Open season

The CRTC clears the way for war in the phone business

ROSS LAVER May 12 1997

Open season

The CRTC clears the way for war in the phone business

ROSS LAVER May 12 1997

Open season


The CRTC clears the way for war in the phone business


There was a time, not long ago, when the telephone business was as boring and predictable as they come. Heavily regulated and unfettered by competition in their home markets, major phone companies enjoyed a steady stream of healthy profits.

The only real choice confronting consumers was the color of their phone. No longer. Turn on a television anywhere in Canada and some scrappy long-distance firm is sure to be shilling for new customers, with cut-rate dialling plans and celebrity endorsements.

And the battle for subscribers has just begun.

In a far-reaching set of rulings, the Canadian * Radio-television and Telecommunications

Commission last week threw the doors open § to wider competition, promising a telecom| munications revolution. “These decisions,” | said CRTC chairwoman Françoise Bertrand,

“will have a direct and profound impact, not § only economically, socially and culturally, but Q also in most people’s homes and their lives.” Telephone The CRTC ruling, hotly anticipated for control centre: months, went further than many in the industry competition is had expected. Rather than a predicted Jan. 1, around the corner 1998, start-up date, the agency said that competition in the $8-billion-a-year local phone sector can begin immediately—although it may take months before the first alternative local phone companies are ready to do business. Next Jan. 1 will mark another milestone: the point at which Canada’s phone giants will be allowed to enter the $3-billion-a-year cable television business, another industry that has always been shielded from competition.

In effect, the CRTC has drawn the lines for all-out war among the traditional phone companies, the cable-TV industry and a growing band of feisty upstarts such as MetroNet Communications Corp. of Calgary and Call-Net Local Services Group Inc. of Toronto, an affiliate of long-distance provider Sprint Canada Inc. “The local market is a great opportunity,” said Philip Bates, president of Call-Net Local Services. His company plans to enter the local phone market by the middle of next year, challenging the existing phone monopolies. “We expect to compete aggressively and fight to keep customers,” vowed Nick Mulder, president of Stentor Telecom Policy Inc., an arm of Canada’s 11 regional phone companies. “Competition is good for customers and tends to drive down prices over time.”

Perhaps not right away, however. In fact, for most Canadians, the first result of last week’s decision will be an increase in their local phone bills. In its ruling, the CRTC said that monthly rates for basic service, which have increased by an average of $2 in each of the past two years, will be allowed to rise again next Jan. 1 by about $3. That decision was condemned by the Ottawa-based Public Interest Advocacy Centre. “Consumers are going to pay more to get competition, and that seems perverse in our view,” said Philippa Lawson, a lawyer for the organization.

Many Canadians would agree, but the problem facing the CRTC is that, without higher local charges, there will be little incentive for new suppliers to enter the market. Canadians now pay some of the lowest local rates in the world, ranging from $16 to $23 a month. In most cases, the price does not reflect the cost of local service, so phone companies subsidize that side of their business with profits from long distance. Long-distance competitors also contribute to the cost of local service, paying the major phone companies about two cents for every minute they bill their customers. Last week, the CRTC froze that levy at its current level, raising the ire of some long-distance providers. “Once again, the big phone companies are being insulated from the full impact of competition,” said George Horhota, an executive with ACC TelEnterprises Ltd. of Toronto.

By raising rates, Ottawa is trying to reduce the subsidy while ensuring that local service remains affordable. After the $3 increase takes effect, the prices charged by phone companies for local service will be regulated for four more years, with increases effectively limited to the rate of inflation. At the same time, the CRTC is slapping a new levy on cellular calls, with the proceeds to be distributed among companies that offer service in rural and remote areas.

Down the road, the CRTC says, almost every Canadian will reap the rewards of phone and cable deregulation. According to Bertrand, more than 80 per cent of the country’s 11.5 million phone subscribers are already benefiting from long-distance rate reductions,


The CRTC is taking a number of steps to safeguard the rights of consumers in competitive local phone markets:

All local service providers will be required to maintain emergency 911 and special message-relay services for the deaf and hard of hearing.

If? Existing phone companies must continue to provide free directories to their own subscribers, including listing information for customers of new entrants.

People who change telephone companies will be able to keep their existing numbers.

^ New competitors will be bound by protection-of-privacy rules that prohibit existing phone companies from selling information on their customers’ calling patterns.

^Tenants of apartment buildings will be allowed to choose their local phone company even if the landlord strikes a bulk deal with one company.

which took effect after that market was pried open in 1993. In the future, customers will also be able to shop around for the best local phone deals. Some might make their selection purely on the basis of price, while others might consider which company offers an all-in-one telecommunications package—local, long-distance and mobile service, as well as cable-TV and Internet access—that best meets their needs. Said Mulder: “That’s the kind of thing we’ve been pushing for: one-stop shopping and getting customers to deal with one company that delivers a variety of products.”

The real question is how soon the new era will arrive. At the outset, most of the industry’s attention will be focused on business customers, who pay substantially higher rates than residential users and thus represent a more lucrative market. Calgary’s MetroNet,

for example, is spending $250 million to install underground fibreoptic lines in downtown Calgary, Vancouver, Edmonton, Toronto and Montreal. MetroNet’s strategy is to go after high-volume corporate clients, offering phone service in combination with highspeed data transmission. “Any company that says we’re going to be all things to all people overnight is just crazy,” said telecommunications consultant Ian Angus. Phil Lind, vice-chairman of the country’s biggest cable company, Rogers Communications Inc., said his firm will also chase business phone customers: “People will go hunting where the ducks are. Obviously, we’re going after the market that looks most attractive to us where the prices are high and our entry level [costs] are low.”

In opening the local phone market, the CRTC is following an example set last year by the U.S. Congress, which passed a sweeping telecommunications law designed to break down long-standing industry barriers. But even there, phone companies have shown little desire to court consumers— in part because of the billions of dollars necessary to install new residential networks. As a result, Federal Communications Commission chairman Reed Hundt is preparing an overhaul of the country’s phone charges. The new rate structure is intended to make it less attractive for competitors to cherry-pick business customers while leaving traditional phone companies to serve everyone else.

In Canada, too, the regional phone companies worry that new competitors will skim off the most profitable portion of the market. A day before the CRTC ruling, Montreal-based BCE Inc.—parent of Bell Canada—warned that its future profit growth depends on the extent to which it is freed from having to provide below-cost local service. “Clearly, competition and the obligation to serve at prices below cost are incompatible,” said BCE chairman Lynton (Red) Wilson. “Something will have to give.” BCE officials later welcomed the fact that phone companies will not be required to lease lines to new entrants at wholesale prices. But the eventual impact of competition remains unclear. “There’s all kinds of little rules here,” said Bernard Courtois, Bell’s group vice-president for regulatory affairs. “Things like how you exchange traffic, who pays for what. I really have to figure all that out before I can get an overall picture.”

For cable companies as well, deregulation is fraught with risk. The industry already faces com-

0 petition from direct-to-home satellites. In the past « three months, two DTH companies have begun to

1 offer limited service, while a third will launch in I September. And last week, a subsidiary of Van1 couver-based WIC Western International Com| munications Inc. inaugurated the first phase of a I planned wireless network based on a two-way

digital technology known as “local multipoint communications systems” (LMCS). Like cellular telephones, LMCS uses a network of small transmitters spaced a few kilometres apart, making it far cheaper than a conventional phone or cable network. WIC, which is licensed to operate in 33 communities across Canada, hopes eventually to offer phone service as well as TV programming and Internet access.

That is just one of a myriad of new services that promise to redefine the once-unshakable telecommunications industry. Mulder points out that as recently as 15 years ago, Canadians were not allowed to buy their own phones. Now, the communications landscape is changing so dramatically that even phone company executives are not sure what to expect.