This is a good decision, which does not go far enough. It keeps independent ISPs (Internet service providers) somewhat competitive, in the interests of the Canadian consumers and businesses. Yet it does not overcome the ambivalence that lies at the heart of the Commission’s decision-making in regard to the independent ISP sector. It neither eliminates them nor allows them the scope to compete effectively. It maintains them in a kind of regulatory limbo.
The reasons why this ambivalence exists will be considered below.
The Commission has not seen fit to agree with the large carriers (cable and telephone) that the time has come to put an end to the leasing of parts of the networks owned by the large carriers, despite eloquent pleas by them to do so. It has, by the same decision, not approved the means necessary for smaller ISPs to compete effectively, which is to say, to allow them to lease and build facilities that would allow them to avoid the bit rate caps, the traffic management and other measures, which would allow the smaller ISPs to fulfill a more creative role.
Thus, as a result of this decision, the Commission has
These decisions seem reasonable and justifiable in the circumstances.
As regards the eventual elimination of wholesale services, I have doubts about whether wireless based alternatives will ever be sufficiently cheap and capacious to justify their elimination. This is a future state of affairs on which it would be superfluous to speculate, and I let the matter rest for the unfolding of events.
Where I depart from my friends on the panel is in relation to a technical arrangement called CO-based ADSL access service.[46] The advantage of such an arrangement, if it were brought into being, would be to allow an independent ISP to get behind the traffic management measures imposed by the incumbent carrier. The effect of doing so would be to allow substantial service innovations, so that the lessee of the wholesale service could rearrange the technical characteristics of the signal without harming the underlying network, and which would allow it to offer quality of service guarantees, different bit rates, capacities and prices. In short, innovation could proceed in ways not envisaged by the underlying carrier. The creation of such a service would also have provided the opportunity for some smaller carriers to move up the “investment ladder” to greater measures of facilities-based competition, which is approved of by policy-makers, but made impossible in practice by many forces.
In short, CO-based ADSL is a technical arrangement permitting significant service innovation, by allowing specialist carriers to differentiate significantly their service offerings from the underlying carrier.
The Commission has turned down CO-based ADSL. It has done so because in its judgment, it is not persuaded that the pricing principles upon which the new service would have to be based would make it attractive, and that only two of five significant smaller ISPs were interested in using the new type of service.
In short, in the presence of what it believes to be ambiguous signals from parts of the smaller ISP industry, the Commission has substituted its judgment of what the market would do, and declared itself satisfied with the arrangements foreseen in this decision.
I think this is unfortunate and mistaken. I shall try to explain why.
The attitude one takes towards this decision depends greatly on where you consider innovation comes from. If innovation comes frequently from smaller players trying to satisfy the novel requirements of specialized customers, then creating circumstances in which engineers can innovate is beneficial to the public; indeed, public policy in telecommunications should aim for it – in a sensible balance with other policy considerations.
Consider for a moment musical downloading. It started as a practice among technically aware youth and has spread to become socially normal. The means whereby it is accomplished were at first experimental, and then became more routine as the software was improved. Users developed the idea, and then business followed.
Likewise, I maintain, with telecommunications. In the race to satisfy special customer requirements there exists the possibility that the specialist software engineers of the smaller firms will beat the incumbents to a technical and business solution. To this extent it is socially useful for them to be able to re-assemble and re-purpose parts of the transmission systems, so long as network harm does not ensue. There may be other conditions which should be satisfied, too, but in general the inclination should be to favour the possibility of innovation.
Competition in telecommunications comes in two forms, not one. The first kind of competition, the conventional kind, is where carriers compete with each other, and further, the carriers determine what gets onto their networks. This would be the kind of competition that is characterized by what I call “closed end-points”. The customer gets what the carrier determines the service shall be. Service definition is fully in the hands of the carrier. The ability to modify any portion of the network to suit customer needs belongs solely to the carrier. The old public switched telephone network (PSTN) was of this nature, as is the business model of Apple, which alone determines which applications shall be allowed on its devices. This is a sensible business model if you are a carrier; it minimizes risk of harm to the network, and allows the carrier to capture the economic rents from the services it allows to be offered on its network, so that applications pay for infrastructure.
There is a second form of competition, which comes from innovation. It will be recalled that ISPs first came to public attention when they offered a way for people to get onto the Internet. The development of the Internet protocol (IP) suite has constituted a radical innovation in signal transmission systems. It came from developers outside the carrier industry. In turn, the IP suite has transformed the capacities of cable and telephone systems and made them rival to one another, since IP ended the single-purpose nature of transmission systems. In this model, applications still pay for infrastructure, but the owners of the applications have a right to get onto the infrastructure without anyone’s permission. This phenomenon is referred to as innovation without permission.
When people speak of competition in telecommunications, the distinction between open and closed end-points, and the consequences which flow from those technical possibilities, is not usually well understood.
The first people to satisfy consumer demand for access to the Internet were small ISPs, who saw a demand and found a technical way to satisfy it. Carriers caught up to them a few years later, and have been squeezing them out of business ever since the beginning of the 21st century.
The large carriers have to be encouraged to invest and innovate, certainly, and the Commission does everything it thinks necessary to allow that to happen. Yet the question remains whether two large players in each market constitute the right mix of factors to encourage innovation in services. To this question the Commission has answered “no” on several occasions, including this one. Why then do I dissent in part from the decision?
My concern is that the Commission is not engaging the steps that would be consistent with allowing significant service innovation, and doing so on rather flimsy grounds that it knows better than industry participants what the difficulties might be. It has done this both in relation to CO-based ADSL access service, and with regard to local head-end-based cable access service. It has not investigated the matter in depth, in the sense of spending extra time investigating these matters. It has relied in part upon cost figures from the parts of the industry opposed to these possibilities. I think the Commission would have been better off looking into these assertions in greater depth than we did.
While I recognize that nearly all decisions are made with inadequate information, and in an environment of time and other constraints, I think we have failed here to take seriously the possibility of significant service innovation on the basis of questionable assumptions and inadequate digging into the issues.
At this stage it is appropriate to discuss the opinion-environment in which we operate. The opinion-environment pervades decision-making because it means that whatever differs from the current opinion environment will need more justification. More justification is both riskier and requires harder work. The large carriers have the inclination and ability to convey their messages to the public and the political class relentlessly and effectively. That message can be reduced to the simple proposition that they should at all times be allowed to maximize profits because only then can they make the investments they need to keep Canada internationally competitive. No matter what the profit margins are on leased equipment, wholesale services are always deemed to undermine profit maximization. It is a message constantly heard by the Commission and we have repeatedly found it to be without merit.
Networks are private property and derogations from the full rights of ownership are deeply suspect. In this view, those who lease equipment and services, regardless of the profit margins allowed by regulation, ought in principle not to exist, or if allowed to exist, they should have no rights to lease services at tariffed rates, but should have to negotiate the price.
Experience has shown in New Zealand and elsewhere, including this country, that the duration of negotiations and the price demands of the carrier will ensure the business opportunity disappears.
Networks are not of the same order of thing as a metal-stamping business. They are affected with the public interest, which is merely to say that the reasons why they are subject to a measure of regulation under the Telecommunications Act are valid.
The Commission does not believe that innovation occurs only at the edges of the network. The right of carriers to innovate in network architectures is absolute, subject to the normal policy constraints of non-discrimination and non-self-preference. The question remains whether innovation from the edge will ever be allowed again, after the burst of innovation which accompanied the introduction of the Internet.
What is deplorable, in my view, is the disinclination to consider that specialist outfits like small ISPs should be allowed the opportunity for service innovation because the Commission:
a) substitutes its opinion for what certain players in the market might decide to do; and
b) declines to investigate the options for innovation in a serious and prolonged way.
The result is that the possibility for service innovation was turned down, without sufficient consideration, in my estimation. The current ambivalence about the role and legitimacy of smaller carriers continues. They are allowed to exist but denied the means to innovate. In a business with as much uncertainty as this, turning down the possibility for technical and business innovation seems a riskier move than letting it go ahead. To that extent, I dissent.