Who Benefits From Telco Deregulation

Eric Reguly Business Columnist in yesterdays Globe and Mail (article is locked however this link is the Goggle cache) makes these interesting points about Industy Minister Maxime Bernier's decision to override the CRTC this week and give post Income Trust Kick Backs to Telus and Bell.

The point is that prices for Canadian telecom services are high by American standards and the changes announced by the government are unlikely to put a smile on your face when you rip open the phone bill. If prices were set to plunge, you wouldn't see the phone company bosses beaming like they had just invented Cheez Whiz. Bell Canada owner BCE predicted a 4- to 7-per-cent rise in earnings per share in 2007 on rising sales. Nice exactly a whack job on the industry, Mr. Bernier!

The new deregulation rules are designed to heat up local competition. Phone companies will no longer have to lose 25-per-cent market share to rivals before they are given the liberty to set prices as they chose. Instead, they will only have to show that at least three phone providers exist in the given market. The phone companies will also gain the right to use sales pitches to win back customers.

The Canadian wireless companies are making lavish profits. Rogers made almost 50 cents in EBITDA (earnings before interest, taxes, depreciation and amortization) for every dollar in revenue in the third quarter. Ditto Telus. Five years ago, the margins might have been half that amount. Forget finding a diamond deposit. If you want to get rich in this country, own a wireless business and maintain the fiction that there's enough competition to ensure customers get great deals.

And when it comes to real competition between these two and the cable companies, its only in two areas, broadband internet services including VOIP and cell-phones. And Berniers decision impacts both VOIP and the existing teleco monopoly of their local markets.

It's the cellphone and wireless market however where all the players are becoming filthy rich, and where the only real comptetion is occuring.

VANCOUVER (CP) - Telus Corp. (TSX:T) expects growth in its wireless, data and Internet businesses to outpace losses in its traditional phone service next year as competition looms in local markets. Canada's second-biggest phone company said Thursday it expects revenue growth of six to seven per cent revenue growth in 2007, an increase of about $550 million, to between $9.175 billion and $9.275 billion. Growth in earnings before income tax, depreciation and amortization was pegged at between four and seven per cent, with adjusted earnings per share between $3.25 and $3.45.

This article is locked at the Globe and Mail and so courtesy of Google I am reprinting it in whole.

QUEBEC VIEW: REGULATION

Watchdog lacks telco bite

KONRAD YAKABUSKI

From Thursday's Globe and Mail, December 14, 2006

MONTREAL — Industry Minister Maxime Bernier has demonstrated he's either devilishly cunning or naively misguided in suggesting consumers will be the big winners with his accelerated deregulation of Canada's local phone business. After all, not even he can deny that changes he announced on Monday will favour big telcos, none more so than the recently soul-searching BCE.

So what if bolstering BCE is exactly what Mr. Bernier wants to do? What if, for the federal government, BCE is to telecom what Air Canada is to airlines? That is, our national flag voice-and-data carrier.

BCE is still the only Canadian telecom that even merits mention in global rankings, and just barely at that. But with more than 12.2 million local telephone customers, it still dwarfs, by a multiple of at least 20, all of its direct competitors. Its upcoming name change back to Bell Canada only underscores its national champion status.

That's not to say Ottawa doesn't have a love-hate relationship with BCE, just as it loves and loathes Air Canada. But in the end, the national flag carrier, whether it transports people or pixels, gets special consideration in Ottawa. There's too much at stake for it not to.

How else do you explain Mr. Bernier's eagerness to neuter the Canadian Radio-television and Telecommunications Commission? Or his leaving the Competition Bureau in charge of making sure BCE and Telus don't abuse dominant positions in the local phone market?

The Competition Bureau is the same agency Ottawa charged with ensuring Air Canada played well with others after it swallowed Canadian Airlines. Just as Mr. Bernier has now promised the bureau will vigorously police big telcos, Ottawa under the Liberals pledged back then that the watchdog would keep Air Canada in line. It even equipped the bureau with the power to issue scary-sounding "cease-and-desist" orders to stop the quasi-monopoly airline from undercutting upstarts' fares in order to drive them under. The bureau even used the power -- once -- before a Quebec court took it away, saying it deprived the airline of its right to due process.

That one instance set the stage for a three-year, multimillion-dollar legal battle, not just before the Quebec Court of Appeal, but also the Competition Tribunal, the quasi-judiciary body that rules on charges brought by the bureau.

In 2001, the latter had accused Air Canada of engaging in predatory pricing on five Eastern Canada routes in order to prevent WestJet and CanJet from viably competing there. The tribunal ruled in 2003 that Air Canada had indeed set prices below its "avoidable costs," a key piece of evidence needed to prove predatory pricing.

However, the bureau, under commissioner Sheridan Scott, abandoned the case in 2004, saying: "In light of the passage of time and the significant changes in the industry, we have concluded it would not be in the public interest to pursue the second part of this case." She was referring to Air Canada's bankruptcy filing and the arrival of Jetsgo as competitor. The only problem with this logic was that Air Canada's restructuring was not caused by competitive pressures, but rather its inability to juggle a bloated debt and cost structure in the wake of Sept. 11. Jetsgo, meanwhile, was toast only months after Ms. Scott's declaration.

The moral of this story is you can't count on the bureau to effectively police abuse of market dominance by companies in any sector. It takes way too long and almost always sides with the big boys. The London-based Global Competition Review has consistently concluded as much after several years of rating the agency poorly in its annual ranking of the developed world's watchdogs. In its latest report, it noted that 28 of 40 abuse-of-dominance cases were closed in 2005 with no fines or remedies issued.

It's not entirely the bureau's fault. It operates on the basis of competitor complaints and faces an almost unattainable burden of proof. Its budget has remained stagnant at about $30-million for about a decade, even though the Organization for Economic Co-operation and Development called for a 50-per-cent increase in 2000. The workload is such that it has not even tabled a 2005 to 2006 report, almost nine months after its year-end.

In the 2004 to 2005 report, meanwhile, we are reminded it approved the takeover of Microcell by Rogers because "the transaction would not create or enhance market power in the mobile wireless market" nor "increase the likelihood of co-ordinated behaviour among the major cellular companies." Say what?

Now Mr. Bernier is promising us that the bureau, with a new power to slap $15-million fines on telcos, will keep BCE and Telus in line. Sorry, Mr. Bernier, you say rottweiler but all we see is lhasa apso.

Me thinks this author's Eastern Canadian bias is showing. Note he says that in Bell Canada is Canada's National Phone Company. Of course he would he works for a BCE owned newspaper, the Globe and Mail. He lives in Quyebec and Bell is dominant in Ontario and Quebec Canada's largest population centres.

That being said Telus is not just number two in Canada but a far more flexible player than BCE which is now encumbered not just with its Teleco business but with its ownership of other media, CTV, Globe and Mail etc. The irony of course is that if as he says the Conservatives are protecting Bell Canada in their recent move to tax Income Trusts, and to over-ride the CRTC, then they are protecting one of the largest corporate homes of Liberal Party movers and shakers.

Ask yourself if that makes political sense. Of course not.

In reality it is the Conservatives ideology of deregulation that is driving thier moves, which benefit both Telus and Bell. They hate the Wheat Board, and they hate the CRTC. Heck they hate the CBC so watch out. However the neo-liberal market ideology of the Tories does not help consumers, despite their rhetorical excuses, ironically it actually does the opposite of creating a competitive market it helps monopolize the market place.

How telecom reform topped Bernier's agenda

Mr. Bernier listened as the telecom review panel members argued that VoIP, a breakthrough technology that allows phone calls to be made through Internet infrastructure, is an important niche that should be left as unfettered as possible. They said there were also questions about whether governments can do much to regulate such border-free technologies, anyway.

For Mr. Bernier, a staunch advocate of free markets and small government, it was a critical moment.

Mr. Bernier, a lawyer and former executive with the Montreal Economic Institute, a free-markets think tank, would eventually open up part of the VoIP market while also charting a course that would put him in conflict with more pragmatic members of cabinet and within the senior ranks of his new department. Some in each of those influential groups would prefer that the Beauce, Que., native focus more on specific policy goals, instead of broader philosophical ideals.

This week, he added to his roster of telecom changes when he announced that he intends to overrule another major CRTC decision, this time the commission's move to continue regulating local phone services.

'Man of action' or just ignoring consumers?

Eamon Hoey, senior partner at consultancy Hoey Associates, has a different view. He says Mr. Bernier has done nothing but make the big telephone companies happy before the Christmas season.

"[Mr.] Bernier is looking at this problem through the eyes of the carriers and the providers, rather than from the perspective of the consumers," Mr. Hoey said. "He has to figure out the needs of consumers that aren't being served and why, rather than saying if we deregulate them all then we'll end up where we need to go."

This week, Mr. Bernier said the federal government was scrapping CRTC rules on local phone deregulation and proposing its own guidelines. His rules, which could be implemented as early as February, would see much of urban Canada deregulated as long as it can be proven there are at least two wireline phone carriers -- a combination of either Bell Canada or Telus and a cable company -- in a given market.

This is seen as a major victory for BCE Inc. and Telus Corp., which have argued they are constrained in efforts to compete against cable companies and Web-based players because of CRTC constraints.

It was the second time he dismissed CRTC guidelines in favour of more market-friendly options, as recommended in the blue-chip Telecommunications Policy Review panel report tabled last March.

Less than a month ago, Mr. Bernier said VoIP services, or Voice over Internet Protocol, would not be subject to regulation, as the CRTC had recommended. "It makes the CRTC look up toward the Minister and say, 'What do you want me to do next, boss?,' " Mr. Hoey said

Bernier rewrites CRTC's forebearance ruling

In a move to accelerate his desire to deregulate telecommunications in favour of market forces, Industry Canada Minister Maxime Bernier outlined new criteria for determining when the CRTC should forbear, or refrain, from regulating local telephone service provided by the former monopoly telephone companies. Business customers, for example, would have to have access to at least two fixed-line facilities-based service providers for forbearance to occur – an incumbent, for example, and a cable company -- while consumers would also have to have access to at least one wireless service provider.

“It’s an entirely different ideological mindset,” said Ian Angus, principal analyst with Angus Telemanagement in Ajax, Ont. “The CRTC had said a market is competitive when there are successful competitors – companies that have achieved enough success to survive in business. The minister is saying if there is facilities-based competition, then it’s competitive and we will deregulate.”

One of the areas left out of the proposal is any provision for re-establishing regulation if various geographic zones return to a monopoly, Angus added. “What happens in five years down the line if we have competition in most cities and the cable companies decide they can’t survive, that it’s just too expensive?”

And being the Party of Western Canada, as we have heard over the last few days from various Cabinet ministers and the PM himself (We represent Western Canadian Farmers who voted for us not the Liberals) I suspect that the Tories are as eager to see Telus benefit as they are Bell. In fact I think they see deregulation benefiting Telus more in the Telco market, in direct competition with Bell, than benefiting Bell. Bell's business is too widely distributed now, and their telecommunications business is their weak spot.

I do like his criticism of the Competition Bureau. And over all the business press has been far more critical of the governments moves to deregulate than those who simply are ideologically opposed to the CRTC (it certainly needs to be reformed to represent us the taxpayers and consumers and not the industry and corporate interests) or who have an unwavering belief in the neo-liberal myths that deregualtion and privatization are the be all and end all of reforming the market place.

See:

Telus

BCE

CRTC

Bernier

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