In my talk a few weeks ago at RAG New Orleans I ended by saying "Or maybe the situation is worse. Maybe the regulator fails to see that smaller players – who function without large scale facilities - are legitimate stakeholders at all. That might be the more ominous explanation for its telecom decisions of late."
Only a few days after my return, the Federal Cabinet declined to overturn the CRTC's 2021 ruling denying full Mobile Virtual Network Operators (MVNOs) in Canada. While no one really expected the decision to be overturned, this is just another blow in a on-going string of losses faced by smaller providers trying to offer compeditive services in Canada. Last year there was the devastating CRTC 2021-181 decision which rolled back wholesale internet rates to levels that make it virtually impossible to compete with the incumbents. The message from the CRTC and the Government in both the MVNO and wholesale internet rate decision is clear - it's facilities or bust and that's terrible for Canadain consumers. Perhaps my fears are true.
Service based competiton is capitalism’s response to the possibilities of specialization of functions. The job of service based competitors is to fill the pipes of the larger incumbents more economically than the incumbents with market power can do for themselves. But this is not all. Their job is to find niches in which they can excel: to develop, deploy, and operate services consumers will want to use. Their primary task is innovation. Innovation is their facility.
Before I get into the weeds, I wanted to clear up a common misunderstanding about exactly how the smaller service based competitors deliver services to the marketplace. Service based competitors are not simply "resellers", who sell existing internet plans on behalf of a telephone or cable company. Instead, service based competitors, through their investments, control a significant range of service variables, including the capacity limits and prices of their internet plans. These are not simply people reselling internet - these are providers building networks, crafting innovative service offerings, and delivering value to Canadians. These service based competitors detach innovation from the ownership of facilities.
But do we really need these smaller providers in the market? Do they provide any real benefit to consumers? The Competition Bureau thinks so. In at 2019 study, they found that "More competition generally leads to lower prices for consumers, as well as increased choice and greater innovation.". And consumers want them - over 57,000 members of OpenMedia’s community reached out to Cabinet in defence of the 2019 wholesale rates. And in a 2018 report to the Competition Bureau, Professor Roger Ware, Queen's University said "The prevalence of service-based competition can bring a series of benefits that include faster broadband diffusion, lower prices, and larger service selection". The same report went on to say that "It is a trivial task to construct a theoretical example in which an insistence on facilities-based competition will lower economic efficiency rather than increase it. Suppose that a vertically integrated incumbent possesses an input that is essential for operating in the industry, but has unlimited capacity (or just a very large amount of excess capacity). The input can feasibly be duplicated, but has a large fixed cost (“F1”) that is incurred annually. Economic efficiency requires that the input be shared between the two firms. Forcing the entrant/competitor to duplicate the fixed input is a dead weight cost to society, and pure economic inefficiency. But forcing the competitor to build their own version of the input is precisely what facilities-based competition requires. This simple economic logic seems to have become lost, or at least neglected, in the more recent emphasis on encouraging exclusively facilities-based competition."
Of couse we can't have 100% service based competition, and the policies makers are correct in stating that facilities are a necessary thing. Without any facilities consumers would have no access to the Internet. But where they are failing Canadians is insisting on the overbuilding of facilities for the sake of building facilities. Take your home for example - we do not insist on two or three electrial lines or natural gas pipes be built the house, yet consumers in Ontario and Alberta can choose which provider they buy their power and gas from through the deregulated market. Building facilities on top of facilities seems like a crazy way to achieve your goals, and yet we do it every day - Rogers and Bell will both build seperate fibre into a new home. If we had true service based competition this overbuild could be avoided - instead of spending capital building two fiber networks to reach the same customers, facilities based providers could utilize the existing service to reach customers in that area and then redirect the money they would have spent overbuilding to greenfield builds of new areas. This has the net effect of increasing the number of consumers who have access to next generation high speed networks and is win-win-win - more facilities get built, capital is used optimally, and consumers continue to enjoy the benifits of competition.
The CRTC needs to drop its obsession with facilities and re-focus on serving the needs of Canadains, and those needs are best served with a robust service based competition framework for both wireless and wired services. They need to open up access to next generation fiber facilities to service based competition now. We need to do everything we can to empower service based competitors create the innovative products and services Canadian consumers deserve or we will all suffer the concquences of living in a Rogers/Telus/Bell oligopoly.