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• Publié par: Enne
• Nombre de lectures: 17
• Langue: English

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Voice over Internet Protocol (VoIP): A Unique Opportunity for Genuine Competition in Local Telephone Service

A study of conditions for successful introduction of VoIP in Canada

Prepared for Vidéotron

By

Yves Rabeau, PhD Professor Department of Business Strategy School of Management Université du Québec à Montréal

May 2005

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Executive Summary The introduction of competition in the telecommunications market, combined with the digital revolution and the advent of the Internet, has led to the arrival of new players in the marketplace, lower prices for various services, and a proliferation of new services. Consumers have been the big winners in the sometimes turbulent changes in the marketplace. Now a new innovative technology, voice over Internet Protocol (VoIP), is sweeping the industry. In 2004, new players offering VoIP services appeared and the established industry players responded with their own offerings. As this is a new service which is disrupting the existing market equilibrium, the CRTC, as the industry regulator, took an interest in the matter and put forward proposals concerning the marketing of VoIP services. It also held hearings in which stakeholders explained their points of view on the matter. Finally, on May 12, 2005, the CRTC issued Telecom Decision CRTC 2005-28, ‘Regulatory framework for voice communication services using Internet Protocol’, in which the Commission upheld its preliminary views and affirmed its intention to regulate the VoIP services offered by the former monopoly incumbents until such time as sustainable competition takes hold in the Canadian local telephony marketplace. In this study, we will briefly survey the main components of the regulatory framework for telecom services established by the CRTC over the past decade, with particular attention to the rules governing local competition, since VoIP is a technology which promises to make the local market competitive at last. We will also look at the effects that regulation has had on competition in the telecom market. Finally, we will discuss conditions for the roll-out of VoIP services which, in our view, would make it most advantageous for users of telephone services while affording long-term prospects for businesses that take the risk of investing in the industry. In the long-distance market, the new competitors have never succeeded in becoming truly profitable. Some have had to seek bankruptcy protection, despite industry consolidation. The existence of a large number of resellers has created a kind of artificial competition which has basically served to lower prices without creating value in the marketplace. The pricing competition worked against market entrants that invested in infrastructure. After more than 10 years of competition, the results suggest that the shareholders in the new competitors in the long-distance market have generally had to absorb losses and the beneficiaries of the lower prices and new services have been consumers. To be sure, lower long-distance rates have exerted pressure on the profitability of the monopoly incumbents, but their footprint and their quasi-monopoly position in the local market have enabled them to stabilize their finances and compensate for the loss of long- distance revenues by various means. For example, extensive bundling of services is a powerful instrument that enables the incumbents to maintain their market position and their profits. Very recently, anticipating the disappearance of long-distance revenues with the penetration of VoIP technology, the incumbents have been able to take defensive action to secure their customer base and make VoIP services less attractive by offering

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unregulated deep-discount long-distance rates. These deals are not directly related to local telephone service but their dominance in the local market gives the incumbents ready access to customers and makes it much easier for them to promote their offerings. This illustrates the continuing competitive asymmetry in the telephone market. The dominance of the incumbents in the local market has remained essentially unchanged since 1997, when the market was opened up to competition. The incumbents still have nearly 96% of the entire local market, and roughly 98% of the residential market. The incumbents argue that wireless telephone service is the real competition in the local market. It is true that, in the long term, competition in the local loop will become technology-driven, as companies with their own infrastructure and their own technology face off against each other. However, neither wireless technology nor the market have yet reached that stage of development. Worldwide, the wireless market is growing while the landline market is mature. The fast spread of the Internet, and particularly of high-speed Internet services, has also helped slow the net increase in landlines. This being said, in Canada the incumbents are also major players in wireless and Internet services. Their bundled offerings embrace local, long-distance, wireless, Internet services and satellite TV services. The incumbents may therefore encourage their own customers to migrate to wireless when market conditions make it profitable for them to do so. In this case, it is not a matter of competition between different market players but rather profitable management of the customer base. In short, the incumbents continue to dominate the local loop and without regulation that promotes competition, they have an arsenal of market instruments that can create major barriers to market entry. The CRTC must take into account the principle of universal access to basic telephone service when setting rates. In the rate rebalancing process, this consideration has led the CRTC to set rates as low as possible, and therefore close to the incumbents’ costs. One possible explanation for the small number of competitors to date in the Canadian local market is therefore that with rates close to marginal costs, a competitive market equilibrium has been established at a level where there is virtually no profit to be made by new players using the same or similar technology. The fact that neither incumbent has entered the other’s residential market is a strong indication that this is indeed the case. On the other hand, in the business services segment, where rates are higher and there are opportunities for profit, each incumbent has invested in the other’s service area. Entering the local market with a technology other than the one used by the incumbents is possible provided that the required investments can be recouped, while charging customers a lower rate than the incumbents so as to induce them to change their local service provider. Price is a key consideration if a service of equivalent quality is being offered using another technology.

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The fact that rates are close to marginal cost in Canada has made it difficult for players such as the cable companies, which employ a different technology than the incumbents, to enter the market. In the U.S., where local rates are much higher, the cable companies already have a significant presence in the local market. In Canada to date, the necessary investments have generally been too high for the cable companies to get a competitive return on investment, in view of the prices they would have had to offer to lure customers away from the incumbents. However, the British experience shows that it can be possible to have competition between network operators in the local market, as the CRTC would like, since the cable companies have used their infrastructure to become the main competitors of the former monopoly BT. More than 10 years after the various segments of the telecommunications market were opened up to competition, Bell Canada dominates the market with 50% of revenues from all market segments combined, followed by Telus with 20%. On their own, the incumbents therefore account for 70% of the total telecom market in Canada, with the rest divided up among a number of companies. As VoIP technology makes its appearance in the marketplace, therefore, the playing field is not level. Consequently, it is vital that the regulator maintain for some time yet a regulatory framework that enables different players to enter the market. While the goal of creating a competitive marketplace by means of infrastructure investments by new competitors in the local market has not been achieved, VoIP technology has changed the equation and is now making this objective attainable. Technology is the factor that will make competition possible on the “last kilometre” of the telecom network. If VoIP services were deregulated, as the incumbents wish, they would have powerful means by which to thwart competition and would enjoy free rein with a full suite of deregulated services, including wireless, long-distance, video, Internet access and VoIP. In a deregulated market, their market dominance would deny customers a choice of VoIP services from new players who otherwise could develop and tailor their VoIP services to the needs of their target customers. Customers might see a substantial reduction in prices in the short term. Once the competition had been eliminated, the incumbents could raise their prices again. In the long term, lack of competition does not promote productivity gains by suppliers or lower prices. To avoid this outcome, which would compound the failure of competition in the local loop, it is not necessary to make the regulatory framework more cumbersome by adding new rules. As the CRTC confirmed in Decision 2005-28, all that is required to make competition in local telephone service possible is to maintain the regulatory safeguards already in place. This is not to say that maintaining these rules would guarantee the success of the new competitors in the marketplace. They would not only have to invest in facilities but also wage a costly marketing battle to lure customers away from the incumbents in the local market. Consumers would benefit from such a battle between competitors.

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Once competition in the local market has reached a level deemed sufficient and viable as a result of these new technologies, the CRTC will be able to forbear and let the market determine pricing and service availability.

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1. VoIP: a new wave of innovation in telecommunications Canada’s telecommunications industry has seen many changes over the past 10 years. The introduction of competition in the telecom market, combined with the digital revolution and the advent of the Internet, has led to the arrival of new players in the marketplace, lower prices for various services, such as long distance and Internet access, and a proliferation of new services. Consumers have been the big winners in the sometimes turbulent changes in the marketplace. Now, when the industry consolidation sparked by the difficulties experienced in the first years of the new millennium has not yet been completed, a new innovative technology, voice over Internet Protocol (VoIP), is starting to sweep the industry. This technology has been known for some time but various technical problems had not been resolved and a viable business model for offering the service in the marketplace had not been developed. In 2004, new players offering VoIP services appeared and the established industry players responded with their own offerings. As this is a new service which is disrupting the existing market equilibrium, the CRTC, as the industry regulator, took an interest in the matter and put forward proposals concerning the marketing of VoIP. It also held hearings in which stakeholders explained their points of view on the matter. Finally, on May 12, 2005, the CRTC issued Telecom Decision CRTC 2005-28, ‘Regulatory framework for voice communication services using Internet Protocol’, in which the Commission upheld its preliminary views and affirmed its intention to regulate the VoIP services offered by the monopoly incumbents until such time as sustainable competition takes hold in the Canadian local telephony marketplace. In this study, we will consider the most suitable regulatory framework for optimal roll- out of this technology in Canada, which is vital in order to promote the competitiveness of the Canadian economy. We will briefly survey the main components of the regulatory framework for telecom services established by the CRTC over the past decade, with particular attention to the rules governing local competition, since VoIP is a technology which promises to make the local market competitive at last. We will also look at the effects that regulation has had on competition in the telecom market. Finally, we will discuss conditions for the roll-out of VoIP services which, in our view, would make it most advantageous for users of telephone services while affording long-term prospects for businesses that take the risk of investing in the industry.

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2. Brief history of the major regulatory principles behind the introduction of competition in telecommunications in Canada The move to competition The CRTC opened the long-distance market to competition in 1992. Two main types of competitors entered the marketplace. The first were resellers that lease capacity from the monopoly incumbents 1  at reduced rates and resell to consumers. Since they have few fixed costs, they are able to offer lower rates than the monopoly incumbents. There are also companies that build and own infrastructure, and use their own facilities to compete with the incumbents. They have to conclude interconnection agreements with the incumbents to terminate long-distance calls on the local loop and other purposes. The CRTC set interconnection fees on the basis of the monopoly incumbents’ historic costs. An example of this type of operator in the long-distance market was Unitel, which grew out of the CNCP network. Breaking down barriers The CRTC’s historic Telecom Decision CRTC 94-19 (Decision 94-19) removed barriers to competition in the information distribution industry by letting the cable companies compete with the incumbents on the telephone services market and letting the incumbents distribute television content. The CRTC also spelled out the rules that would govern the move to competition in telecom markets. Those rules, which continue to influence the market today, may be summed up as follows: ƒ   the telephone market have to pay the incumbents a fee forThe new competitors in access to their network called a Carrier Access Tariff (CAT), based on network costs plus a contribution to help fund local residential service. ƒ   Residential rates, which were cross-subsidized from long-distance and business services, were gradually raised to a level closer to the cost of providing the service ("rate rebalancing") but continue to be subsidized from revenues such as the contribution included in the CAT. ƒ   To prevent predatory pricing, the CRTC set floor prices for the incumbents’ long- distance rates until competition had reached a sufficient level to allow the market to determine prices. The CRTC thereby stated a basic principle for regulating competition which continues to play an important role, the "forbearance principle": when the market is considered to be competitive enough to freely determine prices, the regulator will lift regulations. By 1998, there were a number of competitors in the long-distance market and the CRTC forbore from regulation, letting the market set prices. Today the incumbents, such as Bell                                                  1 Strictly speaking, they are ex-monopoly incumbents, for they no longer hold a monopoly since the market was opened up to competition. However, the CRTC continues to refer to them as “the incumbents” and we shall use that term in this study.

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and Telus, no longer need to seek CRTC approval of their long-distance rates and can freely offer the services in the marketplace. Competition in the local market Decision 94-19 contemplated future competition in local telephone service. The CRTC held lengthy hearings on the various considerations involved in establishing rules to govern such competition. In 1997, following the hearings, the CRTC issued another major decision (Telecom Decision CRTC 97-8) on competition in the local market. The CRTC decision was based on core principles that still underlie the rules governing competition in the local market. The first is facilities-based competition rather than mechanisms such as the resale of capacity leased from the incumbents. The CRTC adopted an approach designed to create value for users and therefore to encourage companies to invest in facilities to serve customers in the local market. The regulator expected it would be possible for companies to offer customers bundled services through the local market. Another principle is that of co-carrier status, that is equality among all the carriers targeting consumers. The new competitors are equal in status to the incumbents and may not be discriminated against. For example, customers who decide to switch carriers can keep their telephone number. Also, the CRTC established the “bill and keep” system for telephone calls that must be exchanged between local competitors to reach their destination, an equitable model that provides for mutual compensation. Finally, technological neutrality is another basic principle. Competitors may use the technology of their choice to access local customers. For example, calls can be routed over a coaxial cable system, a wireless network or even copper local loops leased from the incumbents. Technological neutrality also applies to the choice of switching methods and transmission protocols for local service. The incumbents may have chosen one type of switch and new competitors may choose another equipment supplier with a different technology to serve their own local customers. This is an important principle now that it is possible to offer customers local service using VoIP technology. Notwithstanding these basic principles, the CRTC has also recognized that any carrier that enters into competition on the local market remains dependent to some extent on the incumbents’ pervasive systems and will therefore need a measure of rate protection in order to prevent anti-competitive practices. In order to provide such protection for any carrier using the incumbents’ facilities, the incumbents have been required to unbundle their assets so as to identify the facilities and the equipment used to provide services to competitors and the cost of doing so. The main points of this decision, which remain important with the advent of VoIP services, may be summarized as follows: ƒ   Contrary to the approach taken by the FCC in the U.S. and in keeping with the principle of facilities-based competition, the CRTC did not require the incumbents to offer wholesale prices on the local loop, which would have

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encouraged the appearance of resellers, as in the case of long-distance service. The formula for setting the fees that the incumbents may charge the new competitors allows the incumbents to recover a large portion of their historic costs. ƒ   The incumbents must physically open their local facilities to allow competitors to install their own equipment in order to offer competing local services. ƒ   The rates the incumbents may charge new competitors for use of their local network are capped to prevent anti-competitive practices. The price caps replace rate of return regulation of the incumbents. ƒ   charge their customers for local service areAs well, the rates the incumbents may subject to floor prices, again to prevent predatory pricing, which would make it impossible for the new competitors to offer competitive prices. Otherwise, given the large number of services they offer, the incumbents could bill their customers below cost prices for services on the local loop in order to prevent new competitors from entering the local market, and then cross-subsidize their losses. The incumbents must therefore submit to imputation tests to make sure the rates they bill their customers cover their costs, as established before and approved by the regulator.   nIk eethh “ae ngpiit wytilrp ”roffibadch h whiple,incielhp tett ahlosdise icrvsee on ƒ a basic service that must be available to all citizens, the CRTC has refused to raise rates for local residential service enough to fully cover the incumbents’ costs. Rates for certain local services therefore remain cross-subsidized from other services and other service providers. Competitors in the long-distance market continue to support this cross-subsidization by paying contribution fees. Those contributions are paid into a fund which is shared with new competitors in the local market that offer services to customers currently paying a cross-subsidized rate. The amount to which new entrants in the local loop are entitled is determined using a complicated formula. The subsidy aims to create a level playing field for new competitors in the local market. Competition in the local market was therefore introduced through a fairly complicated process, accompanied by many rules intended to address the economics of telecom systems in view of the monopoly position formerly occupied by the incumbents. The rules were also intended to create a level playing field for market entrants. Balance is difficult to achieve and this is reflected by the complexity of the rules. Subsequent events showed that even with these rules, entering the local telephone market is difficult from an economic point of view, since the companies that have made the attempt have generally been unsuccessful. In this period of deregulation and technological progress, wireless service has also made significant progress, particularly with the advent of digital technology and support for electronic data transfer. Rates in this segment of the telecom market are set by market

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forces. If however a customer calls a landline subscriber, call termination on the local loop is subject to regulation. The tariff for interconnecting with the local loop must be approved by the CRTC and cover the costs the incumbents have submitted to the CRTC. Internet service providers After putting up some resistance in the mid-1990s against the arrival of Internet Service Providers (ISPs), the incumbents came to voluntary agreements, at the urging of the CRTC, with the ISPs on local loop interconnection arrangements in order to avoid the costly hearings process. In response to the booming popularity of the technology, the incumbents also launched their own Internet access services. In the wake of Decision 94- 19, the cable companies could also offer Internet access services. Their technology enabled them to quickly introduce high-speed Internet access service offering better performance than the incumbents’ copper wiring. The technological competition led the incumbents to speed up the roll-out of their high-speed technology – digital subscriber lines (DSL) – and also generated price competition. Voice over Internet Protocol The imminent arrival of voice over Internet Protocol service has been predicted since the late 1990s, but various technical problems had to be resolved before the service could be launched. Pilot projects were carried out but no Canadian carrier introduced the service. Then, the appearance of the small operator Vonage on the market, first in the U.S. and then in Canada, sent shock waves through the telecom industry. Vonage’s business model is similar to that of a reseller in that the company does not have its own infrastructure and relies on the high-speed Internet access provided by the ISPs to deliver its services. The arrival of Vonage prompted other competitors in the Canadian marketplace such as Primus to offer VoIP services using an Analogue Telephone Adaptor (ATA), which connects to a high-speed Internet connection and a conventional telephone, enabling customers to make telephone calls over the Internet. It should be noted that companies such as Vonage, which do not have their own transmission network, are dependent on the roll-out of high-speed Internet access. If there is no carrier offering high-speed Internet access, they cannot deliver their product. They can therefore be referred to asproviders of VoIP services over the public Internet.business model, akin to that of aThis reseller, can therefore entail various problems for customers, which we shall discuss below. Companies that own their own infrastructure, such as the incumbents and the cable companies, can deliver VoIP services over their own networks and manage development of the service by investing in facilities to provide high-speed access. They can also develop various services based on consumer needs. Cable companies that own a full network for delivering services to their customers may be referred to asproviders of VoIP services over a managed network. is an entirely different business model This which is currently experiencing widespread deployment. Vidéotron and Shaw already offer service over part of their networks. We shall discuss the implications below. Other

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companies that own infrastructure have already responded to the competition and have announced their own VoIP service offerings, particularly for business customers. Consequences of VoIP technology VoIP technology has various consequences for the entire telecom industry and for the role of the Internet in the economy as a whole. The most important are: ƒ   Because IP technology makes it possible to send messages in packets, VoIP service costs significantly less than traditional telephone service, which must monopolize an entire line for two parties to have a conversation. With VoIP technology, many conversations can be routed over a segment of the network simultaneously and the cost per byte exchanged is therefore lower. VoIP technology can thus be expected to lower telephone rates as long-distance competition did before it. ƒ   There is no such thing as long distance on a packet-based network: there is no difference between e-mailing a neighbour or a friend in Paris. Long-distance service can therefore be expected to become a thing of the past. In the not-so- distant future, the term “long distance”will have disappeared from the telephone vocabulary, at least in North America. ƒ   With the disappearance of long distance, users of VoIP services can choose the area code they want, regardless of their location. It is even possible to get a virtual telephone number so that callers using a conventional telephone can dial a local number. For example, a Montréal-based business that has customers in Vancouver can use a Vancouver telephone number for customers in that city. ƒ   IP technology supports convergence between voice communications,Finally, voice messaging and data exchange (e-mail messages, files, images, etc.) on a single platform. An individual or a business could therefore replace its conventional telephone line, voice messaging and high-speed Internet access, with all the related services, with a single IP service. The convergence of all services on a single platform, combined with lower pricing, will give IP technology a substantial competitive edge. Significant growth in demand for VoIP services can therefore be expected on the part of businesses, households and governmental organizations alike. In response to this technological and competitive revolution, the CRTC first expressed its general views on VoIP services: since it is a voice transmission service, the regulatory framework that currently applies to conventional telephone service 2 should also apply to VoIP services. This proposition would appear to be based on the principle of technological neutrality with respect to regulation of competition in local services. Since the incumbents could continue to dominate the local market in the face of competition from new entrants using a new technology, namely VoIP, it is appropriate to keep the                                                  2 I.e. the Public Switched Telephone Network (PSTN).

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