Blessed by the Potato

CRTC will rescind ‘unlimited use’ Internet decision – or Ottawa will overturn it is the headline tonight, so maybe all the ruckus we’ve raised over UBB has actually been effective (thank you all!)

Hopefully this will be the last post on the issue for a while.

I talked about the core issue of regulated reselling in the previous post, but didn’t really break it down or provide metaphors. So that’s what I’m going to do here briefly: lay out some basic economics.

If you have a service with inelastic pricing — economics talk for closer to a need than a want, that someone will keep buying even if the price goes up — then you have a precarious situation on your hands if you’re a staunch believer in the free market. What happens all too often is that a monopoly forms, or an oligopoly (a market of just a few large players), and they decide to get together to fix prices. If prices go up, people will still pay because of price inelasticity. More profits for them, at the expense of the consumer.

Imagine if you lived in a town with only one grocery store. One day the store owner decides to increase the price on food from $1/unit to $1.50. Then the next day to $2. Then the next to $3. What are you going to do? Not eat? So you pay. Eventually, one of two things will happen: a popular, potentially violent uprising, or a competitor will open up shop. Sometimes, there are barriers to entry: what if it were a company town? No one else could open up shop. Or in the case of a utility, it’s not easy to get into, and the town doesn’t want two utilities laying cable or pipes or whatever anyway.

When it comes to “essential” services with inelastic pricing that nearly everyone uses every day, everyone (except Kevin O’Leary) agrees that one of two things is needed: competition, or regulation. Even in that bastion of the free market, the United States, many utilities are regulated, and large monopolies or tied selling arrangements have been broken up to make way for competition. Some industries are “natural monopolies”: where it’s too expensive or just doesn’t make sense for competitors to set up, things like gas distribution, water and sewer service, electricity distribution, and yes, phone systems. In most countries these types of monopolies are either regulated or owned and operated outright by the government.

And that brings us back around to the internet in Canada, and why the CRTC is involved. Bell and Rogers have a duopoly in most of Ontario — in some neighbourhoods, one or the other has a full-out monopoly, while in some others another player like Telus or Cogeco may be playing second fiddle. Telecommunications is, if not an “essential” service, very close to it, so Canadians need to be protected from the voracious profit appetite of these two players who are in control.

Competition or regulation.

In Canada’s case, we groped awkwardly for both: competition at the retail level, and regulation at the wholesale level. The CRTC regulates and oversees the tariffs that the incumbents charge the independents for access to their networks, the utility part of the network that is. The independents then compete openly with each other and the incumbents’ retail arms to grab customers. This was actually a fairly elegant solution for quite a while (modeled after phone service deregulation). You see, internet service wasn’t always just internet access: it used to be that you could compete not just on speed, price, and data caps, but also on extra features, such as premium usenet access, web hosting, email (at one time it was one of 3-4 key bullet points in Rogers’ advertising that you could get up to 8 email addresses with your account!), flickr pro accounts, “homepages”, “exclusive” content, antivirus subscriptions, and yes, even a special branded edition of Netscape or IE (oooh, aaah). Not many people used the extra features, or at least didn’t complain loudly enough/switch when they were cut off, and so over the years they’ve been trimmed back.

Now, competition is almost exclusively based on price, speed, and data caps. It makes comparison shopping more straightforward for sure, but I also have to wonder if maybe it’s time for the regulation to move down a step from the wholesale level to the retail level, as one of the reasons for having that deregulated retail level isn’t quite as viable (there are fewer dimensions across which independents can differentiate themselves). The problem with that though is the regulator (and also, inertia).

The CRTC has grandly demonstrated here that they are either corrupt, or incompetent. They can’t really deal with standing between two sets of professionals (the incumbents and independents), so how would they stand up for a largely unrepresented retail client base? So what are we to do? There have been several suggestions, including splitting up Bell to separate the content company from the utility company, and maybe even the retail utility from the wholesale utility. I think the current set-up is not such a bad one though, the real weakness is just in the regulator. So, in all seriousness, I’m putting my own name forward to run the CRTC at the next changing of the guard in 2012. I know, I’ve got a lot of science stuff to do in my life, but I’m sure I could take a few years off to live high on the government hog and help set the country straight. And you all know I’m an edible starchy tuber of upstanding character and possessing both a technical and financial mind, providing me with pretty much everything the position calls for. Plus, it’s a pretty low bar to hit, so I’m sure I’ll do fine.