Words By Nowak | Download limits only a symptom of the problem

By Peter Nowak

I thought I’d take a break from blogging about all this adult entertainment stuff that went on last weekend and instead write on a related topic: how Canadian internet users are getting screwed.

I came across a couple of items this week that relate to the issue. The first was an open letter addressed to the media and various government departments opposing the metered usage schemes that have been implemented by big internet providers here in Canada (also known as usage-based billing). The letter, posted on the Open Media internet activist website, goes into detail about how this is bad for Canada in a number of ways. The Reader’s Digest version:

1. Smaller and smaller download limits runs contrary to how Canadians are using the internet, which is more and more.

2. With that dichotomy in place, it means we’re inevitably going to be paying multiple times for certain services. Netflix, for example – not only do we pay a monthly bill to access the internet so we can get the service, we also pay a monthly subscription fee to Netflix. With smaller download limits, that means we ultimately have to pay a third time if we watch more than a few movies on it.

3. Given those facts, such services are going to avoid doing business in Canada, or they’re going to be considerably more expensive here, as a recent report found.

4. There are also involuntary services that chew up our bandwidth, such as software updates for computers. Sure, we can decline these, but then Canada is going to a haven for the viruses, etc., that inevitably get through. Nobody wants that.

5. Notwithstanding all of that, low usage caps will also significantly limit the ability of any such Canadian services developing, such as a competitor to Netflix. In other words, low caps limit innovation and stifle new businesses.

I can’t say I disagree with any of those arguments, but I do think the letter writers are barking up the wrong tree. I’m not necessarily opposed to usage-based billing, but I do think that market forces need to exist to keep such schemes honest. If the big internet providers want to keep lowering usage limits, there need to be alternative ISPs that won’t – that way the consumer can decide which company and plan is right for them. The problem in Canada, as I’ve said before, is that those market forces don’t exist and smaller ISPs have had the bigger companies’ business models foisted on them.

That brings us to the second item: a regulatory ruling yesterday on something called unbundled local loops. Warning: this is a topic that can put even the biggest nerds to sleep, so I’ll try to keep it brief and simple.

For much of the past decade, Canada and virtually every other developed nation has recognized the need for competition between internet providers. Only when such companies compete with each other do consumers benefit from faster, better and cheaper services. However, governments and regulators have also recognized that it is considerably expensive to build competing networks.

As such, the concept of local loop unbundling was rolled out across most of the developed world. The idea was to take the networks owned by major phone companies and allow other providers to access them to sell their own internet services to customers. So for example: a small company such as Chatham, Ont.-based Teksavvy could connect to Bell Canada’s network and get its own subscribers.

Under this scheme, there was of course the recognition that the network owners should get some sort of compensation for other companies using their networks. Those other companies were thus effectively charged rent, generally determined by regulators, to do so.

The intent behind the whole plan was to allow smaller, less well-funded companies to build up a good business, at which point they could afford to build their own infrastructure and eventually ween themselves off the networks of the big phone companies.

The trick, however, has always been in the rent set by the regulator. If that rent was set too low, a smaller internet provider would have no incentive to ween itself off the bigger company’s network; why spend money building a network when the one you’re using is really cheap? If the rent was set too high, though, the smaller provider wouldn’t make much money and therefore couldn’t afford to build its own network.

Guess which situation unfolded in Canada? You got it: the rents are too high. According to a Harvard report (PDF, on page 168), “Canada has the highest monthly charge for access to an unbundled local loop of any OECD country.” I believe the term for that is: booya.

The result: small Canadian internet service providers can barely eke out a living, let alone think about building networks to compete with the likes of Bell and Rogers. Read more »

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