Incumbent Consultants Target VMedia, Fire Blanks

There has recently been a discussion in The Financial Post about regulating the internet. More specifically the discussion is about giving independent internet service providers like VMedia access to incumbent facilities and on fair terms so that they can offer consumers more choice and competitive pricing in internet service.

Terence Corcoran, an editor of the Post, kicked it off with a column two weeks ago (http://business.financialpost.com/fp-comment/canadas-competing-competition-anachronisms ),naming VMedia as an ISP wishing to “cash in” on CRTC regulations. VMedia of course felt compelled to respond, and Mr. Corcoran graciously agreed to publish our submission (http://business.financialpost.com/fp-comment/counterpoint-regulate-the-internet-as-a-utility ) last Tuesday.

This week the Post published a submission (http://business.financialpost.com/fp-comment/dont-over-regulate-the-internet ) by Andy Baziliauskas and Frank Mathewson, of Charles River Associates, a U.S.-based consulting firm that has acted for incumbents, which was surprisingly personal, as well as inaccurate.

In view of the direct attack on VMedia, we felt compelled to respond and set the record straight. We submitted our response to the Post, but it declined to publish it. We respect the Post’s editorial judgment, but we do feel a public response to the Charles Rivers piece is required, and so we are publishing our submission, in full, here.

When writers, certainly this one, submit their arguments to the public on leading platforms like FP Comment, there is always the fear someone will publish an article filled with facts and logic that will annihilate credibility, character and reputation. The response earlier this week to my recent comments, by Andy Baziliauskas and Frank Mathewson, thankfully was not that article.

I am not sure whether it is their previous and possibly current engagements with Bell that motivated Charles River Associates, a well-known US consultancy and employer of the writers, but the piece was surprisingly personal, populated with words like “naive” and “misleading” and even “highly misleading”. Having acted for Bell, it would have been nice if they would have declared their interest.

Whatever, if this response is the best a high-powered consultancy can offer, then clearly proponents of regulation leading to more competition are on the right track.

There are quite a few elements in their piece that deserve comment, but I will limit myself to three.

1. It is surprisingly sophomoric to dissect my use of the term “telcos”, by suggesting that Rogers and Quebecor should not be included in the 90% of the market that the CRTC itself says the incumbents dominate. Both Quebecor and Rogers, and Shaw and Cogeco for that matter are, to the extent of their internet, home phone and mobile(where applicable) businesses, governed by The Telecommunications Act, and in every respect they fit the common understanding of the term “telco”, so the writers’ point is a distinction without a difference. There is nothing misleading, “highly” or otherwise, about my facts, as they are hiding in plain sight in the CRTC’s most recent Communications Monitoring Report. Their claim otherwise shows that either the writers do not know the meaning of the term, or are desperate to obscure the weakness of their arguments by attempting to undermine my credibility.

Moreover, the writers clearly missed the point of my argument, which is that without independent ISPs, every market is served by two players at best. To suggest that the existence of Rogers in Toronto is of any comfort to someone in Vancouver served by Shaw is absurd.

2. I wrote “margins could easily be well over 70 per cent in Canada”. This is, clearly, an educated guess based on the very few financial performance measures that the incumbents disclose. Again, neither the phrase itself nor its context is misleading.

More importantly, they argue that the real indicator of costs is capex, and that the incumbents “have very high fixed costs” and “very large sunk investments in network infrastructure”. What are those very large sunken costs? What are those very high fixed costs? To paraphrase the writers, I don’t know and neither do they, unless as consultants to the incumbents they are privy to information that is the most highly guarded secret in the industry.

If those numbers undermine my argument, then the writers should disclose them.

What we do know is:

a) Canadian incumbent capital intensity is not materially greater, if at all, than that of the US incumbents, which again manage to fund capex with significantly lesser operating margins.

b) With the possible exception of the fibre rollouts in recent years by Bell and Telus, the vast majority of sunken costs were fully amortized, or should have been, years ago so all we are talking about are incremental costs which I suggest are far less than the assets on the books. Again, we would be happy to be shown otherwise, if the incumbents would come out from behind their shield of obscure financial disclosure and specious claims of confidentiality. Indeed, we have and continue to plead with the CRTC to compel incumbents to do just that.

c) Every dollar of network capex at this point is split between internet, TV, home phone, home security and other services. Once the writers, or the incumbents, show us the portion applicable to internet service only, we will be happy to re-engage the discussion on that basis. And VMedia will have no problem paying a fair tariff, assuring a fair return to the incumbents on those investments, on those real costs.

3. Last, the writers claim that competition will make investors flee the incumbents, and the incumbents will stop investing, ending innovation and capacity expansion. This argument is, of course, the last refuge of the monopolist.

This tired argument is pure speculation, and I suppose by the writers’ definition, “highly misleading”. Investors in BCE have done exceedingly well, and capital inflows never missed a beat, since third party access was mandated to voice facilities in 1992. In fact, in the five years following, BCE share prices rose over 50%, with nary a missed dividend.

Charles River Associates is well-known in the US, but less so in Canada. This is not a great way to build a reputation.

By George Burger