CRTC chairman Jean-Pierre Blais

Independent Internet Service Providers are hailing a decision by telecommunications regulators that will force big phone and cable companies to open their fiber optic networks to competitors, suggesting Canadian consumers will benefit from lower prices, fewer usage caps, and higher-speed Internet.

The Canadian Radio-television and Telecommunications Commission on Wednesday ordered companies like Bell/BCE, Telus, Rogers, Shaw, and others to sell wholesale access to their growing fiber optic networks, despite industry protests giving that access would harm future investment in fiber technology just as it is on the cusp of spreading across the country.

“We’re an evidence-based body, so we heard all of the positions of the various parties and we balanced those off through what we heard in our deliberations afterwards,” said CRTC chairman Jean-Pierre Blais. “In this particular case, we are concerned about the future of broadband in the country so we have to make sure we have a sustainable and competitive marketplace. It’s a wholesale decision that says Canadians can expect a better competitive marketplace because we are going to require incumbent cable and telephone companies to make their high-speed facilities available to competitors.”

[flv]http://www.phillipdampier.com/video/BNN Breaking News CRTC Decision Fiber 7-22-15.flv[/flv]

BNN broke into regular programming with this Special Report on the CRTC decision that will grant independent ISPs access to large telecom companies’ fiber optic networks. (3:13)

Large phone companies, including Bell, warned regulators in a hearing last fall that forcing them to open their networks to third parties would deter investment in fiber expansion. Canadian telecom companies now provide about three million homes with either fiber to the home or fiber to the neighborhood service. Blais, along with representatives of independent ISPs have rejected Bell’s arguments, arguing competition from cable operators was forcing telephone companies to upgrade their networks regardless of the wholesale access debate.

“Our view is the incumbent telcos have a market reason to invest in improving their plant through the investment in fiber,” Blais said. “That’s what Canadians expect and because of market conditions they have to do that investment. So we’re quite confident that’s going to happen.”

Canadian telecommunications companies have done well selling Internet and television services in a highly concentrated telecommunications and media marketplace. For example, BCE, the parent company of Bell Canada, Bell Media, and Bell TV owns a wireless carrier, a satellite TV provider, the CTV television network and many of its local affiliates, dozens of radio stations, more than two dozen cable networks, a landline telephone company, an Internet Service Provider, and ownership interests in sports teams like the Montreal Canadiens as well as a part interest in The Globe and Mail, Canada’s unofficial newspaper of record.

Companies like Rogers, Shaw, Vidéotron, Telus, and Bell have dominated the market for Internet access. But regulators began requiring these companies to sell access to their networks on a wholesale basis to smaller competitors to foster additional retail competition. Today, there are over 500 independent ISPs selling service in Canada, including well-known companies like TekSavvy, Primus, and Distributel. In the past few years, Internet enthusiasts have flocked to these alternative providers to escape a regime of usage caps and usage-based billing of Internet service common among most incumbent cable and phone companies. Competition from the independents, which offer more generous usage allowances or sell unlimited access, has forced some phone and cable companies to offer cap-free Internet service as well.

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BNN interviewed CRTC chairman Jean-Pierre Blais about the commission’s decision to open up wholesale access to Canada’s fiber optic networks. (5:26)

Despite the competition, the majority of Canadians still do business with BCE, Rogers Communications, Quebecor (Vidéotron), Shaw Communications, or Telus, that collectively captured 75 percent of telecom revenue in 2013.

Although competitors have been able to purchase wholesale access to cable broadband and DSL service, nothing in the CRTC rules required big cable and phone companies to sell access to next generation fiber networks. That gap threatened the viability of independent ISPs, left with offering customers access to older cable/copper technology only. This week’s CRTC decision is the first step to grant access to fiber networks as well, although some ISPs are cautious about the impact of the decision until the CRTC provides pricing guidance.

“The commission took a great step today in favor of competition,” Matt Stein, CEO of Distributel Communications Ltd., told The Globe and Mail. “In giving us access to fiber to the premise, they have ensured that as speeds and demands increase, we’re going to continue to be able to provide service that customers want. It’s definitely going to be some time before these products make it to market. There’s going to be the costing and the implementation, and reasonably it could be a year or even longer before the products are actually out the door. But the heavy lifting? Today that was done.”

Bram Abramson, chief legal and regulatory officer for TekSavvy Solutions Inc., added some caution.

Distributel, an independent ISP, made a name for itself offering usage-cap free Internet access to Canadians.

“The devil really is in the details on this,” Abramson told the newspaper. “That’s why I say we like the direction, because there are a million ways in which this could become unworkable if implemented wrong. For example, what rates are we going to pay? We won’t know until those tariffs are done and settled.”

Other so-called “wireline incumbents” like Manitoba Telecom and SaskTel will also be required to make their fiber optic networks available to competitors.

Last fall, Bell warned the CRTC of the consequences of letting TekSavvy, Distributel, and others resell access to their fiber networks.

“We are not suggesting that mandated access will immediately grind investment to a halt in every location in Canada, but it is a question of balance and it will have an impact,” Mirko Bibic, chief legal and regulatory officer for BCE/Bell told CRTC commissioners at a hearing.

Bibic cautioned if the CRTC granted competitive access it could affect how the company allocated its capital investments and could lead it to shift spending to other areas instead.

“What we’re saying is a mandated access rule will affect the pace of deployment and the breadth of deployment,” Bibic said.

Bibic

Specifically, Bibic claimed Bell may call it quits on fiber expansion beyond the fiber-to-the-neighborhood service Bell sells under the Fibe brand in 80% of its service area in Ontario and Quebec. Bell had envisioned upgrading the network to straight fiber-to-the-home service, eliminating the rest of the legacy copper still in its network. But perhaps not anymore.

“If the commission forces the incumbent telephone operators to open access to fiber-to-the-home, BCE might not prioritize building that final leg in some communities,” Bibic warned. “The point is, with 80% of our territory covered […] we can hold and do really well with fiber-to-the-node for longer than we otherwise might.”

Nonsense, independent ISPs told the CRTC, pointing to the cable industry’s preparations to introduce DOCSIS 3.1 cable broadband and vastly increase broadband speeds well in excess of what a fiber-to-the-neighborhood network can offer.

“First of all, [telephone companies] have a natural incentive to build wherever there is a cable carrier, because otherwise the cable carrier will eat their lunch,” said Chris Tacit, counsel to the Canadian Network Operators Consortium, which represents the interests of independent ISPs. “There’s a reason that they’re sinking all that money into [fiber-to-the-home], it’s because they have to keep up. Now, I don’t believe for a minute that they are going to stop investing if they have to grant access.”

Regulators in the United States have traditionally sided with large telecommunications companies and have largely allowed phone and cable companies to keep access to their advanced broadband networks to themselves. Republicans have largely defended the industry position that regulation and forced open access would deter private investment and competitors should construct networks of their own. In some cases, they have. Google Fiber is now the most prominent overbuilder, but several dozen independent providers are also slowly wiring fiber optics in communities already served by cable and telephone company-provided broadband. Whether it is better to inspire new entrants to build their own networks or grant them access to existing ones is an ongoing political debate.

But the CRTC has not given independent ISPs a free ride. The commission announced it will begin moving towards “disaggregated” network availability for smaller ISPs, which will require them to invest in network equipment to connect with incumbent networks on a more local level, starting in Ontario and Quebec.

The CRTC under Blais’ leadership is gaining a reputation of being pro-consumer, a departure from the CRTC’s often-industry-friendly past. Blais has presided over rulings to regulate wholesale wireless roaming fees to lower consumer costs and forced pay television providers to unbundle their huge TV channel packages so consumers can get rid of scores of channels they don’t watch.

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Canadian Press spoke with independent ISPs about their reaction to the wholesale access decision. (1:18)

Unless a broadband provider can deliver the same kind of profitability earned by U.S. cable operators, don’t expect significant private investment in broadband expansion even if the company can easily turn a profit.

That was the argument brought to a House hearing on funding broadband infrastructure expansion by Craig Moffett, a Wall Street analyst at Moffett Nathanson.

“Infrastructure deployment requires the expectation of a healthy return on capital,” Moffett told the House Communications and Technology Subcommittee in a hearing this afternoon. “That should be taken as a given, but all too often, in my experience, the issue of return on capital is either ignored or misunderstood in policy forums. It is not a matter of whether a business is or isn’t profitable, it is instead a matter of whether it is sufficiently profitable to warrant the high levels of capital investment required for the deployment of infrastructure.”

Moffett pointed to the massive profits earned by cable operators Comcast, Time Warner Cable, Charter and Cablevision, all of which earned returns well in excess of their cost of capital, ranging from 13-33 percent. Moffett argued Wall Street has come to expect those kinds of returns, and investors will take a hard look at companies deploying new expensive networks against those that have largely paid back much of the capital costs incurred when their networks were built decades ago.

Moffett continued to criticize the broadband expansion being undertaken by large incumbent telephone companies that he claims does not earn attractive returns for their wireline businesses, even as they have introduced new services like faster broadband and television.

“For example, a decade after first undertaking their FiOS fiber-to-the-home buildout to 18 million homes, Verizon has not yet come close to earning a return in excess of their cost of capital,” said Moffett. “In 2014 their aggregate wired telecommunications business earned a paltry 1.2% return, against a cost of capital of roughly 5%. For the non-financial types in the room, that’s the equivalent of borrowing money at 5% interest in order to earn interest of 1%. That’s a good way to go bankrupt.”

Moffett was also critical of AT&T’s planned expansion of gigabit fiber broadband.

“AT&T has committed to the FCC to make fiber available to a total of 11.7 million locations in their footprint in order to make their acquisition of DirecTV more palatable to policy-makers, but it is hard to be optimistic that they will do much better this time around,” Moffett argued.

Moffett believes competition is bad for the profitable broadband business.

Moffett

“The broader take-away here is that the returns to be had from overbuilding – that is, being the second or third broadband provider in a given market – are generally poor,” Moffett said. “Let that sink in for a moment. Stated simply, it means that market forces are unlikely to yield a competitive broadband market. Neither, by the way, does wireless appear to offer the promise of imminent competition for incumbent broadband providers. Wireless networks simply aren’t engineered for the kind of sustained throughput required for a wired-broadband-replacement service.”

As a result, investors prefer that the broadband marketplace remain a monopoly or duopoly to guarantee the kinds of healthy returns they have earned for years, especially from the cable stocks Moffett has always favored in reports to his clients. Additional competition drives prices down, reducing profits, which in turn discourages investors who have high expectations their money will make them a lot more money.

Moffett’s arguments are largely based on broadband being a for-profit private enterprise, not a public infrastructure effort. But it does explain why there is a willingness to compete in large cities where network construction costs are lower and rural communities remain relatively unserved. As with electrification 100 years ago, investor-owned utilities were willing to wire large communities while ignoring rural farms and communities. Only after electricity was deemed a necessary utility did alternative means of funding, including member-owned co-ops and community-owned utilities finish electrifying areas private capital ignored.

Moffett’s guide to better broadband is based entirely on profitability — delivering enough profits and other returns to attract investors that will look elsewhere if costs become too high. Community-owned broadband avoids this dilemma by advocating for break-even or modestly profitable networks that focus on service, not investor-attractive profits.

Several members of Congress commented Moffett’s vision of broadband was discouraging, even depressing, because it seemed to be locked in a for-profit, private sector model that had few answers to offer for communities left behind. Moffett even warned against oversight and regulation of incumbent cable and phone companies, claiming it would further drive away private investment.

But broadband customers, Moffett admitted, will still pay the price for investor expectations.

“As everyone understands, the cable video business is facing unprecedented pressure,” Moffett testified. “Cord cutting has been talked about for years but is finally starting to show up in a meaningful way in the numbers. And soaring programming costs are eating away at video profit margins. From a cable operator’s perspective, the video business and the broadband business are opposite sides of the same coin. It is, after all, all one infrastructure. Pressure on the video profit pool will therefore naturally trigger a pricing response in broadband, where cable operators will have greater pricing leverage.”

Moffett said the kinds of rate hikes consumers used to pay for cable television now increasingly transferred to broadband customers is nothing nefarious. To keep investors happy, the kind of returns once earned from cable television will now have be delivered on the backs of broadband customers if Congress expects cable companies to continue upgrading and expanding their networks.

“All else being equal, that will mean that even new builds of broadband will become increasingly economically challenged and therefore will become less and less likely,” said Moffett. “Or they will simply have to sharply raise broadband prices.”

Moffett’s comments do come with some baggage, however. His clients pay for his advice and Moffett has been a long-time supporter of cable industry stocks. He has been a strong and natural advocate for a cable industry that faces only token opposition. He has browbeaten executives to start broadband usage caps and usage-based billing to further boost broadband profits, slammed telephone company competition in the cable business as financially reckless and unwarranted, and dismissed Google Fiber as a project designed to help Google’s public policy aims more than earn the search giant profits from the broadband business.

But Moffett has also been wrong in the past, particularly with respect to cord-cutting which he used to downplay as an urban legend and on the ease cable companies would be able to acquire and merge with each other.

Beyond all that, Moffett and his clients have a proverbial dog in the fight. After years of pumping cable stocks, suggestions that more competition for the cable industry is a good thing would simply be bad for business.

The magic of fiber

Ever wonder why Comcast, one of the strongest defenders of classic coaxial-based cable technology, is suddenly getting on board the fiber-to-the-home bandwagon? New research suggests if they don’t, their market share could fall to 40% or less if a serious fiber competitor arrives.

“There’s some sort of magic associated with fiber,” John Caezza, president of Arris’s Access Technologies division, told Multichannel News. “Everyone thinks it’s better than [cable technology].”

The risks to the cable industry are clear: be prepared to upgrade or face customer losses.

Craig Moffett of Moffett Nathanson has never been a cheerleader for fiber to the home service. In 2008, Moffett vilified Verizon for its investment in a major fiber upgrade we know today as FiOS to replace its aging copper infrastructure, complaining it was too expensive and was overkill for most residential customers. He was more tolerant of AT&T’s less-costly fiber to the neighborhood approach, dubbed U-verse, that still used traditional telephone lines to deliver service into the home. Because U-verse did not need AT&T to replace wiring at each customer location, the cost savings were considerable. But the cost-capability compromise left AT&T with a less robust platform, with broadband speeds initially limited to a maximum of around 24Mbps.

While phone companies like AT&T and Verizon were saddled with the enormous cost of tearing out decades-old obsolete phone wiring to varying degrees, the cable industry seemed well positioned with a mature, yet still recent hybrid fiber-coaxial (HFC) platform that was upgraded in the 1990s in many cities. While still partly reliant on the same RG-6 and RG-11 coaxial cable used since the first days of cable television, cable companies also invested in fiber optics to bring services from distant headends to each town, removing some of the copper from their networks without the huge expense of bringing fiber all the way to customer homes.

For Moffett, it was the cable industry that had the network with room to grow without spending huge amounts of capital on upgrades. He has touted cable stocks ever since.

Moffett

What worries Moffett now isn’t Google, Frontier, CenturyLink, or even Verizon. He’s concerned about AT&T.

As part of its commitment to win approval of its merger with DirecTV, AT&T promised regulators in June it would expand AT&T U-verse with GigaPower — AT&T’s gigabit fiber to the home upgrade — to at least 11.7 million homes, nine million more than it has ever promised before. Comcast has a 32% overlap with AT&T U-verse, compared to Time Warner Cable (26%), Charter Communications (32%), Bright House Networks (25%) and Cox Communications (25%). Comcast had promised faster broadband with the advent of DOCSIS 3.1 beginning as early as next year. But the company isn’t willing to wait around to watch AT&T and others steal its speed-craving customers. This spring, it promised 2Gbps Gigabit Pro fiber to the home service to customers living within 1/3rd of a mile of the nearest Comcast fiber line.

Some in the cable industry complain Google’s huge marketing operation has saddled cable broadband with a bad rap — ‘it’s yesterday’s news, with Google Fiber representing the future.’ The marketing war has been largely won by Google, they say, leaving consumers convinced fiber is the better and more reliable technology, and they need it more than the cable company.

Cable’s defense is to consider some marketing changes of its own — including the idea of dropping the name “cable” from the business altogether, because it implies older technology. But despite any name change, most cable companies will continue to rely on HFC infrastructure for at least several more years, despite claims they are bringing their own middle mile fiber networks closer to customers than ever. Cable operators now serve an average of 400 homes from each cable node. Some cable companies like Comcast plan to cut the number of customers sharing a node to around 100-125 homes, which means fewer customers will share the same broadband connection. But in the end, that will make cable comparable at best to a fiber to the neighborhood network, still hampered to some degree by the presence of legacy coaxial copper cable. The industry believes most consumers will never see the limitations, and for those that do, a limited fiber buildout with a steep installation fee may keep costs (and demand) down to those who need the fastest possible speeds and are willing to pay to get them.

That philosophy may still cost cable companies customers if a fiber competitor doesn’t have to compromise speed and performance and can afford to charge less.

The top 10 U.S. cable companies currently account for 60% of the residential broadband market and 86% of all broadband net additions in the first quarter of 2015, says Leichtman Research Group.

Moffett predicts cable broadband will only capture 40% of share in markets where it faces a fiber to the home competitor (Google, EPB, Greenlight, Verizon FiOS), 55% in markets served by a fiber to the neighborhood competitor (U-verse, Prism), and 60% where the competition only sells DSL (most Frontier, Windstream service areas). Nationwide, AT&T’s newest gigabit fiber commitment could cost the cable industry 2.4% of the whole residential broadband market, Moffett said.

Phil McKinney, president and CEO of CableLabs, believes DOCSIS 3.1 — the next standard for cable broadband — can easily stand toe to toe with fiber to the home providers.

McKinney

“I think it [HFC] has tremendous life, and we are going to be riding it all day long,” Werner said. DOCSIS 3.1 “is definitely going to be our go-to animal. Due to ubiquity, we can go out and virtually serve all of our [customers] very quickly.”

Cable companies claim their speed increases reach all of their customers in a given area at the same time without playing games with “fiberhoods” or waiting for incremental service upgrades common with Google Fiber or AT&T’s U-verse. Customers, the industry says, also appreciate DOCSIS upgrades bring no service disruption and nobody has to come to the home to install or upgrade service.

“The cable industry has more fiber in the ground than each fiber provider in the world,” McKinney argues. “If you look at total fiber strand miles, there’s more fiber under management and under control of the [cable] operators than anybody else combined.”

That may be true, but Moffett thinks it is only natural shareholders may eventually punish the stocks of cable operators that will face competition from AT&T’s U-verse with GigaPower. There is precedent. Cablevision serves customers in New York, Connecticut, and New Jersey and faces fierce competition from Verizon FiOS in most of its service areas. That competition has been brutal, occasionally made worse in periodic price wars. What may be protecting cable stocks so far is the fact AT&T competition will only affect, at most, 32% of the impacted cable operators’ service areas.

AT&T’s gigabit network has also proved itself to be more press release than performance, with very limited availability in the cities where it claims to be available. Verizon FiOS, in contrast, is widely available in most of Cablevision’s service area.

Still, Comcast is hoping it can hang on to premium customers who demand the very fastest speeds and performance with targeted fiber.

“Gigabit Pro is really for those customers who have got extreme needs,” said Tony Werner, Comcast’s executive vice president and chief technology officer.

Comcast will challenge cord cutting and entice cord-nevers with an online video package of about a dozen television channels it will sell for $15 a month and likely exempt from its usage cap.

“Stream” will offer about 12 channels — almost all over the air stations including NBC, CBS, ABC, PBS, Fox, The CW, Telemundo, Univision — and HBO to Comcast’s broadband customers and deliver the package over Comcast’s privately managed IP network, which it considers separate from the public Internet. That will also allow Comcast to offer on-demand programming, cloud DVR storage and access to Streampix, Comcast’s movies-on-demand feature it largely abandoned a few years ago.

Comcast’s new no-contract video service will begin in Boston by the end of summer, quickly followed by launches in Chicago and Seattle. Comcast plans to expand the service nationwide by early 2016.

Stream will target millennials and others that have turned their backs on traditional cable television. It will also directly take aim at competing Sling TV, which sells streaming cable TV channels for about $20 a month.

But at first glance, Comcast may have one up on its competition.

Comcast will deliver Stream over the same network it uses for content delivery to game consoles that does not count against Comcast’s trialed usage caps. Watching competitor Sling TV does count against your Comcast usage allowance because it is delivered over the public Internet.

That advantage alone may not help Comcast overcome some of the harsh restrictions it will impose on Stream customers that could prove major turn-offs:

• Viewing must be done from a web browser, tablet, or phone. Stream will not be available on TV-connected platforms like Roku or Apple TV;
• Viewers must stay inside the home to access live streamed content;
• Customers must subscribe to Comcast High Speed Internet service to buy Stream;
• Only Comcast customers inside a Comcast service area can subscribe;
• There are no cable networks offered, except HBO, for now.

Customers will be able to sign up for Stream (and cancel it) over the web with no service technician visit needed. Customers can cancel anytime.

A Dutch telecommunications regulator is warning mergers and acquisitions rarely turn out well for competition or consumers, and admits mistakes were made when regulators allowed John Malone to create an effective cable monopoly in Holland.

Chris Fonteijn, board chairman of the Netherland’s Authority for Consumers and Market (ACM) told fellow regulators at a conference in London that two wired broadband providers are not enough to foster real competition, because the competitors are likely to collude on pricing and have a built-in incentive to limit costly upgrades.

Fonteijn

“Two telecom companies [in an area] is not sufficient to ensure that consumers get the best deals on price and quality,” Fonteijn said. “Two dominant operators can lead to coordination between the main players and less investment and innovation, disadvantaging consumers.”

Fonteijn confessed ACM may have made a mistake allowing John Malone’s UPC — a European cable conglomerate — to acquire its larger competitor Ziggo, establishing an effective monopoly in cable broadband in most parts of Holland. The merger has left most Dutch broadband users with two choices for broadband: telephone company KPN or  cable company Ziggo.

After the merger, Fonteijn believes the two companies reduced investment and innovation. Dutch regulators required KPN to open its network to wholesale customers who resell services over the telephone network. But UPC/Ziggo escaped any wholesale access requirement, further limiting potential competition. Fonteijn said ACM was revisiting that discrepancy and may force Ziggo to open up its cable system.

At the very least, Fonteijn suggests multiple wired operators competing with at least three nationwide mobile carriers to protect competition and innovation.