Competition goes off the rails

Canada’s local voice market has not been kind to newcomers. Despite a spell of raucous competition circa 2000 brought about by many small players racing to wrest business from the industry’s big guys, many of those upstarts are gone.

While some point fingers at government policies or bad business decisions for the carnage, others suggest the problem is entrenched deep – perhaps too deep to fix – in the very nature of the industry.

Whatever the reason, it’s fair to say things weren’t supposed to happen this way. When the Canadian Radio-television Telecommunications Commission (CRTC) deregulated the local voice market in the mid-’90s the idea was to create an environment conducive to competition. The Commission wanted to crack the ancient monopolies held by the country’s incumbent local exchange carriers (ILECs) and make “choice” the buzzword of the day.

If competitive local exchange carriers (CLECs) could connect to the incumbent networks and offer local phone service, they would usher in healthy competition, we theorized. No longer would consumers and businesses have to rely on Aliant Inc., BCE Inc. or Telus Corp. for connectivity. Alternative providers such as Norigen Communications Inc. and C1 Communications Inc. heralded choice.

But that’s not exactly the way things panned out. Instead of making real the CRTC’s utopic vision, many of the CLECs came and were conquered, leaving competition to linger.

Some say the high competitor mortality rate is the result of poor engineering. They blame the CRTC for creating the situation with ill-conceived policies.

“We believe it is extremely important that the government take…action to redress the existing inequities in the regulatory framework,” said AT&T Canada’s CEO John McLennan in a recent press release.

Others say the CLECs have no one to blame but themselves. They were unrealistic and should have planned for the inevitable hardships associated with new markets and rabid competition.

“Why would a competitor go into a business that forces them to lose money?” said Ian Angus, president of Angus TeleManagement Group Inc. in Ajax, Ont. “Unfortunately some of them did, but they shouldn’t have.”

But a third voice amid the fray says what’s broken here can’t be fixed. The voice suggests this lack of competition is inherent, embedded in the market itself.

Perhaps local phone service is a natural monopoly.

Lawrence Surtees, an analyst with IDC Canada Ltd. in Toronto, notes how, throughout Canada’s history, the telecom market occasionally sparked with vibrant yet ultimately untenable competition. Monopoly, he suggests, might be this industry’s inertial state.

It’s bad news for users, he admits. “Clearly if the business tips back to a monopoly, whether it’s natural or not, there would be less choice, less service options, probably less incentive for innovation and fewer savings.”

It’s not a pretty picture, but Surtees insists it’s true to form. To prove his point, “we have to go back a century,” he said. “There was a serious attempt to compete against Bell.”

Circa 1900, the Canadian Pacific Railway (CPR) had its eye on this novel phone stuff. Surtees said Bell, which held sway in the sector, considered the CPR a serious threat.

The rail line juggernaut had poles and could string twisted copper pairs across the country. The CPR already had the expertise required to succeed in high-tech communications, thanks to earlier accomplishments with the telegraph. The company was “a national enterprise with more wealth, more clout and greater geographic scope” than Bell, Surtees said.

But thanks to an aggressive pricing campaign, Bell managed to push the CPR out of the game. The battle for telephone dominance “sucked up all the profit out of the CPR’s highly profitable telegraph unit,” Surtees said. “[CPR’s president William] Van Horne threw in the towel.”

History shows that between 1902 and 1908 other companies tried to tackle the phone business, only to be “gobbled up and fried” when they blipped Bell’s radar screen, Surtees said.

“There were already people making arguments that the telephone business appeared to be a natural monopoly…because of the failure and inability of other rivals to compete,” he said. “A century later, it’s looking to be the same thing.”

Does the modern CLEC carnage demonstrate something fundamentally anti-competitive about local service? Angus from Angus TeleManagement Group seems to think so – but that’s not to say he agrees with the notion of a natural monopoly.

Angus said he’s not convinced local is a natural monopoly, or even that such a state exists. Witness the long-distance sector, which, until recently, looked an awful lot like a natural monopoly. Yet it yielded competition. The local market could do the same, given the right catalyst.

“Up until roughly the 1960s, the cost and complexity of the technology required to build long-distance networks for large-scale switching was out of the question for more than one organization,” Angus said.

By the 1980s, however, the technology was in use. Technology paved the way for long-distance competition. The local market could use a similar high-tech kick in the pants, Angus said.

Surtees said it’s no good comparing long distance and local.

“The local business is a different animal. In long distance, a bunch of guys can duplicate national networks after they do the resale model. In local, you’re wholly dependent on the former monopolies.”

Angus agreed the local versus long distance debate might be an apples-and-oranges thing. But look at it this way: apples and oranges both grow on trees. They’re bound to share certain principals, as are local and long distance. With fruit it comes down to soil, sun and water. With telephony it comes down to technology. The local market is lacking this lifeblood.

“There has not been a new technology…that lets people say, ‘This is a great way to do this cheaper than Bell,'” said Angus.

Does this mean competition hinges on some far-off technological advancement? Are Canadians doomed to abide the incumbents in the meantime? Not necessarily, Angus said. Perhaps truly “alternative” providers offer a solution.

Consider wireless carriers. “Twenty-five per cent of local phone calls are made on cell phones,” Angus said. “That’s a phenomenal success.”

And don’t discount cable operators, said Anu Gupta, portfolio manager with Innovatia (an Aliant division) and honorary research associate with the University of New Brunswick’s Faculty of Business. He pointed out that Eastlink, a cable company, is taking a run at local service in the Halifax area.

“They moved from cable to TV to Internet and they’ve also moved into local competition,” Gupta said. “What’s making them competitive is their ability to bundle. They’re bundling local, cable, Internet and other services. It’s competitive. You’re probably paying a somewhat lower price.”

Could some sort of voice over cable solution bring about competition in the local market? Angus was skeptical.

“There isn’t a cable company in North America that would tell you voice over cable is viable economically, especially in Canada where local prices are pretty low anyway. It’s marginal at best, so the case for doing it is slight.”

Nonetheless, Angus was not willing to cop to the idea of local service as a natural monopoly. Other sources were equally adamant that the competitive dream would come to pass.

For one thing, “consumers don’t want a monopoly,” said Ted Chislett, president of Primus Communications Canada, a long-distance voice and data service provider headquartered in Toronto. “They want choice, different suppliers to choose between. It’s probably even more so for the enterprise customers.”

Michael Stephens, vice-president of marketing with Group Telecom Inc., a Toronto CLEC, said it’s tempting to view the current industry malaise as the inevitable result of fundamental flaws in the competitive paradigm. But, he warned, don’t confuse earth-shattering theories like “natural monopoly” with the more mundane problems affecting the sector.

Concerning his company’s trouble – GT sought court protection from creditors this summer. Stephens said, “A lot of it was timing. We were actually hitting our numbers quarter after quarter, no question. It wasn’t until last fall that we started to miss them. That corresponds with the slowdown.” It does not, however, suggest competitors like GT should give up and go home, he said.

Bernard Courtois, executive counsel to Bell and its parent company BCE, said the notion of a natural monopoly demonstrates a “myopic view” of the industry. Just because local voice is in the throes of consolidation and shakeout doesn’t mean competition is out of the question. It will happen, whether by Internet Protocol (IP) voice over cable (VoCable) or fixed wireless connections.

“Just as 10 or 20 companies didn’t make sense, one doesn’t make sense,” Courtois said, adding that people who say local voice is a natural monopoly clearly forgot all about long distance and that market’s early struggles with competition.

Nonetheless, Surtees from IDC Canada maintains that history guides his view of the business. As far as he’s concerned, the past indicates a poor future for competition in the local voice market. Competitors of bygone times have tried, failed and now stand to warn us just how difficult it can be to bring market forces to bear where nature abhors them.

“History will tell you there’s only one answer,” Surtees said. “And the big lesson of history is history always repeats.”