COMPETITION IN TELECOMMUNICATIONS IN CANADA – A CASE STUDY
OSGOODE HALL, TORONTO. MARCH 25, 1988
There are limited examples where a reasonably free market situation has been allowed to exist in the telecommunications industry in Canada. As cellular is one of these it forms a case study in which we can examine the benefits and problems.
During the late 70’s and early 80’s there has been a worldwide trend to increasing competition in the telecommunications industry. Based on the well known landmark decisions in the United States, interconnect of non telephone company devices has been grudgingly allowed but is now a maturing business. An even greater impact has come from the competition for Message Toll Service (MTS) in the United States and an increasing competition in the local loop alternative such as the non-switched direct access approach to provide private access to major buildings with the long distance being carried by carriers such as MCI or Sprint. There has even been limited competition with switched service built around the same principle of putting in a local service fibre loop plus a switch which in turn interfaces with one of the non telco MTS carriers.
Cellular, however, provides the most obvious direct competitive model. Most governments, e.g. U.K., U.S. and Canada did not feel that providing competition to the current telephone system by allowing another organization to put copper pairs up and down streets was the answer. Instead they waited for new technology to provide this new form of local loop. In each country the decision was made to license one or more new companies to split the frequencies for cellular telephone technology with the existing telephone company.
This creation of what were clearly new telephone companies was naturally greeted with some reservation by the existing organizations. The thought of competition when one had enjoyed a monopoly for 80 – 100 years was naturally a concern.
Some telephone companies in Canada reacted reasonably well and took the approach that “success is capitalizing on the inevitable”. In this regard, Bell Canada is to be complimented for viewing Cantel as a customer as well as a competitor. Some other companies have reacted with genuine alarm or have not reacted at all hoping this new telephone company would simply go away.
The purpose of this case study is to point out that after about two and a half years of operation, there can now be no reasonable doubt that allowing competition has benefited all parties in Canada. The process has clearly benefited the public as would be expected but also the wireline telephone companies and hence the telecommunications industry as a whole. I hope that the cellular example will form a role model for the type of competition that does benefit all parties.
In looking at the type of competition that would most benefit Canada, the Department of Communications made a wise decision in the fall of 1983. This was to license a single national company to compete against the regional telephone companies. This was unlike the cellular approach in the United States where the awards were made for individual Metropolitan Areas. In the United States the awarding of cellular franchises became so difficult that a lottery system was finally set up. This led to hundreds of bids coming in by organizations totally incapable of establishing a proper cellular operation. This in turn led to what effectively became trafficking in licences.
By contrast, the Canadian model allowed one company to be strong enough to effectively compete with the wireline companies and also to follow the traditional telecommunications industry approach of allowing the Major Metropolitan Areas to subsidize the less densely populated areas.
After Cantel received the national cellular telephone mandate in December, 1983 the Minister of Communications and the CRTC followed this with a series of Decisions that assisted in creating a sensible competitive environment for cellular.
On March 14, 1984 the Minister announced the six months’ rule which stated that neither the wireline telephone company nor Cantel could start in an area until a suitable interconnect agreement had been signed between the two organizations. This avoided the difficult head start situation experienced in the United States.
In CRTC Decision 84-10, Cantel was declared a company under the Railway Act, e.g. a telephone company, cellular service was declared to be in the public interest and hence interconnect was required for federally regulated wireline companies and finally Cantel was given the right to carry its own MTS traffic.
I suspect that the wireline telephone companies did not take Cantel very seriously at first. However, as the initial start date of July 1, 1985 neared, it was obvious to all that a truly competitive situation was developing. Because of this, the CRTC created a state of regulatory forebearance, i.e. while retaining its ultimate right to regulate the price charged to the public, the Commission concluded that price regulation was not necessary at this time because of the developing competitive market place. This has turned out to be a very accurate assessment.
DEVELOPMENTS SINCE JULY 1, 1985
Despite the worst fears of the wireline companies, competition has worked to everyone’s benefit.
Sales of cellular units have far exceeded either the wireline companies’ or Cantel’s expectations. There are now about 125,000 cellular telephones in Canada split more or less evenly between the wireline companies and Cantel although wearing my salesman’s hat, I would have to point out that there is a slight edge in Cantel’s favour.
Much of this development took place because of the equal start in each market and the resultant intense selling effort as two companies vied to gain the public’s attention for this new service. I believe even the telephone companies would now admit that the market would be a fraction of its current size without the competitive stimulus that the companies provide to each other.
Of more importance, however, in examining the benefits of competition, one should consider:
• the wide range of innovative packaging of phones and usage now available to consumers;
• the very wide coverage provided which is far better in many cases than that provided in the United States. Cantel alone now serves 24 centres in Canada and corridors that would not be covered had there not been the competitive situation;
• new developments are in place that were brought about by the competitive atmosphere including offerings that are not available elsewhere such as those of the Mobile Office with fax machines, lap-top computers, voice messaging and a range of other services.
But the benefits go beyond just the consumers. Canada as a whole has benefited greatly from this competitive environment:
• the investment in plant and equipment alone exceeds $300 million to date and is growing very rapidly;
• in Cantel’s case, we have created over 400 direct jobs and another 800 through our Cantel ServiceCentres. I assume the employment created by the wireline telephone companies is somewhat the same;
• the purchases of equipment have been largely from Canadian suppliers with the multiplier effect this has on the economy;
• additional research and development is taking place in Canada that would never have been considered without a competing new telephone company. Cantel uses Ericsson equipment and was one of the earliest users of Ericsson cellular systems in North America. As a result, Ericsson has established a major R&D centre in Montreal carrying out a good part of its cellular software research for North America. It has also moved its national maintenance operations for North America to Montreal;
• perhaps the most important advantage for Canada has been the productivity improvement for other industries through the wider use of cellular telephones resulting from the active promotion by two companies in each market place. This in turn can be an attractive factor for new industries to move into areas where cellular service is available.
The result has been that competition has led to a major Canadian success story.
THE SITUATION IN 1988
However, old attitudes die hard.
In a federally regulated jurisdiction, a good standard has been set for fair competition. In the other provinces arriving at comparable interconnection arrangements has not been easy. The patchwork quilt of regulation in telecommunications in Canada has left the federal government relatively impotent in those provinces. While the DOC has granted the frequencies to Cantel on a national basis and has even laid the requirements on Cantel to serve areas, neither the DOC or the CRTC can directly require the provinces to provide Cantel with the same facilities as it has under CRTC 84-10.
The result has been an inconsistent competitive situation which will ultimately reflect in lower levels of service to Canadians in some provinces than in others.
A simple example is the ability of Cantel to carry its own MTS. It is this ability which subsidizes the cost of expanding Cantel’s own microwave network to serve less densely populated areas. Without this contribution, these areas will be served more slowly if at all. In varying degrees, Cantel is restricted from this in several of the provinces not regulated by the federal government.
In a more general way, Cantel is still not accepted as an equal competitor by any of the telephone companies;
• it has been very difficult to get multiple interconnection points ensuring that Cantel would have redundant paths in its network. No wireline telephone company would design its own network in this fashion;
• although in the United States cellular telephone companies are recognized as being full telephone companies and therefore have the right to their own phone numbers without ongoing payments to anyone else, this has not been the case in Canada;
• in non federally regulated areas, Cantel finds itself competing against a division of the telephone company rather than a fully arms length subsidiary;
• the arrangements for interconnect and the attendant costs are quite different from those of other smaller regional telephone companies.
Despite the fact that it is still far from a level playing field across Canada, the benefits of competition cannot now be denied.
Cantel is already a responsible member of the telecom community contributing significantly to the services available in this country. This is the type of competition that the DOC and CRTC envisaged when they established the rules for competition in cellular in Canada.
The next step is to recognize the benefits that have accrued to the industry, the public and the country at large and to accept Cantel as a full fledged member of the telecom industry. The model works. The final artificial constraints should be removed to allow the process to continue to provide the kinds of benefits to Canada that are there for all to see.
Then this case study will be an even better model for ensuring that competition brings the benefits everyone hoped it would.