Download Limits Only A Symptom Of The Problem

I thought I’d take a break from blogging about all this adult entertainment stuff that went on last weekend and instead write on a related topic: how Canadian internet users are getting screwed.

I came across a couple of items this week that relate to the issue. The first was an open letter addressed to the media and various government departments opposing the metered usage schemes that have been implemented by big internet providers here in Canada (also known as usage-based billing). The letter, posted on the Open Media internet activist website, goes into detail about how this is bad for Canada in a number of ways. The Reader’s Digest version:

1. Smaller and smaller download limits runs contrary to how Canadians are using the internet, which is more and more.

2. With that dichotomy in place, it means we’re inevitably going to be paying multiple times for certain services. Netflix, for example – not only do we pay a monthly bill to access the internet so we can get the service, we also pay a monthly subscription fee to Netflix. With smaller download limits, that means we ultimately have to pay a third time if we watch more than a few movies on it.

3. Given those facts, such services are going to avoid doing business in Canada, or they’re going to be considerably more expensive here, as a recent report found.

4. There are also involuntary services that chew up our bandwidth, such as software updates for computers. Sure, we can decline these, but then Canada is going to a haven for the viruses, etc., that inevitably get through. Nobody wants that.

5. Notwithstanding all of that, low usage caps will also significantly limit the ability of any such Canadian services developing, such as a competitor to Netflix. In other words, low caps limit innovation and stifle new businesses.

I can’t say I disagree with any of those arguments, but I do think the letter writers are barking up the wrong tree. I’m not necessarily opposed to usage-based billing, but I do think that market forces need to exist to keep such schemes honest. If the big internet providers want to keep lowering usage limits, there need to be alternative ISPs that won’t – that way the consumer can decide which company and plan is right for them. The problem in Canada, as I’ve said before, is that those market forces don’t exist and smaller ISPs have had the bigger companies’ business models foisted on them.

That brings us to the second item: a regulatory ruling yesterday on something called unbundled local loops. Warning: this is a topic that can put even the biggest nerds to sleep, so I’ll try to keep it brief and simple.

For much of the past decade, Canada and virtually every other developed nation has recognized the need for competition between internet providers. Only when such companies compete with each other do consumers benefit from faster, better and cheaper services. However, governments and regulators have also recognized that it is considerably expensive to build competing networks.

As such, the concept of local loop unbundling was rolled out across most of the developed world. The idea was to take the networks owned by major phone companies and allow other providers to access them to sell their own internet services to customers. So for example: a small company such as Chatham, Ont.-based Teksavvy could connect to Bell Canada’s network and get its own subscribers.

Under this scheme, there was of course the recognition that the network owners should get some sort of compensation for other companies using their networks. Those other companies were thus effectively charged rent, generally determined by regulators, to do so.

The intent behind the whole plan was to allow smaller, less well-funded companies to build up a good business, at which point they could afford to build their own infrastructure and eventually ween themselves off the networks of the big phone companies.

The trick, however, has always been in the rent set by the regulator. If that rent was set too low, a smaller internet provider would have no incentive to ween itself off the bigger company’s network; why spend money building a network when the one you’re using is really cheap? If the rent was set too high, though, the smaller provider wouldn’t make much money and therefore couldn’t afford to build its own network.

Guess which situation unfolded in Canada? You got it: the rents are too high. According to a Harvard report (PDF, on page 168), “Canada has the highest monthly charge for access to an unbundled local loop of any OECD country.” I believe the term for that is: booya.

The result: small Canadian internet service providers can barely eke out a living, let alone think about building networks to compete with the likes of Bell and Rogers.

But wait, it gets better. Not only is that a problem, even if a small ISP performed relatively well and was able to position itself as a decent challenger – which some miraculously have, like Teksavvy – it’s not like they could even find someone to loan them the money they’d need. We all know a non-Canadian company can’t get involved, thanks to our foreign ownership limits, and I believe the Canadian banker’s proper response when somone asks them for money to compete against Bell and Rogers is: “Bwahahahahahaha!”

What have the big boys been doing during all of this? Well, they wouldn’t be smart if they weren’t trying to put their foot into the smaller ISPs’ figurative nards. Bell applied to our regulator, the CRTC, to raise those rents further and, from the looks of it, got them. According to some of the smaller ISPs, yesterday’s ruling will cause those local loop rates to change, generally not for the better, which is further going to squeeze them and their ability to build their own networks (translation: it’s not going to happen).

To go back to the beginning of this post, while it’s good that people are complaining to politicians about our incredible shrinking usage limits, the issue is only a symptom of the deeper problem. I’ve said it many times: lack of competition is the real problem and it needs to be fixed, pronto. That’s what people should be complaining about.

There are two potential ways to do this: either the government lifts those foreign ownership restrictions and throws open the battlefield for anyone to enter, or as a consumer watchdog group recently suggested, it orders the CRTC to start taking a heavier and more proactive hand in regulating again. Given the ideological bent of our government, it’s obvious the first option is much more preferable. To put it bluntly, Industry Minister Tony Clement needs to crap or get off the pot because things are really starting to stink