A loophole in the deregulation of local telephone services could hurt competition in smaller markets across Canada, says a leading telecom analyst.
The Canadian Radio-television and Telecommunications Commission (CRTC) has announced it will allow large telephone companies - so-called incumbents, such as Telus and Bell Canada - to seek deregulated pricing for residential and business services in local areas where their competition has at least 25 per cent of market share. But in markets where rivals of the big telcos do not have at least a 25-per-cent share, the CRTC will continue to set prices.
Roberta Fox, senior partner with the Toronto-based telecom industry analyst Fox Group, says the 25-per-cent provision will be "an artificial barrier" to competition, especially small businesses.
"The market should determine the successes and failures, not the regulator, of future successful companies," she says.
Fox says prices should be deregulated in all markets. The CRTC ruling is also in direct conflict with a recent 392-page federal telecommunications panel report that calls for deregulation of local phone services - without any reference to percentage of market share, she adds.
"They're not taking their own panel's recommendation," says Fox. "So why did they even bother to have the panel in the first place?" The three-person review panel, commissioned by Industry Canada, issued several sweeping policy recommendations, including deregulation of local phone services and tax credits for small businesses that adopt information and communications technologies (ICT). But the panel's recommendations apply only to policy and are not legally binding, while the CRTC, which governs telecommunications across the country, has the authority to set rules.
Until now, the CRTC has set prices on all local telephone services, which include basic telephone service, voice-over-Internet protocol (VoIP) services and optional features such as voicemail and caller ID.
Because of Canada's small population and high equipment costs, most small companies can't afford to provide local phone services, says Fox.
But Chris Peirce, chief regulatory officer for Winnipeg-based MTS Allstream Inc., welcomes the ruling, although he does not expect local phone prices to be deregulated in Manitoba.
"Competition and competitive pricing are here to stay," says Peirce.
He says the ruling will allow his firm to become more competitive in B.C., where it is the leading competitor for the business market against Telus, and other parts of Canada where it is a rival to the local-service incumbent.
"We think it's a good (ruling)," says Peirce. "The issue was how quickly and where the regulator should effectively stop regulating retail pricing to telephone services in both the residential and business markets."
Big telcos seeking deregulated local pricing must also make their networks accessible for competitors for six months, ensure their networks provide good services to competitors, and have competitor-services tariffs in place on the networks.
The CRTC also ruled companies that have lost customers to rivals will only have to wait three months - instead of the previously required 12 - to woo them back.
Corinne Pohlmann, national affairs director for the Canadian Federation of Independent Business (CFIB), which represents 100,000 small and medium-sized companies across Canada, says the decision will give members more choice in telecom suppliers.
She questions whether deregulation will prompt incumbents to raise their prices, but adds prices should remain fair if competition is strong.
Meanwhile, small businesses will make big gains if some of the telecommunications review panel's recommendations are implemented, say telecom experts.
The panel's report says Canada needs to base its telecommunications policy more on market-based forces than regulations, and calls for more foreign ownership of telecom firms. The proposed ITC-adoption tax credits are intended to boost the productivity of small and medium-sized enterprises (SMEs) and help them grow, says the report.
It recommends fully refundable tax credits should apply to a broad array of ICT assets, including computers, communications equipment, software and computerized manufacturing equipment.
"The tax credits are probably more beneficial to the small businesses than large businesses," says analyst Fox.
She says they will encourage more small tech companies to survive and grow, especially in their startup years. Increased foreign ownership, Fox adds, will provide telcos with the money they need to develop new technologies, which can have short lifespans.
"The Canadian capital markets are consistently hesitant about funding telecommunications and technology," says Fox. "Telecommunications is a capital-intense industry, so the increase in foreign ownership will provide the telecom industry with much-needed funds. As long as majority ownership is maintained, we can still deliver world-class telecommunications services with a Canadian view and maintain culture."
Dorian Banks, chief technology officer with Vancouver-based MetroBridge Networks Corp., a wireless telephone and Internet services provider, says the proposed tax credits mean investors will be "quicker to pull the trigger on (making) investments."
The combination of tax credits and taxpayer-funded broadband connectivity will make it easier for his firm to go into smaller markets, he adds.
He praises the recommendation for government to provide broadband connectivity in more remote areas where the market can't support investment, noting it can cost as much as $20,000 for his company to serve one customer in northern Alberta, whereas serving customers in Calgary is much cheaper. But he contends a low price is the last thing that will drive innovation, because large companies will eventually gain a monopoly.
Banks also support the panel's suggestion to make more radio frequencies available to wireless operators. Under the current system, he says, major telcos such as Telus and Bell purchase long-term rights to frequencies for hundreds of millions of dollars, but do not use the airwaves, effectively limiting competition.
The CFIB's Pohlmann says more deregulation and foreign ownership would provide more competition, lower costs and increase innovation within the telecommunication industry, which is "heavily dominated by big players.”
She says the proposed tax credits will also help small business owners who need help setting up systems but are too busy with day-to-day operations.
Bernard Courtois, president and CEO of the Ottawa-based Information Technology Association of Canada (ITAC), which represents firms in all IT sectors, says he feels "very positive" about the report.
He says the tax credits will help Canadian firms shorten the "productivity gap" between Canada, the U.S. and other developed countries. He adds it's important to kick-start more ICT use among small businesses, because such a move would help Canada's whole economy.
Just how much of the report will become reality remains to be seen. Industry Minister Maxime Bernier has expressed support for a market-based approach to regulation, but says he plans to take several months to review the recommendations.
John Manley, a former Liberal industry minister who also served as the minister responsible for telecommunications, told Canadian Press the Liberals won't voice much opposition to the report, and more foreign ownership will improve "the competitive nature of Canada's economy."
However, the national Communications, Energy and Paperworkers union (CEP) has urged the Harper government to cease trade talks that would open the domestic telephone industry to more international players.
"This sector is of fundamental importance to sustaining and expanding both national and regional economic development. Who in their right mind would want to turn it over to foreign interests?" CEP president Brian Payne said in a statement.
Contrary to his praise for the CRTC ruling, MTS Allstream's Peirce says the report is "hopelessly complicated and impractical," and does not bode well for competition and innovation.
