For small ISPs, creativity isn’t the issue

Is the problem with Canada’s small internet providers a lack of creativity and innovation? Such is the premise put forward by University of Ottawa professor Michael Geist in response to my post Wednesday about usage-based billing.

As he argues, small ISPs - the ones who use portions of the networks owned by big companies such as Bell and Rogers - have simply been offering “me-too” plans, which have been differentiated only by higher usage caps or cheaper prices.

That hasn’t really got them far, amounting to only 6% of the market despite years of regulated access and fights with the CRTC and big network owners.

The CRTC’s recent ruling on usage-based billing is good, Geist says, because it allows those ISPs to get creative with what they offer customers. They could, for example, have:

• Peak timing plans that offer unlimited for much of the day and a reasonable cap during peak periods.
• Rate limited plans that offer hundreds of GB per month at full speed and then slow down for the rest of the month if the customer exceeds the cap (with customer profiles broadly distributed throughout the 30 day cycle to better manage the network)
• Plans that allow users to rollover unused data the following month (particularly for use during off-peak times)
• Skinny basic broadband plans that take advantage of $14.00 access to give a segment of the public relatively cheap, no-frills broadband
• Plans targeted to specific communities, such as Freedom 65 broadband plan for older demographics that may have different usage patterns from younger demographics

The ISPs could indeed offer any or all of those, but would such efforts be effective at expanding their customer bases? More importantly, would they be profitable? The answer to both questions, realistically, is likely to be no.

So far, throughout the entire history of selling internet access to the public, ISPs have been dumb pipes. The providers, big or small, uniformly hate that term, but the fact is internet access is sold on price, speed, usage and, in some cases, customer service. Anyone who has introduced any other element on top of that - the failed Bell/MSN and Rogers/Yahoo tie-ups come to mind - soon found that doing so was pointless. All customers want is a fast, cheap connection with lots of usage and hopefully customer service agents who can speak English.

Introducing complicating factors such as slow-downs at peak times or after a certain amount of usage is likely to turn people off. They’ll turn to bigger providers with simpler plans because nobody wants to be measuring how much they’re using the internet between 4 pm and midnight.

Down at the other side of the equation, selling really cheap, basic broadband plans to seniors is also nice too, but will any ISP make any money doing so? Such a possibility might enable some bigger operations who simply want to extend their brands - think President’s Choice or Walmart - to think about getting into the ISP game at a loss, but for dedicated providers it’s not exactly a panacea of riches.

Therefore, if the intent of the CRTC’s plan is to turn ISPs into something other than dumb pipes, it’s woefully misguided. That’s a whole line of thinking that needs to be abandoned - the big guys did it years ago after realizing that broadband is merely a commodity to be packaged with their other services.

The reason why independent ISPs are stuck at only a fraction of the market is because they have traditionally operated in an environment where they are largely unwanted and barely tolerated, especially over the last few years. They are the begrudging creation of a country that is too paralyzed to do the right things to properly encourage competition, either by opening up to foreign investment, building a new, next-generation open-access network or structurally separating its incumbents. Almost every OECD country has moved down one or more of these paths.

The whole plan behind letting small ISPs access portions of big companies’ networks was to give them a chance to build their businesses to the point where they could invest in their own infrastructure. From there, they could wean themselves off others’ networks. The small ISPs argue that they’ve come some way in doing this, but certainly not to the scale needed to compete with the likes of Bell and Rogers.

The reasons are many. There have been arguments that the wholesale rates small ISPs have had to pay network owners have either been too high, thereby preventing them from earning enough profit to reinvest, or they’ve been too low, thereby encouraging to keep feeding at the trough, as it were. In either case, they’ve had trouble getting the financing to expand - no Canadian bank in its right mind is going to fund a small ISP to compete against Bell and Rogers.

That, inevitably, brings things back to where they always end up: foreign investment. Independent ISPs being mired at 6% of the market has nothing to do with the creativity of their services, it has everything to do with their lack of access to cash and the often laissez faire attitude of the regulator and government toward them.

Case in point: at the ISP Summit dinner last week, CRTC vice-chairman Leonard Katz told a room full of small internet providers that they should consider offering wireless services. At least one person, in quiet disbelief, jested, “Hey Len, got a billion dollars you can lend us?”