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Can the Competitive Model of Telecommunications Deliver the Goods?

By Michael Janigan (Speech to Pacific Telecommunications Council)

Pacific Telecommunications Council ’99

Introduction

By now, few of us have not been exposed to the visionary rhetoric that has accompanied the dawning of the so-called information age. Fortunately there is no amount of cynicism engendered by the hype surrounding the Information Highway that can fully extinguish the sense of awe that most of us have when we contemplate the potential of the new communications technologies. On a worldwide basis, these technologies are establishing an infrastructure that is transforming the way we do business and, to a large extent, the way we live.

For public interest advocates, the allure of these technologies has not been their ability to change a resource based economy to an information based economy, a change largely effected by the marriage of the computer and communications technologies. The attraction is rather that these technologies offer an opportunity to deliver societally important public goods and services in dramatically more effective ways, both domestically and internationally. These new methods of delivery connote an opportunity to better everyone’s lot.

But as we all know, the delivery of these new goods and services does not take place in a governmental or regulatory vacuum. First of all, the technological advances themselves have served to rebut the notion of the telephone system as a natural monopoly. Developments in digitization, transmission and traffic switching technology enabled new entrants to challenge incumbent hegemony in telecommunications services.

However, the advent of the digital age has also served to focus industry dissatisfaction on the alleged shortcomings of the traditional methods of communications regulation. It is particularly interesting how the potential application of the new technologies has been used a lever to advocate for dramatic changes in the regulatory environment. Despite the fact that reliance on market forces is largely at odds with the broad based social goals promised by the new technologies, there has been a consistent clamour, particularly from the former incumbent monopolists, to be released from the chains of regulatory oversight.

It would be hyperbolic to claim that the regulatory models currently evolving are solely the result of the aggressive posturing of telecommunications players to the effect that fantastic new developments cannot be achieved under existing regulation. However, it is important to note that the promise of seductive new technologies and new services on the horizon has been successfully married by industry spokespersons with the plea to be set free from regulatory “bondage.”

The question that policymakers and public interest advocates must confront is whether the competitive model of communications oversight currently espoused will be capable of delivering the goods in the form of universal affordable access to those communications technologies and services that are recognized as socially useful and necessary. It is first perhaps necessary to look at the essential components of the conceptual competitive model. The talking points of this model will certainly vary by jurisdiction. For the purpose of this paper, its development is primarily predicated on the Canadian experience. However, even given its country specific limitation, the description of this model will be admittedly general and broad brush. In fairness, it is likely that no industry actor ever finds its position itself entirely within the construct of this model as elaborated herein. However, the description of the model does serve a focus the discussion as to whether the full implementation of the model would broaden or narrow access to the services enabled by the new technologies.

The essential features of this model are:

1. Internal subsidies to enable network access are sought to be eliminated.

2. Individual components of network access are, to the greatest extent possible, unbundled and repriced.

3. Consumer choice and individualized programs of service are a network priority.

4. Market forces are sufficient to ensure service quality.

5. Universal public access is a public goal to be ensured with public monies.

6. Telecommunications objectives are best achieved through competitive means.

7. Consumer protection is best achieved through competition or anti-trust policy rather than regulatory oversight.

1. Internal subsidies to enable network access are sought to be eliminated.

I do not intend to revisit the debate of the last two decades concerning who should pay the costs of network access. The impact, however, of the migration of greater costs in telephony to local basic service has had two principal effects:

I) savings, particularly for high volume customers of competitive services such as long distance

ii) a substantial escalation of the basic costs to get on the network.

For competitive model adherents, this reallocation of costs reflects simple market realities and allocates costs to telecommunications services using the network in a market-based fashion.

To consumer and public interest advocates, the costing results are decidedly subjective, geared more to ensure competitive entry by service providers than allocative efficiency and value. (One wag has termed the process the evolution from cost based pricing to price based costing).

Whatever the merits of the different applications at this principle, it is undeniable that its impacts is most heavily felt by those with the least ability to pay. Access to advanced applications of communications technologies may be a moot point if a subscriber has already dropped off the network. On the other hand, a rebalancing of network costs may make start-up and delivery of new applications on the network more cost effective.

2. Individual components of network access are, to the greatest extent possible, unbundled and repriced.

In a competitive telecommunications universe, there is a perpetual squeeze between the desire for a return on investment and the fulfilment of the important telecommunications objective of maintaining basic universal service. In Canada, consumer and public advocates have seen a wholescale attack in telephony on the collaterally important functions of the telephone system that were either formerly or realistically part of a package of basic services. Network functions such as local information services, long distance information services, repairs to subscriber lines and touchtone service are classified as services additional to local basic service for which the telcos assess an additional fee. Other U.S. jurisdictions have allowed the introduction of local measured service. The erosion of the content of basic network service that ensures functional access to the communications network and full participation in the community of interests served by the local network presents a substantial irritant, if not a road block to establishing or maintaining universal accessibility.

3. Consumer choice and individualized programs of service are a network priority.

The discipline of competition has meant a quicker and better response by industry participants to those customers whose consumption of services represent a significant market share to be obtained or retained. As well, new providers of communication services have been able to enter and provide services to emerging markets particularly through the use of wireless technologies where traditional networks could not have been implemented. The presence of competing players in the communications market does present possibilities for expanding access to consumers whose needs cannot be met in the traditional monopoly environment.

4. Market forces are sufficient to ensure service quality.

While competition has produced increased efficiencies and choice for consumers in desirable markets, it has also had the effect of inducing ambivalence by network providers concerning markets whose economies of scale or scope, or net revenue, make them unattractive for industry participants. This is particularly been evident in US jurisdictions where the local network provider has in many instances virtually abandoned its responsibility to provide local service and failed to address service quality problems in a suitable fashion.

In Canada, the CRTC has been non compliant with requests from local service providers that they be exempted from accountability on quality of service matters, and resistant to the claim that market forces can provide incentives to ensure that quality of service is maintained. The CRTC, as the national telecommunications regulatory body, has insisted upon the maintenance of appropriate quality standards in that “market forces are not sufficient incentives to ensure that quality of service with respect to essential utility segment services and bottleneck facilities does not deteriorate…”(1)

The experience to date in Canada and the United States, arising in jurisdictions where regulation has not been completely ceded to market forces, represents a significant counsel of caution to those who would advocate an abandonment of the maintenance through regulatory authority of quality of service network standards as a result of the introduction of competition.

5. Universal public access is a public goal to be ensured with public monies.

While there is agreement by government, industry and consumers that the telecommunications networks of the present and future represent a substantial national and public interest, there is an ever widening divergence of views between industry and public interest advocates as to the responsibility for ensuring network access. While the industry players continue to publicly highlight the importance of the applications of new communications technologies as the lifeblood of future economic development, the responsibility to ensure delivery of access to all elements of society is looked upon by industry as a non-network cost.

In Canada, we appear to be committed to access as an objective, yet we are indefinite as to how access will be achieved in the current environment without government subsidy. Clearly the most successful efforts to promote access, to new technologies outside of industry pilot studies have involved direct federal funding.

The Canadian government’s Information Highway Advisory Council recognized the critical necessity for developing access to the Internet and ensuring equitable participation in a knowledge society. It’s September 1997 report contained far-reaching recommendations to enable such participation. Through the Community Access Program, the federal government is committed to the goal of connecting up to 5,000 communities across Canada by 2001 through the establishment of public access sites in low cost public locations. The SchoolNet program is a collaborative effort sponsored by federal, provincial, and territorial governments and takes in about half of Canada’s 16,500 schools with hundreds of on line services.

While the government has been forthright in its desire to put money into range of partnerships to expand access to new telecommunications services, the traditional industry players have resiled from their longstanding notion of stewardship over network access to a position of “show me the money”.

In a current CRTC proceeding examining service to high cost serving areas in Canada, the submission by the Stentor Resources Centre Inc., the alliance of Canada’s local telephone companies, contains the following statements:

“Stentor believes the following principles should apply in achieving the objectives of this proceeding:

First, market forces should be relied on to achieve public policy goals whenever possible. Second in cases where it is determined that market forces are insufficient to achieve public policy goals relating to accessibility, then governments should accomplish such goals directly through spending and tax measures.”

I do not quote from this document to illustrate that Stentor is callous or indifferent to the needs of Canadian society. It is rather that some of the goals associated with the implementation of a competitive model of telecommunications are difficult to reconcile with the notion of expanding access by consumers in undesirable markets. As a matter of policy, you are unlikely to accomplish access goals simply by reliance upon market forces, notwithstanding the promise associated with some of the new technologies.

In Canada, it is also interesting to note that the ongoing debate concerning the achievement of other important national communications goals is taking on the same characteristics as the struggle to ensure public access. The touchstone of Canadian communications and broadcasting policies for more than half a century has been the maintenance of Canadian content in creation and distribution. However, a verity of equal importance in the regulatory arena, has been the continual, and occasionally successful, whining from the non-governmental providers of broadcasting services that the content restrictions constitute an unacceptable straightjacket on their ability to earn an acceptable rate of return.

As I write this paper, the news media is covering a squabble between the two main private networks concerning Canadian content programming. One network is accusing the other of profiting by maintaining smaller Canadian content quotas. Predictably, the response from the network accused of such delinquency is “if you are going to regulate free enterprise in the private sector, you’ve got to give them some room to do well”(2).

In Canada, the traditional telecommunications players have increasingly focused on the prospect of providing services that would be traditionally looked upon as broadcasting through their own networks. These services have been principally enabled by new developments in Internet streaming audio-video technology. However, similar to the industry attempts to winnow down the statutory responsibilities of ensuring public access in local telephony networks, the framework of Canadian broadcasting policy emphasising maintenance of Canadian content is under increasing attack from the high powered aspiring new entrants.

In a remarkable discussion paper issued by Stentor in March of 1998, there is an attempt to revisit all of the largely successful themes that have been played in the telecommunications market.(3)

First of all, the promise of flourishing Canadian industry created by the new technologies and the intersection of telecommunications and computing in the creative content industries is provocatively dangled before government policymakers. However, after whetting the appetite with the carrot of the economic promise of the brave new media world, the stick is applied when it is stated that investment in new media services requires minimal regulatory intervention to expedite new entry and to limit the application of longstanding licensing requirements.

To assist in the bulldozing of the current regulatory framework, the viewing preferences of Canadians are attempted to be enllisted.

“Changes in consumer behaviour and technology will demand a economic framework aimed at promoting rather than protecting and encouraging access rather than relying on barriers as the means to success”(4)

In any event, the discussion paper predictably that government funding and tax incentives should be used to assist Canadian content creators for new media services and certainly no further financial demands should be put upon the providers of new services.

When all else fails, the admonition of potential impotence is given to government policymakers.

“A number of changes in the market – in consumer attitudes and technology and international agreements are raising questions with respect to our ability to maintain such restrictive (ie Canadian content approaches), all be it for a public policy purpose that continues to be important to Canadians.”(5)

Now one can scarcely expect that traditional telecommunications companies, about to embark upon new ventures will embrace schemes of national regulation which may prove burdensome to their bottom line. But it is important to note, it is implicit in their approach that the creation of a competitive framework which may enable the new technologies to deliver services does not guarantee the achievement of national goals such as Canadian content and public access particularly without public finance. In fact it may create an aggressive lobby for the alteration of the national public goals.

6. Telecommunications objectives are best achieved through competitive means.

Most governments are now of the belief that market forces represent the preferable way of achieving telecommunications goals.

For example, in Canada, the 1993 Telecommunications Act explicitly instructs the national regulator, the CRTC, to forebear from regulation where a service or class of services is or will be subject to competition sufficient to protect the interest of users.(6) In addition, the Act recognizes as an objective

“To foster increased reliance on market forces for the provision of telecommunication services and to ensure that regulation where required, is efficient and effective”(7)

The current framework of Canadian communications governance has evolved from a series of decisions that permitted entry into the local market by striving to ensure that the right economic and technical conditions existed for open access. A price cap regime has subsequently put in place governing local network services until competition is established. Finally the CRTC has recently forborne from regulating long distance services offered by the former monopoly telcos.

While the introduction of competition as a principal tool of industry governance is not controversial, its establishment as the only tool certainly is. The former incumbent monopolists are anxious to hasten the transition to what is termed “a fully competitive communications market”. A recent study by the Stentor companies concluded:

“Regulation in a fully competitive communications market will be considerably different. The market failures which required industry specific economic and technical regulation will no longer be present as new players compete aggressively for customers.”(8)

In Canada, Stentor’s enthusiasm for unrestricted competition does not have industry-wide enthusiasm. A wireless competitor notes:

“As competition is introduced into markets still dominated by telephone companies whose actions and positions have been influenced by the regulated past, it is important to evaluate carefully then correct for the ways in which these markets are distorted by the lingering effects of the past.”(9)

As well, the claims of some that allowance of market entry has obliterated the vestiges of monopoly power, has attracted the expressed disbelief, attention of industrial economists. As a recent study notes:

“The hope that monopoly and dominance will quickly disappear are contrary to industrial experience. …New entry is actually a complicated process; it is rarely a strong force in mainstream markets that is able to discipline incumbent dominant firms.” (10)

The efforts of the Regional Bell Operating Companies to enter the long distance market following passage of the 1996 Telecommunications Act in the United States has also spurred renewed interest in the examination of whether workable competition in the local market actually exists notwithstanding the regulatory seal of approval. In a petition filed by the American Association of Retired Persons, the Competition Policy Institute and four other state based public advocates, the FCC was requested to ensure that consumers have a realistic choice of alternative local telephone companies before any assumptions were made concerning competitive entry into the local markets.

The significance of the lingering effects of monopoly in a deregulated environment are devastating for the constituencies that formerly relied upon regulation as their consumer protection. Without sufficient market power to ensure the best value for the best price, vulnerable consumers will struggle to maintain their current access to networks, let alone expanded levels of services and technologies.

7. Consumer protection is best achieved through competition or anti-trust policy rather than regulatory oversight.

In many utility markets, there has been a marked tendency on the part of the former incumbent monopolist to embrace the concept of oversight only by anti-trust or competition policy authorities. This idea is trenchant, as it appears to logically coincide with the use of competition as a principle tool of protection.

It is undeniable that competition law and policy has a significant place in maintaining the level playing field upon which all industries including the communication industry must play.

“The anti-trust laws…are the Magna Carta of free enterprise. They are as important to the preservation of economic freedom and our free enterprise system as the Bill of Rights is to the protection of our fundamental freedoms”(11)

However, there are significant differences between the approach of a tribunal implementing competition policy and those that are concerned with the responsible delivery of telecommunication services in the public interest. Some of the difficulties inherent in the proposal to substitute competition policy for regulatory oversight include the following:

1. Enforcement of anti-competitive statutory prohibitions tend to be isolated episodes of intervention rather than maintenance of a particular industry end state (hence its attraction for a dominant industry player). In competition or anti-trust policy, the goal is to intervene, fix the problem, and exit. This works well when there is a particular instance of preferential pricing or restrictions to deal. Its application is more problematic where a pattern of industry behaviour has created market conditions which stifle competition in important market segments. Such problems may call for timely and repeated intervention and monitoring – a function which is not always compatible with the mandate of the competition or anti-trust authorities.

2. The economic underpinnings of competition policy are not universal static equations which are easy to apply, particularly with respect to the concept of market power. In Canada, our Competition Bureau has been far more successful in rooting out competitive injurious conduct brought about by the conduct of multiple firms rather than the problems of market dominance by a single firm. This is largely because remedial action associated with market dominance questions in competition or anti-trust law involves the removal of market entry barriers. In large part, the theory of contestable markets holds sway in relation to the solution of barrier removal as a principal remedy. The theory is that if it is easy for firms to enter the industry then the firms already engaged in the industry will be unable to raise prices above the competitive levels lest such entry occur and the increased industry output will cause prices to fall. However, as critics have noted that empirical evidence for this is weak(12).

For national telecommunications regulators, the rather abstruse debate among economists concerning different methods to affect price must be more than a matter of philosophy. The migration from regulation to competition requires workable competition in order to protect consumers in the delivery of essential services. It is important that a regulator entrusted with public goals has the ability to monitor and implement regulatory process to effect publicly desirable results when market failure occurs.

3. National goals do not fit neatly into competitive policy analysis. It is all well and good to theorize on a basis of competition economics that prices will eventually fall to enable network access. The real question lies whether there is a higher societal cost associated with the denial of access while we are waiting for competition policy doctrine to do its stuff. One commentator has objected to reliance upon competition law to regulate telecommunications policy as follows:

“Competition law is a blunt instrument, mainly designed for manufactured goods, such as toothpaste, cameras and gasoline, where many companies compete. To the contrary, communications is a public utility, an essential infrastructure, where a range of economic, social cultural and political objectives must be satisfied.”(13)

Conclusions

I do not intend that the message of this paper to be that the increasing reliance upon market forces to deliver new communications technologies is a mistaken policy. The difficulty is that, there is considerable, and sometimes intentionally, generated confusion about what a competitive model of telecommunications governance can deliver and what it can’t. While the new technologies, particularly in wireless fields, hold the potential of being able to engender enormous cost efficiencies in the maintenance of universal networks, competitive providers will implement these technologies to maximize returns without the presence of protections to ensure public access and other desirable national goals.

In Canada, we have been able to effect significant inroads in broadening access to new technologies by negotiating with providers of new wireless technologies to “set aside” for public lanes in which access by non-commercial providers of communications content are assured. This strategy represents a symbiotic confluence of competition policy and the national goals of access which cannot be replaced by a simplistic call to obliterate telecommunications regulators.

As well, critical governmental choices loom on the horizon as the principal providers of telecommunications services evolve from their heretofore paternalistic roles as the monopoly trustees of the national interest, to market participants with a steadfast devotion to shareholder expectations. The current policy solution that seems to be provided by these transformed companies, is that any vestige of their former public interest role should be provided and funded by national governments.

However, most governments find themselves in a position where there is fierce competition for their scarce resources. Before wholly embracing the chief tenets of the competitive model elaborated above, we would suggest that government policymakers may wish to ensure that there is a regulatory framework in place that can satisfy public goals without the necessity for extensive public subsidization.

1. Telecom Decision CRTC 97-16 para.37

2. Globe and Mail, August 6, 1998

3. New Consumers, New Technologies and New Media: An Opportunity for Canada SRCI., March 1998

4. New Consumers New Technologies and New Media an Opportunity for Canada, page 8, March 1998

5. Ibid at p. 22

6. Section 34(2) Telecommunications Act S.C. 1993 chapter 38

7. Sect 7 (f) Telecommunications Act

8. Competition and Regulation in the Canadian Communications Market Stentor Telcom Policy Inc. 1998

9. From Monopoly to Mediation New Roles for the Regulator In Competitive Communications Markets, Dean Proctor, Microcell Communications, Toronto, April 13, 1998

10. Deregulation From Monopoly Only to Dominance Telecommunications Railroads and Electricity, William G. Sheppard, NRRI Quarterly Bulletin, Summer 1996

11. United States v Topco Associates Inc. 405 U.S. 596 610 (1972)

12. Determining When Competition Is Workable, David Chesler, PHD, National Regulatory Research Institute, July, 1996

13. Communications Regulatory Agencies for Canadians, page 6, Andrew Reddick, (PIAC), 1998

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