantage and anti-consumer measures such as throttling and usage-based billing are unlikely to happen. If one ISP were to implement low usage caps, for example, customers could have the choice of several other companies that offer more generous limits. That differs from the current situation in Canada because big ISPs usually move in lockstep with one another and force their practices onto smaller ISPs as well.

As the International Telecommunications Union states, separation is usually only necessary when a country has difficulty attaining a competitive telecom market through other means. I wrote about this topic and how it might apply to Canada two years ago in a story that predicted what’s happening now. With evidence – including stats from the OECD and the World Economic Forum – mounting that Canada’s telecom markets are indeed uncompetitive and with the continuing souring of relations between network owners and the small ISPs who need them to survive, it was inevitable that talk of separation would follow.

But are the Liberals serious? Garneau’s comments struck me as throw-away pandering to an already partisan online crowd, given that it was really the first time the Liberals had suggested the idea of separation. It certainly isn’t in the party’s published platform. To be honest, I’m not sure Garneau knows what he’s talking about or that he has thought about the issue at any great length. I’d love to hear him questioned more on it.

Tony Clement, the current Conservative Industry Minister, lambasted Garneau on his comments, telling the Wire Report that it’s “completely unrealistic” for the Liberals to support functional separation. More tellingly, he said “the whole industry is going to convergence, not splitting off,” which seems a pretty clear indication that separation is nowhere near being on Clement’s and the Conservatives’ agenda.

That’s really disappointing because it shows Clement doesn’t understand the fundamentals of the situation either. The telecom industry is indeed converging, which is the whole point of separation – it converges networks more than it splits them off, which is a cheaper and more efficient way of doing business and getting better services. Even telecom companies themselves are coming to understand this – it’s why Bell and Telus jointly built a cellphone network and it’s why the top executives of several large telecom firms in Europe are voluntarily suggesting the idea of structural separation. Clement has made several poignant comments in the media over the past few months that he understands there are deep problems in Canada’s telecom market, yet he seems clueless as to how to fix them.

Separation would indeed be the closest thing to a silver bullet for solving Canada’s telecom woes. The problem here, which hasn’t really been encountered in any other country where separation has been done, is that it would be more complicated to do. Most other countries have simply split up their big phone incumbent – if this were to happen in Canada, it would also have to be done to the cable companies (in the interest of fairness).

Catherine Middleton, the Canada Research Chair in Communications (not the royal bride-to-be), has just released a report studying the possibility of separation in Canada. In it, she argues that getting separation with phone and cable companies would be tough to do and take a long time, so much so that “by the time it was implemented, it is not clear how many independent ISPs will remain to benefit from this change to the wholesale regime.”

Indeed, that’s why separation – although a great ideal – is not something I’ve harped on much. The much easier thing to do, which is something I’ve been incessant about, is to lift foreign ownership restrictions so that deep-pocketed international players can come in and compete. That, coupled with good and strong regulation (which is another topic for another day), would probably suffice in giving Canada a competitive telecom market.

With that said, a Canada with structurally separated phone and cable companies – and without foreign-ownership restrictions – is a telecom utopia we can only dare to dream of. Canada wouldn’t just benefit from the enhanced competitiveness that separation brings in, it would get it two-fold by having two different separate network companies competing against each other. Under this scenario, new ISPs might actually start up, as opposed to existing ones continually worrying about how they’re going to pay their bills from month to month. Canada could actually become one of the most competitive telecom markets in the world.

Such moves, however, would take strong, visionary leadership, not to mention a majority government. Unfortunately, those things are currently in short supply.

Digital Strategy Is Government’s Phantom Menace

“Me’sa so happy to get 5-megabit broadband!”

The year was 1999 and nerds around the world were abuzz for something they had been waiting a seeming eternity for: a new Star Wars movie. Anticipation and expectations couldn’t have been higher going into George Lucas’ long-promised return to the pop culture phenomenon he had set in motion with the Original Trilogy back in 1977. But then, The Phantom Menace happened. And things got even worse with the next one, Attack of the Clones. Lucas redeemed himself somewhat with his third prequel, Revenge of the Sith – I know this because I just rewatched them – but in the end, there was no denying it. The new Star Wars movies were terrible.

And so it is with the equally long-awaited digital strategy from the Canadian government, titled Digital Canada 150. Believe it or not, there are actually a number of similarities between the movies and this bit of government policy. Nerds like me have been waiting for it forever and it has indeed been in the works for a long time. But most crucially, it’s also abjectly terrible.

Divided into five “pillars” – connecting Canadians, protecting Canadians, economic opportunities, digital government and Canadian content – there’s almost no actual “strategy” in the short, 25-page document, which is perhaps why that word isn’t actually in its title despite it being presented as such. Rather, Digital Canada 150 is more a collection of bullet-point reminders of the government’s recent efforts across a number of technologically-related subjects, such as its development of an app commemorating the War of 1812 and the lowering of corporate taxes. And oh yes, there are lots of pretty pictures and useful factoids, like the one that predicts internet usage is going to increase over the next few years. Good thing that’s in there.

There are a few hints of things to come, like a promise to “work with the Canadian Radio-television and Telecommunications Commission (CRTC) to develop a plan to unbundle television channels and ensure cable and satellite providers offer Canadian consumers the option to pick and choose the combination of television channels they want,” and the introduction of “new anti-money laundering and anti-terrorist financing regulations for virtual currencies,” which is obviously aimed at the likes of Bitcoin. But otherwise, there are few concrete goals set out and no evidence that any of these isolated efforts are in any way connected to the larger idea of accelerating digital usage or growth by Canadians.

One of the few actual targets is to bring internet access of at least 5 megabits per second to 98 per cent of the population by 2019, but this is a bad plan for several reasons. Firstly, the CRTC already had such a goal in place, except it was supposed to be achieved by 2015, meaning that the government is delaying it another four years. But perhaps more importantly, it’s far less ambitious than what other countries are doing. As University of Ottawa internet law professor Michael Geist points out, Canada’s goal is well behind the likes of Australia, Germany and Sweden in both speed and target dates. Many countries are aiming for speeds of 100 megabits or more. Indeed, the only country that appears to be as unambitious as Canada with its broadband plan is the United States.

Inevitably, the issue of size arises in such discussions. Canada is, after all, one of the biggest countries in the world in terms of land mass, yet it has a relatively small population. That makes it harder and more expensive to roll out services here than in, say, a tiny country like Denmark, right? This is the rationalization that has been used for Canada’s high wireless prices and it has indeed been trotted out for wired home connections too. It’s also one the government has apparently accepted to rationalize its efforts.

Except that it’s nonsense. Canada is, in fact, one of the most urbanized countries in the world, ranking 37th overall with more than 80 per cent of the population bunched up together in cities. The chart below shows urbanization rates among developed countries, according to the United Nations’ population division:

And here’s a chart that strips out all the tiny OECD countries with fewer than 10 million people:

Given the relatively high concentration of the Canadian population, it should actually be easier or more efficient to roll out advanced telecommunications services here than in Germany, the United Kingdom, Norway, Austria or Switzerland, yet all of those countries outstrip Canada in terms of broadband goals and wireless performance in general.

In that vein, Canada’s broadband goal is amazingly lame – it’s the veritable Jar Jar Binks of the entire digital strategy. The government should be shooting for those 100-megabit-plus speeds that others are going for, yet instead it’s settling for what’s barely considered broadband in places such as Pakistan.

As a whole, there is one other way in which the Digital Canada 150 is similar to Star Wars. George Lucas at least had the good sense to sell Star Wars to Disney and allow someone else to have a crack at producing something that fans might be able to appreciate. With the thoroughly lacklustre digital strategy taking four years and three different industry ministers to produce, it’s looking increasingly clear that this is not the government to take Canada forward into a digital future. Observers interested in such matters can’t be faulted for hoping that someone else takes up this task.

Review: LG G Flex’s Curve Is Too Gimmicky

The onset of spring means a cavalcade of new products in the tech world, especially in phones. In that vein, over the next few days I’ll be taking a look at several of the season’s hottest releases, starting with perhaps the most unique entry: LG’s G Flex curved smartphone.

The Flex features a six-inch curved plastic OLED display, as well as a curved battery to go with it. The idea is to provide a more ergonomic experience that contours to the shape of its user’s head. The curved display is also supposed to provide a better media viewing experience, akin to the slightly concave screens in movie theatres.

The cynically minded might be quick to write this off as a gimmick, and in this case they’d be right. After testing the Flex out for a few days, I couldn’t really see the point of the curve. In fact, it’s also likely responsible for the phone’s biggest problem: poor screen resolution.

At a resolution of 1280 x 720 and 225 pixels per inch, the Flex doesn’t have the full high-definition screen of some of its “phablet” competitors, such as Samsung’s Galaxy Note 3. It’s actually quite noticeable, with the icons and backgrounds appearing grainy. This is pretty much a deal breaker for me – if you’re going to go for such a giant display, it had better be a nice one.

The lower resolution is likely either the result of the curve itself, or LG trying to keep the price down in order to pack in the advanced technology that makes the curve possible in the first place. Even still, it’s not exactly a cheap phone, running $649 upfront or $199 on a two-year contract exclusively through Rogers. Ultimately, the tradeoff isn’t worth it.

Despite the marketing behind it, the curve doesn’t enhance video-watching experience. While the science has been proven with the giant displays in theatres, the jury is still out on whether it makes a difference with the sorts of curved televisions that manufacturers have recently been introducing, and doubly so with even smaller screens.

The Flex’s curve also doesn’t add any obvious sound-quality improvements to phone calls, which means the only thing it’s good for is party tricks – you can flatten the phone by pushing down on it (hence it’s “flex” name), but trust me, that gets old quickly.

Otherwise, the device itself is decent enough. The battery life is particularly good, with the Flex holding a full-day charge easily even with moderate usage. That’s somewhat impressive given its giant screen, but the lower resolution again probably provides some power savings.

One feature I like is the one-handed mode, which is particularly useful for such a big device. When switched on, keyboards and number pads shift over slightly to the right or left of the screen depending on preference, so you don’t have to strain your fingers reaching all the way across.

I also like the fact that the Flex can shoot ultra-high-definition videos with its main 13-megapixel rear-facing camera, although again that’s not a benefit that you can even get close to enjoying on the phone itself thanks to its lower-resolution screen.

All told, the G Flex is probably best suited for those phone buyers who want a conversation piece. It certainly stands out from the rest, but it’s not the best in its class by any stretch.

Next Issue – The Netflix Of Magazines – Is A Winner

The Netflix of magazines – Next Issue – is coming to Canada. However, unlike the video streaming service that inspired it, subscribers here won’t have to perform internet connection gymnastics to access good content.

The service comes in the form of an app for Apple, Android and Windows tablets and PCs, and it offers unlimited access to more than 100 magazines, including big international names such as Sports Illustrated, Oprah Winfrey’s O, GQ, Esquire, Wired, Time and so on for $9.99 a month, or $14.99 if weeklies are included.

Joining them on Oct. 15 will be Rogers Media publications including Maclean’s, Canadian Business, Chatelaine and others. Americans will get access to the Canadian magazines on that date, which is also when the service launches for Rogers’ customers. The rest of Canada gets Next Issue on Dec. 15.

The upsides of the venture are many. For consumers who already subscribe to a magazine, it’s a fantastic service at a great price. With individual subscriptions running a couple of dollars per month, Next Issue offers tremendous value since it’s only a few dollars for more content than anyone could ever want.

I subscribe to Wired, for example. There are plenty more magazines I’d like to buy, but that one publication pretty much eats up how much I’m willing to spend per month on that particular category of goods. Next Issue changes that since a few extra bucks gets me access to all those magazines I’d like to read, but am not willing to pay full freight for. I imagine that will be the case for many readers too.

Ken Whyte, president of Next Issue Canada – a joint venture between Silicon Valley-based Next Issue Media and Toronto-based Rogers Media – says that’s exactly the intent. I asked him why I shouldn’t just ditch my Wired subscription and sign up to the app instead. “I think you should,” he said. “It’s great value. There’s thousands of dollars of great magazines on there.”

The service benefits publishers too, he says, because each magazine gets a cut of Next Issue’s monthly fees based on “dwell time,” or how long subscribers look at them. Readers might thus sign up to get access to, say, Maclean’s and Canadian Business, but they could also end up putting money in Time‘s pockets. That’s revenue that wasn’t there to start with.

“There’s a tendency by people to use Next Issue to sample magazines, the average is close to 20 per user,” he says. “It really spreads the audience across more brands. It brings in people who just weren’t inclined to subscribe to a print magazine.”

I tried the app out and it really is as simple as it’s made out to be. Magazines are organized alphabetically; you simply tap on the ones you want to add to your personal collection, then tap again on each individual one to access its full library. New digital issues hit at the same time as printed versions, or earlier, and some – like Wired and Esquire – have interactive features such as embedded videos.

Once they’re in your library, individual issues can be downloaded and read offline. That’s an important feature, since many people like to read magazines in places where there is no internet connection. I do the majority of my reading on planes, for example. (Coincidentally, it’s great to see that aviation authorities are finally going to allow the use of electronic devices during takeoff and landing.)

Next Issue chief executive Morgen Guenther says the app is going to get some big upgrades by the end of the year, with the ability to search magazines as well as Netflix-like recommendations being added. An iPhone app is also in the works.

Perhaps the biggest winner from all this are Canadian magazines and the people who write for them (guilty as charged). Many of the publications will be available in the United States for the first time, representing a dramatic expansion of their potential readership. And the best part is, Next Issue subscribers in the United States get access to these Canadian magazines for no extra cost. Publications such as Chatelaine and MoneySense stand to attract many new readers as a result.

This is unusual when it comes to any sort of Canadian cultural product, and especially when it involves a Canadian telecommunications company. Whyte said as much during his opening remarks on Thursday when he referred to the launch as historic.

“We’ve had an attitude of cultural protectionism, but the outlook has changed. Canadians want to see our magazines stand with the best in the world,” he said. “We are going global as a Canadian content company.”

All of that notwithstanding, there are plenty of criticisms of the service. Gigaom writer and former Globe and Mail community editor Mathew Ingram, who has written more than anyone I know on the issue of media adapting to the internet, thinks it’s a bad idea. Next Issue just doesn’t fit with how readers are consuming content, he wrote last year after the service launched in the United States:

This trend, where users of services like Twitter and aggregators like Flipboard or Zite or Prismatic rely on their social graph and increasingly intelligent algorithms to find the content they want, just doesn’t fit with the model that Next Issue has in mind — where readers stand and look at the front covers of specific magazines and then drill down into one, then come back to the newsstand and choose another, and so on.

As he commented on Twitter on Thursday, the model won’t save the magazine business: it will “maybe slow the decline a bit, which I suppose is better than nothing.” Some people might pay for Next Issue, just as some are paying for paywall subscriptions for newspapers, but that won’t stave off the larger problem that the model of money-for-stories is somehow fundamentally broken.

That could very well be the case for newspapers, but I’m not so sure it applies to magazines. As Ingram writes in a related post, people will apparently pay for all-you-can-eat entertainment such as Netflix or Spotify, but not for news. Magazines, however, rest somewhere between the two. People generally seek them because they feature longer, more in-depth stories, which are typically consumed during leisure time. As leisure activities, they can therefore almost be considered entertainment. So maybe people are willing to pay for them?

There’s also the question of whether people want to read magazines on a screen. If they’re at leisure, after all, don’t they want something physical and tactile with which to relax their screen-weary eyes? That’s a fair comment, but it’s at odds with the suggestion that people are seeking out content through their social graphs. That’s all done online — on screens. So yes, if there are people who want to read long articles, there probably are many who want to read them on tablets.

The issue so far – which Next Issue firmly addresses – has been one of value; no one has made it really appealing to pay for digital magazines before. Funnily enough, these are not criticisms that ever get leveled at Netflix, despite the two services being very similar. By many accounts including its own, Netflix is having a dramatic effect on piracy, with chief executive Reed Hastings recently saying Bittorrent traffic has declined by half in Canada since the service launched here three years ago. People can still get movies and TV shows for free, and plenty do, but many others have bought into Netflix’s value proposition.

By the same token, people can still get much of the content featured in their favourite magazines for free, but it’s the same situation as with Netflix. Having it all in one attractive and easy to use place is convenient. Millions of people are paying for Netflix, even when a lot of its content – at least here in Canada – isn’t all that great. That’s not an issue for Next Issue.

What Happens If Verizon Doesn’t Come?

Heritage Minister James "Macho Man" Moore. Ooh yeah, dig it!

Heritage Minister James “Macho Man” Moore. Ooh yeah, dig it!

If there was any remaining doubt about where the federal government was coming down in the wireless war currently raging in Canada, Industry Minister James Moore put the issue to rest Tuesday evening with a rather sternly worded post on his website.

Bell Canada board member Anthony Fell provoked the reaction by first penning an open letter published in the Financial Post, wherein he charged the government of reacting to “a political populist initiative to capitalize on a misinformed public view of Canada’s telecommunications industry” through its alleged efforts to spur Verizon into expanding into the country.

Moore was having none of it: “Unlike Mr. Fell, I do not believe the public is misinformed. I think Canadians know very well what is at stake and they know dishonest attempts to skew debates via misleading campaigns when they see them,” he wrote. “Equally, Canadian consumers know instinctively that more competition will serve their families well through better service and lower prices.”

In the world of professional wrestling – which this over-the-top fight has at times resembled – that would be known as a “finishing move.” Bam! Cue Moore’s music and hit the pyro.

Until now the government has played it pretty cool, with Moore, his predecessor Christian Paradis and Prime Minister Stephen Harper all maintaining that they are simply committed to promoting more wireless competition. But the Industry Minister’s extraordinarily harsh words spell out in no uncertain terms what the government really thinks of Bell, Rogers and Telus.

Given that, an intriguing question emerges: What happens if Verizon doesn’t enter Canada?

Many industry observers agree that the clock is running out for that to happen, since the deadline for registering to participate in the next auction of spectrum licenses – which is simply a must for any player – is just a month away, on Sept. 17. Verizon could conceivably participate in some fashion after that date, but that would likely lead to some muddy waters. If the company is going to enter Canada by acquiring Wind and/or Mobilicity, such deals need to happen really, really soon.

So, what if the company ultimately decides against pulling the trigger, or some other forces prevent it from coming north? What then?

The government is clearly displeased, so some sort of intervention would be very likely. Here are some possibilities, along with their respective likelihoods or desirability:

Another buyer: Verizon isn’t the only entity interested in acquiring Wind and/or Mobilicity. Private equity buyers – at least one of which could be stealthily backed by Rogers – and current Wind chairman Anthony Lacavera are also in the game. Neither option is particularly desirable, though, because they would likely result in one of two things; either the smaller companies continue to be relatively poorly resourced compared to their bigger competitors, or they simply become speculative investment vehicles that will be sold to the Big Three just as soon as the government allows that to happen. In other words, status quo.

There is one other unspoken possibility. Remember that scene in Return of the Jedi where the ghost of Obi Wan wistfully tells Yoda that Luke Skywalker is their last hope, to which Yoda replies, “No, there is another.” That scenario may apply here too. Verizon is the only big wireless company we know of that has approached Wind and/or Mobilicity. That doesn’t mean others haven’t. A source close to the situation tells me that T-Mobile has also kicked the tires on at least Wind. Intriguing? You betcha.

Either way, a big, international wireless company would be the most desirable buyer of the new entrants, since it would be a “strategic investor” looking to grow its businesses, rather than just a speculator out to turn a quick buck. Multinational players also tend to have track records of expanding into other countries and staying there, so that helps.

More regulation: If a big strategic investor doesn’t materialize, the government may be faced with something it once considered ideologically unthinkable – further regulation. With its anger evident, the sky really could be the limit here. Moore could conceivably direct the Canada Radio-television and Telecommunications Commission to start cooking up a scheme to regulate prices.

I don’t see it happening, mainly because the CRTC’s Wireless Code hasn’t even officially taken effect yet (it kicks in in December). While those incoming rules have already caused the industry to reprice services, notably getting rid of three-year contracts, nobody will know for some time what the full effect of the regulations will be. In this case, it’s probably wise to let one coat of paint dry before applying another, at least in regards to things like pricing. (Interesting Sept. 2 update: It looks like I might be wrong on this point, as the CRTC has just announced that it is probing wireless carriers’ roaming charges.)

Crown corporation: Now here’s a crazy idea – what if the government itself got into the wireless business? This could happen with an acquisition of one of the small players or an entirely new firm could be formed to compete against the Big Three. A government-run corporation could introduce de facto discipline into the market by effectively controlling prices. It’s not unheard of. In 2007, the government of New Zealand bought small internet provider Orcon in an effort to instill exactly that kind of discipline.

Such an event would be extremely out of character for the Conservative government and would kick up all kinds of issues, but then again, we all do weird things when we’re angry.

MVNOs: One regulation that could gain currency in the event that no big wireless white knight emerges is the institution of a mandated wholesale scheme, similar to what exists in wired home broadband. Under such a system, any business that wants to would be able to buy minutes and data from wireless network owners at discounted rates set by the CRTC, then resell them at their own prices.

There are two reasons why, on its own, this would be a horrible idea. For one, such operations – known as mobile virtual network operators (MVNOs) – have a tendency to flop far more than they succeed. Secondly, as anyone who has followed the constant game of regulatory football that is wholesale broadband can attest to, the country needs another headache-inducing system like this like it needs a hole in its figurative head.

Structural separation: As the saying goes, all roads lead to Rome, which in this case could be the forced splitting of wireless networks from the companies that sell services over them. It’s a harsh-sounding step, but it’s actually not all that bad and can be the most agreeable solution to all parties involved, including the network owners themselves.

Basically, it’s a step further than MVNOs in that a network owner spins off its infrastructure into a separate company, which then effectively sells wholesale access to all comers – including its parent – on equitable terms. The split removes huge capital barriers for those looking to get in on the action, which inevitably spurs competition that leads to better services and lower prices. It’s truly Darwinian in that it opens up the field and challenges the best to survive, a market-forces concept the Conservatives are fond of. The network owners also reap the benefits of this competition, since they end up getting revenue from all the players.

The system has had some positive effects in the United Kingdom ever since BT split its broadband operation in 2006. Not only is broadband dirt cheap there, the company has also seen its stock price more than double.

All of Canada’s big wireless players have entered into network-sharing agreements already. An extra kick in the pants from an angry government into letting all comers onto those networks may perhaps be the most logical and palatable way forward if some well-resourced foreign competitor doesn’t end up materializing.

Debunking yet another set of wireless myths

A little while ago, I promised I’d respond in greater depth to some comments made by Craig McTaggart, Telus’s head of broadband policy, in his 42-page paper that delightfully borrows Cher’s “Turn Back Time” title. That document was itself a rebuttal to some of the observations previously made by me, University of Ottawa professor Michael Geist and consumer advocates Open Media. My own musings were in response to a report from Scotia Capital that sought to dispel some myths about Canada’s wireless market. It’s a long chain of rebuttals, but here we are.

It’s taken a while to get through all 42 pages, so I won’t punish anyone with a similarly long response. I only hope that if McTaggart does choose to continue the debate that he keeps it short and punchy too. I’ve distilled my responses to his points down to 10, at least as far as they’re relevant to anything I’ve written.

1. High ARPU does not equal high prices. Both Geist and I initially responded to McTaggart’s claims that Canadian carriers’ world-topping average revenue per user does not necessarily mean that subscribers here pay high prices. I think we both did a good job at countering that; claims to the contrary suggest that ARPU is high because Canadians use their phones more than people in other countries, but that’s not true. Brits use more data while Americans use more minutes, yet ARPU is significantly lower in both countries. And if for some reason ARPU really doesn’t equal high prices, it definitely does equal high bills, which is really the only measure that matters to consumers at the end of the day. There’s no two ways about it: Canadians have the highest wireless bills in the world.

2. Growth projections. McTaggart repeatedly criticizes Geist and Open Media for using outdated data – I’m grateful he doesn’t level the the charge at me – but at the same, he also repeatedly uses data that hasn’t happened yet, especially when it comes to talking about Canada’s wireless penetration. Both McTaggart and Scotia Capital flagged Canada’s high smartphone growth as somehow being important. The number is indeed high – at 49.5%, the rate at which Canadian carriers added smartphone customers was the highest among developed nations in the third quarter of 2012. But so what? It’s a figure that doesn’t matter for a number of reasons.

For one, any statistician will tell you that when a country experiences a higher-than-usual growth rate in any measure, it’s usually because it is playing catch-up to peers. Secondly, any such rate might be a temporary occurrence – if I were to guess as to why smartphone growth was so high in Canada during that time period, it could have indeed been an effect of new carriers making the market somewhat more competitive, but I’m not really sure.

Thirdly, there’s no reason to believe such a growth rate will again be duplicated or continue. If Canada is indeed playing catch-up, it’s likely to eventually moderate down to the sort of growth levels being seen in other countries. Smartphone penetration leader Sweden, for example, is seeing only about 29% growth.

Even in the unlikely event that Canada continues its big smartphone growth, it still isn’t likely to result in anything impressive, simply because the country has been so far behind in cellphone adoption overall. If all the developed countries in the Merrill Lynch Bank of America Global Wireless Matrix were to continue their growth rates from the third quarter of 2012 through to a full year later – performance that is more unlikely the more impressive it was – here’s what smartphone penetration might look like close to the end of this year:

So, even if Canada continues its high smartphone penetration growth from 37% in late 2012 to 55% in late 2013, it would go from middle of the pack to… middle of the pack. Why was that world-leading growth rate important again? That’s why talking about numbers that haven’t happened yet seems almost as useful as discussing five-year-old figures.

3. Low churn means happy customers. McTaggart took issue with my assertion that high churn rates – the number of customers who defect to other service providers each month – correlated with countries that had stronger rules governing contract lengths, and that this further correlated with lower ARPU in those countries. The numbers do in fact bear this out on the high end: the countries with the five highest churn rates – Belgium, Denmark, Greece, Spain and Italy – all fall in the lower half of ARPU as well. The correlation is a little weaker at the low end, yet a number of countries with low churn do indeed have high ARPU, including Japan, Switzerland, the U.S. and Canada.

Telus reasons that if prices were indeed as high as they supposedly are in Canada, wouldn’t customers defect more – especially after the carrier has made it easier for them to leave in recent years by simplifying the remaining payments on their devices and lowering their unlocking fees?

That might be true, but the question then becomes: where are those customers going to go? Suppose a customer signs on to a three-year contract with Telus and gets a cheap smartphone in return. Yet, after a few months, he finds he hates the service, decides to pay off the device and take his business elsewhere. Because of network technology differences, he can’t go to a new entrant such as Wind or Mobilicity without buying a new phone because his existing device – the one he just paid handsomely for – won’t work there. His choices are thus Bell, Rogers or the various flanker brands of the big three. Yet, any plan with a reasonable amount of minutes and data usage costs roughly the same regardless of carrier. I’m hard pressed to find a plan with any sort of decent usage from the big three and their various offshoots that doesn’t fall between $60 and $70, which coincidentally is right where their ARPU sits.

How close do those bills end up? Here’s the Global Wireless Matrix’s ARPU estimates for the full year, 2013:

So, moving from Telus to Bell would lower said individual’s bill by a whopping $2.02, while switching to Rogers would actually raise it by 26 cents. Between the three, the difference in bill is less than 4%. In comparison, here is the ARPU differential (in Euros) between the three biggest carriers in Belgium, which has the highest churn among developed countries:

The difference between the cheapest and most expensive is more than 10 euros, or 36%. When faced with that kind of potential savings, it’s no wonder Belgians switch carriers so frequently. And it helps that they’re not trapped by three-year contracts.

That’s actually an issue where you do have to feel a bit for the carriers – it must be tough to differentiate their offerings, especially without rocking the pricing boat too much. Yet, higher churn in other countries indicates that carriers there are somehow managing to convince customers to switch. That’s likely a result of compatible networks that don’t require a new device and better differentiated (read: lower) prices.

Whatever the case, low churn in Canada absolutely cannot be taken as a sign of customers being satisfied with their carriers, as the carriers themselves would like policy makers to think. It’s more a sign of customers either feeling locked in, or feeling that the hassle of switching to another carrier for a deal that won’t be significantly any better just isn’t worth it.

4. Canadians spend comparatively little on communications. McTaggart takes his turn dredging up some relatively ancient numbers here by referring to a 2009 CRTC report comparing how much people in various countries spend on communications services. According to those numbers, overall spending is comparatively low in Canada.

Since we are talking about wireless, let’s keep the conversation limited to that area – and let’s use Merrill Lynch’s more accurate numbers. According to the Wireless Matrix, Canadians spend about 1.1% of their gross domestic product on mobile services, which again rates middle of the pack as the left-hand column of the chart below shows. However, as the right-hand column illustrates, that doesn’t correspond all that closely with Canada’s overall high GDP, which is fifth highest among compared countries. In other words, if we’re one of the richest countries and our wireless aren’t all that high, shouldn’t our expenditure be even smaller than 1.1%?

5. Big geography means higher costs. McTaggart repeats the go-to excuse whenever anyone suggests that Canada has high wireless prices: carriers here have a lot of ground to cover, which makes it more expensive to build and maintain networks. He even supplies some nice charts depicting subscribers and revenue per square kilometer, both of which show Canada to be on the low end.

That’s all fine and dandy, but if it was really that expensive to build and maintain those networks, Canadian carriers wouldn’t be sitting near the top of the profit list. As it is, they had the fifth-highest margins in the developed world and were third in growth as of the third quarter of 2012. Seeing as costs are deducted from revenue to arrive at profit, all of that geography simply isn’t factoring into the bottom line.

Australia, for one, has a similarly sparse population and large geography, yet carriers there saw a profit margin nearly 15% lower than their Canadian counterparts.

6. Roaming prices have come down. Maybe, but they’re still ridiculously high. On my recent trip to Europe, I was caught in an emergency where I simply had to turn on data roaming to check my email and GPS. I ended up using 8.43 MB in a matter of minutes, which cost me $42. It’s an anecdotal example, but does it feel right to pay that much for so little?

7. Regional incumbent responsible for slow speeds. McTaggart references a recent blog post of mine on Akamai’s latest State of the Internet report, which found that wireless speeds in Canada were slow. When I asked David Belson, the report’s editor, about this, he confirmed that it was an incumbent operator and not a new entrant that had returned the slow speeds in tests.

McTaggart somehow jumps to the conclusion that Belson was referring to a regional incumbent – say SaskTel or MTS – but that’s not the sense I got from his response at all. My understanding is that he was referring to Bell, Rogers or Telus.

Nevertheless, more information is needed on this front. Canada’s poor performance in Akamai’s tests is indeed surprising, so we’ll see how further data bears this out.

8. Multiple subscriptions bump up ARPU. McTaggart also draws water from another familiar well in suggesting that subscribers in countries with high wireless penetration actually have it worse than Canadians. Countries such as Finland, with 175% penetration, or Austria with 161%, have it tough because it means customers there are carrying around multiple SIM cards to take advantage of different roaming rates in different countries.

He paints this as weird or undesirable, yet given that Canada is the only developed country that hasn’t surpassed 100% penetration, it seems like we’re the weird ones.

Moreover, if you factor in that greater-than-100-per-cent uptake into ARPU in those countries, here’s what you get:

That chart is exactly what it looks like. Even with multiple SIMs factored in, it still costs more to own just one phone in Canada than it does to own several in other countries. With ARPU in Portugal just $15.75, you can actually own four phones there for just about the same cost as a single device in Canada.

Of course carrying multiple SIM cards isn’t exactly ideal, but it’s better than having only one that costs you an arm and a leg. The multiple SIM argument also doesn’t apply to several non-European countries, notably the U.S. Surely few Americans are carrying around Canadian SIM cards to take advantage of our local rates when roaming.

9. High prices are keeping smartphone penetration down. McTaggart wrote, “The fact that Canadians are adopting smartphones at higher rates than in the U.S. or Europe contradicts Mr. Nowak’s claim that high prices are keeping smartphone penetration down.” I don’t think I said that. I have said that high prices historically have kept overall wireless penetration down. The accelerating growth of smartphone adoption does seem to suggest that prices have finally come down to the point where such devices are now finally within reach of most people. Like I said above, the high growth rate is also not likely a sign that Canadians are somehow special, but more likely that we’re late to the game.

There’s little doubt that the wireless market has become more competitive in the past few years. But it’s hard to attribute that to anything other than the arrival of new entrants and their aggressive pricing. Would smartphone adoption be motoring along if they hadn’t come along? It’s hard to say, but given how behind Canada was before they did, there’s no reason to expect that the situation would have been the same.

10. Boiling blood. In his conclusion, McTaggart wrote that a Halifax Chronicle Herald editorial made “our blood boil” by saying that Canadians have “the highest average wireless bills and among the highest roaming charges in the world, more competition can’t arrive soon enough.” I can’t comment on the roaming rates – they certainly feel high, but I haven’t seen any data comparing against others one way or the other – but the proof of the highest bills is irrefutable. That’s what ARPU is, and it bears repeating – it’s the size of the customer’s bill, and at the end of the day it’s the biggest in the world in Canada. Telus’s blood doesn’t boil when its executives brag about that fact to analysts on conference calls, but customers certainly do get irate when they get their bills every month.

Dispelling The Myths Of Wireless Myth-Busting

Thor is a myth. Wireless problems in Canada are not.

A report last week from Scotia Capital on Canada’s wireless sector caused a commotion, seeking as it did to dispel certain myths with facts. With both the government and regulators recently turning their attention to the wireless market, analyst Jeff Fan sought to tackle some of the commonly held beliefs – namely that Canadian carriers are uncompetitive and are therefore charging high prices.

Telecom consultants and the carriers themselves touted the report as proof that no additional regulation or special dispensations to new competitors are needed. “We think it is time for the regulators to declare victory on the policies they adopted five years ago,” when spectrum set-asides paved the way for new entrants, the report said.

University of Ottawa internet law professor Michael Geist fired back earlier this week with his own take. In his estimation, high prices are no myth – Canada’s wireless market is indeed “woefully uncompetitive.” Consumer advocates Open Media, meanwhile, have issued their own report, urging policy makers to fix the country’s “dysfunctional” situation.

In light of this debate, I thought it might be instructive to take a look at some of the myth-busting facts presented in the Scotia Capital report, to see if they can indeed bear the weight of closer scrutiny. It turns out that they generally can’t.

The biggest problem with the report is its insistence on comparing Canada only to the United States. I had a brief email conversation with Fan about this and I understand why he did so. The U.S. is the most similar market to Canada’s, with a common regulatory approach (as in, regulators have largely abstained from interfering) and systems. In Europe, for example, calling parties pay for calls, while in North America, minutes are counted on both the calling and receiving ends. It’s these sorts of differences that make comparing plans and prices across many countries inherently difficult.

Still, focusing only on the U.S. is aiming pretty low, considering the country has competitive problems of its own. In the first 13 years in which the Federal Communications Commission was required to submit a report to Congress, it deemed in no uncertain terms that the wireless market was competitive. That changed in 2010, when the regulator opted to refrain from making such a proclamation. The FCC didn’t go so far as to say the market was uncompetitive, but the shift in tenor was unmistakable.

The Department of Justice also felt the market was, if not already uncompetitive, very much on the verge of becoming so when it sued to block AT&T’s takeover of rival T-Mobile in 2011. That deal ultimately did not go through and antitrust watchdogs have been keeping a careful eye on the market since. That’s not the sort of market Canada should be aspiring to.

With that in mind, let’s get to those myths.

Myth #1: Canadian wireless prices are more expensive than the U.S. That’s not true, according to Scotia Capital. Smartphone plans in Canada are approximately 24 to 27 per cent cheaper across all usage categories.

This “fact” is pretty selective. For one, Virgin, Fido and Koodo are counted in the Canadian calculation, yet only Verizon and AT&T are included for the U.S. The DOJ, in its 2011 suit, characterized T-Mobile as “an independent, low-priced rival,” so why wasn’t it included in the comparison? Surely T-Mobile and number three player Sprint, with their combined 75 million or so subscribers, should have been counted. Would their numbers have moved the overall U.S. numbers downward?

It sure looks like it. As Geist points out, the number that really matters is average revenue per user – or the amount that carriers extract from each customer. Canadian carriers are pulling in an ARPU around $59 according to the Bank of America Merrill Lynch Global Wireless Matrix,* or about $8 to $9 (or 13 per cent) more than their U.S. counterparts. How are they getting more revenue per customer if their prices are supposedly lower? Unless there’s some sort of gnomish magic at work here – or selective accounting – prices are indeed higher in Canada than in the U.S.

Moreover, they are the highest in the world according to the Wireless Matrix, with ARPU projected to go even higher. Canadian carriers’ ARPU climbed 1.8 per cent in the fourth quarter of 2012, while “strong smartphone loadings, an ongoing mix shift from prepaid to postpaid, and what appears to be a more balanced pricing environment, should continue to support blended ARPU growth in the near-term,” according to a February report from Credit Suisse.

(*I’m using slightly dated figures from a 2011 version of the Global Wireless Matrix. While every effort was made to acquire the latest version, the closely guarded report is akin to the industry’s state secrets. Still, comparing against company reports and other sources, most statistics contained therein have not changed dramatically over the past year, so comparisons listed here can be assumed to be more or less accurate.)

Myth #2: Three-year contracts make Canadian plans less attractive. Actually, the Scotia Capital report says, Canadian smartphone plans are still cheaper than the U.S. even after adjusting for the higher cost on the three-year contract. Canadian plans are therefore 21 to 23 per cent cheaper, with three-year contracts apparently helping smartphone penetration in Canada.

The same magic math found in the first issue is also present here, since only Verizon and AT&T are compared. Aside from that, as Geist points out, there is no correlation between three-year contracts and smartphone adoption. If there was, countries ahead of Canada in that measure – such as Spain and the United Kingdom – would also have three-year contracts, but they don’t.

Further to that, the three-year lock-in also doesn’t take into account either the phone’s durability or the owner’s desire to keep it. If Canada truly is like the United States, then Canadians would typically be replacing their phones every 21 months. Instead, they’re stuck for an extra year, often with a phone that is positively ancient and possibly malfunctioning (ever tried to use a three-year-old iPhone? Yeesh!). Carriers might let them upgrade early, for an extra fee of course, which again is not counted in the magic math.

To address the myth head on, there’s nothing attractive about that.

Myth #3: Three-year contracts trap Canadians and should be banned. Actually, the report says, Canadian and U.S. churn rates – or the frequency with which customers defect to other carriers – are roughly the same. Churn rates should be higher in the U.S. since their contract maximums are two years.

That’s not entirely true. Going up to the point above, not only does the three-year contract prevent churn within its actual duration, it also has the effect of deflecting it even longer since subscribers are often offered (or want) “early” upgrades. But only if they sign on to another three-year contract, of course. So what should be a two-year deal often turns into a six- or even nine-year contract.

Moreover, the report is defeated by its own logic on this point. Churn in North America, according to the Global Wireless Matrix, is about 1.7 per cent, while in Europe – where three-year contracts are largely absent – it is 2.2 per cent. Those may seem like tiny percentages, but to a Canadian carrier with nine million subscribers, that’s an extra 50,000 customer defections. There’s no doubt about it: longer contracts do lock people in for longer.

Myth #4: Canadian incumbents have not been affected by new entrants. Not true, says Scotia Capital. Wireless voice ARPU has declined almost 30 per cent since 2008, total ARPU has been flat and margins fell.

This fact is mostly true. To say that Bell, Rogers and Telus haven’t been affected by the likes of Wind and Mobilicity is madness. System access fees are gone and unlimited plans are almost the norm now. You can get a half-way decent plan from the incumbents for about $60, which is a far cry from what they were charging only a few short years ago. Some have even improved their customer service.

But returning to the Credit Suisse report, incumbent ARPUs are once again climbing, with profitability (expressed as earnings before interest, taxes, depreciation and amortization) following along: “Overall, we continue to expect relatively strong growth in wireless EBITDA as the carriers leverage revenue growth combined with good cost management (expected from Rogers in particular).”

So, while incumbents have definitely been affected by new entrants, they haven’t been that affected. And the effect may only have been temporary. If revenue and profit are already starting to climb again, it’s pretty clear what the situation would have been without new entrants.

Myth #5: Higher data ARPU is due to higher prices. Higher revenue is actually the result of more people using smartphones, not higher prices, says Scotia Capital.

There might be something to that, but not according to the Global Wireless Matrix. Canadian carriers are getting around a third of their revenue from data (aka texting and smartphones), or just a little bit more than their European counterparts. Curiously, Asian carriers are getting more than half their revenue from data, yet their ARPUs are lower than Canada’s (although Japan’s is very close), which indicates the myth is actually true. Higher data ARPU is due to higher prices.

Myth #6: Canadian carriers charge more for data than the U.S. Canadian data ARPU, says the report, is similar to the U.S., ranging from $19 to $24 versus $21 to $23.

I’m not sure I’d disagree with this one, but then again, I’ve never really heard this myth before. There was a time when U.S. carriers offered unlimited data, which naturally made it much cheaper than in Canada, but they’ve been moving towards the Canadian model of smaller buckets for a while now.

Myth #7: Canada is behind because of low wireless penetration. Canada has higher smartphone penetration than the U.S. and has been outpacing its southern neighbour over the past two years.

That’s a bit of a conflation of an older myth with more recent events. Total mobile penetration – which includes non-smartphones – as a percentage of the population is around 80 per cent in Canada. According to the Global Wireless Matrix, we’re the only country in the developed world that has yet to pass the 100-per-cent mark (Japan was at 96 per cent in 2011 and has presumably passed that threshold by now). So yes, there’s no doubt we’re behind. The debate over why has been had and put to rest in 2007, when the government opted to introduce new players to the market: it’s because of historically high prices.

It’s nice to see Canada surging ahead in smartphone adoption; we’re like China, where the majority of the population skipped landlines and went straight to cellphones. Except, Canada is a supposedly advanced country.

Myth #8: Canadian wireless margins are the highest in the world. In actuality, Canadian wireless operators are not more profitable than Verizon in the United States.

If you did a double-take reading that one, you’re not alone – so did I. Verizon is indeed more profitable, but how that equates to “the world,” I’m not sure. The Global Wireless Matrix numbers show Canadian carriers to be significantly more profitable than their U.S. counterparts and in the upper echelon of the developed world. So yes, the myth is technically false, but the Scotia Capital report has a strange way of proving it.

Myth #9: Canada lags in wireless technology adoption. Factually, Canada has higher 4G LTE coverage than the U.S., the Scotia Capital report says.

That’s another myth that harkens back to a bygone era. When Rogers was the sole GSM provider in Canada, the country certainly was behind the times, with Bell and Telus licking their wounds over poorly chosen CDMA technology.

Since jointly building their new network and joining Rogers in the modern era a few years ago, nobody can say Canadians haven’t had access to the latest and greatest phones. Still, despite widespread LTE rollout, Canada isn’t faring well in global speed tests, such as the regular ones performed by content provider Akamai. Despite supposedly having some of the most advanced wireless networks around, Canada is still stuck in the slow lane. Some of this might be explained by the next “myth.”

Myth #10: Canadian wireless incumbents under-invest. Over the past five years, wireless incumbents have invested just as much as U.S. carriers.

Again, that may be true, but it doesn’t mean that’s a good thing. As Geist points out, Canadian carriers are terribly inefficient at using the spectrum they have, which can be taken as an indicator of under-investment and a possible cause for those slow speeds. In a comparison of 10 countries by the CTIA, the wireless industry’s U.S. lobby group, Canadian carriers place dead last in efficiency of spectrum usage. They’re simply not building enough infrastructure to make better use of those airwaves and thus service customers better. Those same airwaves, by the way, are at the crux of this entire debate, with the government preparing to auction off another block this fall.

All told, numbers can be looked at a million different ways to show a million different results. Personally, I think Canadian policy makers should take a wider view than just looking at the United States, which itself shows signs of dysfunction. North American free marketeering is clearly not the answer; Europe’s heavier regulation might also not be the way to go. The solution, as usual, is likely something in between. That’s sort of Canada’s thing, isn’t it?

One thing that is real – that Bay Street numbers don’t capture – is the frustration and anger many Canadians have with their wireless providers. As the old saying goes, you can’t throw a stone in this country without hitting a cellphone horror story. Industry supporters try to pass this off as a small proportion of impossible-to-please complainers, but the reality is that most Canadians have unflattering feelings for their provider for one reason or another.

That’s not good or healthy for anyone. And that’s no myth.

Make No Mistake: Canada Is A Digital Backwater

So, Canadians spend more time online than anyone else, huh? That’s what the latest report from analysis firm ComScore says.

Now, before anyone misinterprets the results and proclaims Canadians to be digerati – and Canada to be an online leader – there are many other facts to consider that suggest the contrary.

Regardless of the fact that ComScore looks at only 11 countries (a limited sample that makes it hard to declare anyone as “best in the world”), it’s important to understand why Canadians do spend so much time online. The simple explanation is: they were there before most other people.

When the world was moving from dial-up to broadband more than a decade ago, both Canada and the United States were in the lucky position of having both cable and phone providers competing to sign up customers. Since internet access represented a new gold mine for these companies, the competition was fierce, prices were low and the services kept getting better.

Cable infrastructure didn’t (and doesn’t) exist in much of the rest of the world, so governments and regulators had to figure out how to convince, cajole or force their phone companies to provide good broadband and reasonable prices. Some are still trying to do that.

So, while most of the rest of the planet was stuck in the kilobit dark ages, North Americans surfed around on their super high-speed (at the time) two- and three-megabit connections. But things changed over the next decade.

With all the easy-to-reach customers – known as “low-hanging fruit” – signed up, that early competition tailed off as large internet providers moved from the acquisition phase to monetization, which is fancy business speak for milking people. The ISPs had to recoup all that money spent building networks and advertising services, so prices started to creep upward. (Remember when you could get the fastest speeds for $25? Ah, the halcyon days of broadband…)

In some countries, ISPs haven’t yet got to this stage – sometimes because regulators haven’t let them – and customer acquisition is still the name of the game. That’s why ridiculously cheap broadband can be had in places such as the United Kingdom.

The larger effect over the decade was that Canada and the United States leveled off while other countries caught up and surpassed them. Both countries used to top OECD measures of broadband-connected citizens, but they’ve been sliding steadily to the point where Canada is clinging to the top 10, while the U.S. – the country that ironically invented the internet – is mired in the middle of the pack.

This early adoption thus hooked North Americans on the internet early. And hooked is the right word – as anyone who has ever used it can obviously attest to, once you’re online you never go back, which explains why Canadians and Americans are such rabid users of everything from YouTube to Facebook to Twitter. North Americans are the veritable crack addicts of the internet world – they’ll use it no matter how much it costs them.

That’s about all online Canadians have in common with Americans, who are true digerati and internet leaders. Besides their similarly high usage, Americans have also created virtually every large internet business, from Google to Amazon to eBay to Netflix, which raises the question: where are the Canadian equivalents?

Many have tried to answer that conundrum and there are several theories. Some small businesses – the lifeblood of Canada – have in fact argued that the high cost of telecommunications services have been a barrier to online expansion., for example, told regulators a few years ago that it was cheaper to distribute movies on DVDs through the mail than it was to do so electronically.

There’s also the suggestion that Canadians’ are naturally more conservative and risk averse, which keeps their businesses from becoming digital leaders. As Google Canada’s country director Chris O’Neill said a few years ago, business usage of the internet is out of whack with that of individuals: “I’d like to see retailers think more in (new) ways, rather than fearing and trying to avoid the experiences and the behaviours that consumers aren’t just experimenting with, (but) are becoming mainstream.”

Heading back to the consumption side again, there’s also the familiar song that Canadians hear whenever a hot new gadget or internet service debuts – “It’s available everywhere… but not in Canada!” In situations that involve digital content, such as with Hulu or the superior selections available through iTunes and Netflix south of the border, it’s usually a case of tangled licensing rights. And who’s in the middle of those? You guessed it – Canadian broadcasters, who are now also the country’s big ISPs.

What else is there? Oh yes… there is the dearth of venture capital, an inability to convert innovation into commercialization, repeated examples of companies selling out too soon (cough Kobo cough) and the fact that Canada is the only G8 country besides Russia that does not yet have some sort of digital economy strategy (Russians spent this past weekend protesting electoral corruption – what’s Canada’s excuse?)

No less than the highest authority in the land, before he actually was so, said it best a few years ago: “Those societies that have a better understanding of the digital economy will prosper very quickly and those that don’t will not. We’ve had a failure of imagination there,” said David Johnston while he was still president of the University of Waterloo. Today, he serves as the Queen’s representative and, as the Governor General, is technically the boss of Canada.

And while we’re on the topic of the government, how about the international shame Prime Minister Stephen Harper has brought the country by muzzling scientists? As an editorial in Nature, one of the world’s leading scientific journals, put it:

Policy directives and e-mails obtained from the government through freedom of information reveal a confused and Byzantine approach to the press, prioritizing message control and showing little understanding of the importance of the free flow of scientific knowledge.

Are Canadians smart and innovative? Absolutely – and the examples are too numerous to list, although the country’s world-beating video-game industry is a notable one. Are they also heavy users of the internet? By all measures, that also seems to be the case.

But when all of the above is taken together, it seems clear that Canada is institutionally a technological backwater. In other words, who really cares how many YouTube videos Canadians watch or how much time they spend on Facebook?

CRTC Is Peddling Broadband Kool-Aid

The CRTC released its annual Communications Monitoring Report last week and, as usual, the document shows Canada to have a very healthy – and wealthy – telecom and broadcast industry. Revenues and subscribers are up pretty much across the board and everyone is happy.

Right? Of course not.

Among the more notable items in the report are some claims – and omissions – made about broadband internet services. Given the overly glossy presentation of some of the findings it sure looks like the CRTC is guilty of some serious PR spin, which is somewhat alarming because it’s not something a supposedly neutral regulator should be doing.

The report paints a rosy picture of broadband internet services, suggesting that prices and speeds compare very well against other countries. According to the summary, “With an average of 5.5 Mbps, Canada ranked second only to Japan in an international comparison of internet download speeds.”

If you’re currently drinking something, now is the time to spit it out all over the screen. Only in the halcyon world of the CRTC, where the sky is purple and pigs can fly, could that claim possibly be true.

Looking at the actual report, it’s clear how the regulator came to its ridiculous conclusion: only eight select countries – Canada, the United States, Japan, United Kingdom, France, Germany, Italy and Australia – were compared (page 192).

When the full numbers from Akamai, whose statistics the regulator’s claim is based on, are factored in Canada actually places ninth in average speed among OECD countries (South Korea, Japan, Denmark, Belgium, Switzerland, Czech Republic, Ireland and the Netherlands are all ahead). Add in a few non-OECD emerging broadband powerhouses, such as Latvia and Romania – both of whom rate better than Canada – and the CRTC’s claim gets even more absurd.

The same goes for other studies that include non-OECD countries. Ookla, for example, rates Canada 33rd in download speeds, or only slightly above the global average. At the very least, the CRTC is guilty of the same selective grading and broadband bikini-ing as Cisco in its recent internet usage report.

What does the CRTC report say about upload speeds? Not much – and that’s probably for the best. That same Ookla report ranks Canada 65th in upload speeds, behind the likes of Rwanda and Kazakhstan.

Seriously. That’s no exaggeration. Here’s a speed test I just did on my Rogers connection: a very respectable 18 megabits per second download, with a ridiculous 500 kilobits upload. Amazingly, here’s another test I did on Mobilicity cellphone, where the upload was 1 Mbps, or double that of the Rogers cable connection.

It’s probably not necessary to get into the importance of good upload speeds. While fast downloads allow for good media consumption, upload speeds are integral for creation and therefore innovation.

The bottom line is Canada can’t even try to aspire to an innovation-based economy without first making sure it has proper upload speeds. This hasn’t occurred yet to the CRTC, which is obviously too busy peddling its Kool-Aid vision of a country with wonderful broadband.