Breaking up telecom companies is hard to do

When Vint Cerf — the man often regarded as the father of the internet — speaks, people listen.

Cerf, who in the 1960s established the technical protocols on which the internet runs, recently accused telecommunications providers of stifling competition and innovation by demanding regulatory breaks from governments.

"Basically, it's like little kids in a tantrum: 'I'm not going to build this system unless you give me three scoops of ice cream and a pony,'" he said in July.

"It's harmful to the national interest to behave in this way because it is serious infrastructure — it's very much like the roadways."

Cerf suggested the best way to keep internet-provider competition and innovation alive and to avoid conflicts of interest is to split telecom companies into two entities: one division that sells access to its networks to all competitors on an equal basis, and another that sells its own retail services.

On Wednesday, the European Parliament took the current Google Inc. vice-president and net neutrality advocate up on his suggestion by passing a proposal that will allow national governments to do just that, adding impetus to a global trend that could soon find its way to Canada.

The issue is the spread and improvement of internet-access networks, which started in the 1990s with slow dial-up speeds over phone lines and evolved into high-speed broadband over those same copper wires around the turn of the millennium.

DSL often still rules

In many countries, this digital subscriber line (DSL) connection is still the only way to get high-speed internet access.

With only one provider — the big phone company — broadband diffusion was initially slow in many countries. In response, governments instituted regulatory frameworks that forced phone incumbents, many of which were formerly state-owned monopolies built with taxpayer money, to open up access to their networks to competitors.

Rival companies then used this access, called "local loop unbundling," to install their own equipment and sell their own services.

Canada instituted local loop unbundling as well and saw a number of smaller players emerge to compete with the likes of Bell Canada Inc. and Telus Corp. Today, there are more than 50 smaller internet service providers accessing the networks of the big phone incumbents.

'We got in at the ground floor but we remained at the ground floor while others kept building.' —University of Waterloo president David Johnston

In addition, Canada also benefited from the emergence of alternative high-speed access offered through the infrastructure of cable television providers. Phone companies such as Bell and Telus thus competed fiercely with the likes of cable providers Rogers Communications Inc. and Shaw Communications Inc. in snapping up internet customers.

The result was an envious global position: in 2002, Canada had more broadband subscribers per capita than anyone in the world, next to South Korea. Canadians became savvy broadband users before almost anyone else and internet-access networks were established here early as a key economic infrastructure.

But that head-start was squandered, industry experts say, as stronger local loop unbundling rules in Europe resulted in a ramping up of competition over recent years. Eight countries — Denmark, the Netherlands, Iceland, Norway, Switzerland, Finland, Sweden and Luxembourg — have since surpassed Canada in broadband subscribers per capita, mostly without the benefit of competition from cable providers.

This summer, University of Waterloo president David Johnston told the annual Telecom Summit that other countries have made investing in broadband a far bigger priority than Canada.

"We got in at the ground floor but we remained at the ground floor while others kept building," he said.

Unbundling not enough?

With Wednesday's vote, the European Parliament went a step further and decided the existing regulatory system of local loop unbundling may not be enough to continue building the European Union's broadband momentum.

In most countries, regulations guarantee smaller providers access only to phone companies' main exchange buildings, where much of the existing network infrastructure has been stored. In recent years, however, phone companies have been pushing networks out of those buildings and into neighbourhood curbside cabinets, closer to their customers' homes, in an effort to boost speeds.

Smaller ISPs have also suggested this type of equipment migration is a purposeful attempt to circumvent access rules as the cabinets generally fall outside regulation. That means phone companies can sell their own customers higher speeds while their wholesale competitors are stuck offering the slower access emanating from the exchanges.

Whether or not the move is an intentional regulatory work-around, such is the case in Canada, where Bell is in some areas offering download speeds of around 15 megabits per second while services from smaller internet service providers such as TekSavvy or Acanac top out at about seven megabits.

Britain's regulator Ofcom was the first to realize this potential competitive problem and took the pioneering step in 2002 of forcing operational separation on the country's incumbent phone company, British Telecommunications PLC. In 2006, BT launched Openreach, a separate fenced-off company that sells access to its network to competitor ISPs.

Broadband competition in Britain has since exploded, resulting in ever-increasing speeds and rock-bottom prices — an eight-megabit download connection can be had for as little as the equivalent of $11, a service that generally costs four times that amount in Canada.

Britain is now nipping at Canada's heels in broadband rankings from the Organization for Economic Co-operation and Development, and is likely to soon take over the No. 10 spot.

New Zealand was the second country to force operational separation on its incumbent, Telecom New Zealand, after wallowing for much of this decade with poor speeds and high prices. The government-ordered split in 2006 took effect earlier this year with the launch of Telecom's new network division, Chorus.

Smaller ISPs in New Zealand say it's still too early to see any measurable results from the split, but the demeanour of the incumbent and the industry as a whole has changed markedly.

"I was cynical … and thought it was nothing but a window-dressing operation," says Scott Bartlett, chief executive of Orcon Internet Ltd. "But it's the first time that Telecom has actually treated me like a customer. They seem legitimately focused on helping me build my business."

Moving to fibre

The European Parliament's endorsement of operational separation must now go to each member state for approval. Even if member countries give the idea the green light, there's no guarantee any of the states will move to split up their phone companies — but some analysts say it is likely, given that broadband is shifting away from copper lines hooked up to exchanges and toward fibre networks that use street-side cabinets.

"Local loop unbundling as a solution is fine in the copper era but it doesn't work as well, if at all, in the fibre-to-the-cabinet era," says David Harrington, head of regulatory affairs at the Communications Management Association in Britain. "It has probably had its day."

On several occasions, Canada has examined the possibility of forcing operational separation on its phone companies, as well as extending regulated access to roadside cabinets, but has so far opted against it.

Phone companies have argued that allowing access to cabinets would discourage them from investing in new equipment, a position the Canadian Radio-television and Telecommunications Commission sided with in March.

'You'll likely get it wrong, but even if you do get it right you'll only have it right for a short period of time as technology evolves.' —Mirko Bibic, head of regulatory affairs at Bell

The CRTC, however, also ruled that local loop unbundling would continue — a decision that didn't please some phone incumbents. In April, Bell lodged an appeal with the Federal Court of Canada to scrap that ruling on grounds that there is already enough competition from cable companies.

"Why do you need wholesale rules when you've got a dynamic retail marketplace with competition and a minimum two pipes to the house, three if you count wireless?" says Mirko Bibic, Bell's head of regulatory affairs.

Bibic says that although the European Parliament has okayed the potential for separation, several member states — Denmark, France, Netherlands and Spain — have already definitively decided against it. A number of studies in Britain have also shown operational separation to be an overly rigid regulatory solution that has not only discouraged BT from investing in new infrastructure, but has also limited the company's flexibility to anticipate future needs, he says.

"The problem you get is you're never certain where the future bottlenecks are going to be. You'll likely get it wrong, but even if you do get it right you'll only have it right for a short period of time as technology evolves."

Lastly, Bibic says, Canadian phone companies have separate wholesale and retail divisions and CRTC rules prohibit the sharing of information between the two.

Still, relations between Bell and its smaller wholesale customers are souring — not only is the company moving to abolish their regulated access, the two sides are also embroiled in a dispute before the CRTC over its throttling of internet speeds.

With operational separation gaining increasing attention in the United States and Europe, it may not be long before calls for another look at the idea surface in Canada.