The Bell Show. The feuding over wholesale broadband continues.

November 22, 2023

If the CRTC’s regulation of Internet broadband pricing was a television series, it would be in something like its 17^th season now as one of Canada’s great reality shows.

The most recent episode of Bell’s capital strike in response to a new CRTC ruling on its Fibe network infrastructure is a worthy follow-up to ‘BeerGate,’ that unmissable season two years ago where CRTC Chair Ian Scott and Bell’s Mirko Bibic were accused of cooking up the Commission’s cancellation of a major cut to the broadband wholesale rates the large telcos charge independent ISPs to rent carriage on their networks (the ISPs in turn compete against the major telcos and cable companies). 

To recap the most recent episode, Bell announced on November 6^th its indefinite deferral of a billion dollars in capital spending to push out its industry-leading fibre telecommunication network to the five million homes it hasn’t reached yet in suburbs, small towns and rural areas.  Its refurbished network will replace its legacy copper with fibre-enabled bandwidth download speeds of up to 8 Gbps (compared to cable co-axial speeds topping out at 1.5 Gbps, offered by its major competitors Rogers and Québecor). 

The dramatic cancellation of investment, delivered in an angry press release from Bell’s CEO Bibic, was sparked by the CRTC ordering Telus and Bell to rent ‘wholesale access’ to their fibre networks in Ontario and Québec to ISP competitors, especially the independent ISPs TekSavvy and an array of smaller broadband “re-sellers.” Until then, the CRTC had never ordered the telcos to share their top-end fibre networks with the independents, only copper or co-axial. 

The CRTC’s regulation of telecommunications is as relentlessly politicized as broadcasting, even more so because of the regulator’s preoccupation with bottom-line numbers on monthly cellphone and Internet bills. 

For the last two decades, the Commission has pursued the holy grail of lower retail prices for Internet services with a strategy of adding more competitors into the market through wholesale access to major telco networks, as ordered by the Commission.

The Commission strategy is founded on its unwavering conviction that affordable Internet services are “essential” to Canadians; that the capital-intensive ISP industry is plagued by high levels of corporate concentration that inflate retail prices; and that adding re-seller competitors is the solution. It has two tools at its disposal: the authority to force the major ‘incumbents’ like Bell and Rogers to open up all or part of their networks to these up-and-coming competitors and fixing the “just and reasonable” wholesale price for that access.

The “just and reasonable” wholesale rate is what the Commission has been trying to get right for over a decade. It’s not an easy task given the constantly evolving network technology and, more visibly, the bitter regulatory feud between the incumbents and the independents over identifying the sweet spot between a fair rate of investment return for the networks and a profit margin for the independents that allows them to compete and grow.

The CRTC’s effort to mediate the fight and find the sweet spot always seems to be in chaos. Nevertheless retail prices have declined —even garnering a gold star from the Competition Bureau— but on the other hand many of the leading independents have thrown in the towel, selling their assets and customers to the major networks (E-Box and Distributel to Bell, VMedia to Québecor, and Comwave to Rogers). Critics and the surviving independent ISPs (like TekSavvy and the ISP trade association CNOC) blame the CRTC for setting wholesale rates too high.

It’s fair to say the CRTC is spooked by these market exits which reflect badly on its long-term strategy. It’s in the midst of yet another review of wholesale rates. Its public hearings lumber on with painstaking evidence and analysis of what it costs to build and amortize multi-billion-dollar investments in networks sprawling across the Canadian land mass.

Perhaps this is why the Commission felt the need to do something short-term and dramatic by ordering Bell and Telus to open up their upgraded networks in central Canada that cater to customers with an appetite for up to 8 Gbps bandwidth. 

Unfortunately, there is no publicly available map of ultra-speed fibre-network consumption. It seems unlikely that a significant number of customers want to pay for speeds greater than the 1.5 Gbps they can get from the co-axial networks owned by the cable companies that have to share access with the competing independent ISPs. 

The median Canadian Internet customer utilizes less than 200 Mbps bandwidth. That’s less than 20% of available co-axial speed. The ultra-bandwidth speeds offered by Telus and Bell’s next-generation fibre networks may be the wave of the future —otherwise why would they spend so much building them— but in 2023 the top fibre bandwidth capacities aren’t what the average or even above-average household needs unless you’ve got multiple 4K televisions or teenage gamers online at the same time. I pay for 500 Mbps bandwidth. What’s in your wallet?

Before making up your mind on anything to do with Canadian telco regulation, I commend you to the blog Telecom Trends published by independent consultant Mark Goldberg.

Goldberg is clearly of the view that CRTC’s regulatory strategy on wholesale broadband regulation is not working because it doesn’t fully appreciate the investment climate for network building by the incumbents.

According to Goldberg, Bell and Telus have already built their fibre networks in the most lucrative, densely populated markets, the “low hanging fruit.” They are now building out to markets where the business case for rate of return on investment is more precarious and requires a disciplined market-by-market business case.

Business considerations are driven by rising capital costs in these less densely populated markets and  Goldberg questions why the Commission based its most recent wholesale rate on only the last five years of capital cost, omitting the next five years, which a Scotiabank analyst projects will increase by 33%.

The CRTC wholesale rate does not include cost recovery of the incumbents’ lost opportunity to sell other core services, especially television, to the customers that the retailer is taking away from them. But the opportunity to sell multiple telco services to customers is a big part of the business case for investing the capital to build the fibre network in the first place.

“Look at a business case [for Bell or Telus] to lay fibre in the suburbs,” Goldberg told me in an e-mail correspondence. “Rogers is already offering up to [1.5] gig speeds over their cable plant. The wholesale-based ISPs have access to Rogers and are reselling that service already. Bell puts together a business case that says ‘we should be able to capture, say 50%, of the market if we make the investment, based on some assumed ARPU’ [average revenue per customer for bundled services]. They look at the cash flows and determine if the forecasted revenues are sufficient to undertake the risk. They set up a capital plan based on all the areas where the business case is positive.

“But now, CRTC says they have to allow TekSavvy to resell Bell Fibre there. So they can’t forecast the same retail share… The wholesale revenue from the resellers will be less than the retail revenues that Bell may have otherwise obtained. So the point is that there will be some areas that the business case for fibre will no longer be supportable.”

That perspective leads one to re-evaluate whether Bell’s investment cancellation is a capital strike, intended to arm-twist the Commission into reconsidering its fibre access order, or just a ruthless calculation of the best way to spend a dollar of gross profit.

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