Blessed by the Potato

Close your eyes (wait, text-based communication… scratch that part) and imagine that we’re standing in a kindergarten class. There’s you, and me, the teacher, and maybe an assistant. Four tall people to a veritable sea of shorties. The majority of users of that room are less than 3 feet tall. Why, then are we building doors with 7′ clearances when clearly the majority of people could be served by a 4′ door, with room to spare? We shouldn’t make the regular people pay more for tall doors just to suit people who are heavy height users. If they can’t get by crawling through, then that minority should pay for bigger doors through usage fees, and not be subsidized by everyone else.

Of course, this is silly: the incremental cost of making the doors taller is not very much compared to the fixed costs of putting in a door in the first place. And, the short people in the room won’t always be short: they’re just children. They’ll grow up.

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.

Some recent media articles on UBB: An article in the Globe, with a website developer concerned about providing media-rich sites, as it may cost too much for end-users to visit with UBB. And one in CBC, indicating that the Liberal party opposes forcing UBB on the independent ISPs. A commentary on the Globe on what a fair price for data transfer also comes up with a figure in the single-cent range. Update: the CRTC’s decision now “under review”. Keep up the pressure for the next month, or else this could just turn into a stall tactic until the popular sentiment runs out of steam. And in the immortal words of Eric: “Just do what Marc Garneau says on tech matters. HE’S BEEN TO OUTER-FUCKING-SPACE!”

Finally, Michael Geist has finally put up a post on the issue. “Anyone taking the time to read the CRTC’s decisions will likely arrive at the conclusion that it simply does not know what to do about the issue. In recent months, it has issued several decisions on essentially the same question – can (and under what conditions) Bell impose UBB on the regulated Gateway Access Service (GAS) that is used by independent ISPs? The Commission has ping-ponged back and forth with no clear idea of what it is trying to achieve. Indeed, the recent decisions have been almost completely devoid of policy analysis or linkages to the frameworks that are supposed to guide the CRTC, leaving the sense that the Commission is making it up as it goes along.” Or as I like to call it, regulatory failure.

Now for that rambly UBB update I promised you yesterday: [See Update 2(a) for the TL,DR version.]

After getting a mention on Michael James on Money and Canadian Capitalist’s weekly round-up posts, I had a few new visitors to the site (always welcome!). Interestingly, two of them actually supported UBB, one going so far as to actually say I needed to “educate” myself. Now, as a life-long student, and someone who takes pride in researching and (occasionally) referencing his posts, in educating and entertaining the public via this blog (and also ranting, raving, joking around, pushing for change, engaging in sleep-deprived insanity, and sharing pictures of cute cats)… I take that as a personal insult. Especially since it’s obvious that commenter didn’t bother to educate himself on the quality of this blog, or on the issue at hand, nor make an effort to provide references to back up his claims and help educate others.

I’ve been following the development of broadband technology, and it’s usage limitations in Canada, for years now, so I may have taken for granted the level of knowledge of just how our system works. Here’s a quick primer for the rest of you [disclaimer: from memory]:

Ancient History: Way, way back in the day, there were these things called BBSs that you “dialed into” with a “modem”. It made a sound like this. Soon, the “Internet” develops, where you can link up with many different computer systems, send email, read web pages, etc. There are dozens of internet service providers (ISPs) listed in your local yellow pages (even PEI had a half-dozen).

The CRTC regulated phone lines at the time because Bell had a monopoly (or very nearly so). Local calling was free on your phone line. Bell wanted to change that as more and more people were staying connected to the internet for hours at a time, either charging for local calling, or charging for modem calls. The CRTC told them to not discriminate against how the phone line was used, and to keep local calling free. It ended up working out for Bell: many people ended up getting second phone lines to their houses as modem lines. The acceleration in demand lead to Toronto’s area code being split into the 905 and 416, which brought us 10-digit local calling. Phone service was also de-regulated, with Bell leasing lines to resellers. That requirement to sell lines wholesale to independents was key to de-regulation: the copper phone network was built out with government support (including getting access to the land the lines are buried under for free) and a monopoly; it’s inherently a non-competitive environment. But without competition or regulation, a monopoly player on a vital service would simply rape consumers, so the regulation moved up from retail to providing wholesale leasing of that last-mile network.

Meanwhile on the ISP side, there was legitimate competition: prices for dial-up access went down every year, with a variety of plans to choose from, whether you just needed a few hours/month to check your email, up to unlimited access. Even back in those days, the cost of actual data transfer was minimal compared to just making the connection in the first place — unlimited vs not was time-based, since the ISPs had limited modem lines for their pool of customers to dial into (indeed, if you were a customer of one that tried to cut it too thin, you might find a busy signal if you dialed in at certain hours). Providers could compete on other features, such as the ability to take your computer and connect in to the network in other cities with a local call, or a lower price for a single-city ISP.

Early broadband: Then high-speed or broadband connections became available via Rogers and Bell. These always-on connections cost a lot more than dial-up, but allowed you to connect to the internet without a second phone line, and offered speeds that were several times higher than was available via dial-up. These brought new possibilities to the internet: streaming audio, video, promises of video conferencing, voice-over-ip, and a much more visual world wide web.

The CRTC decided that broadband internet did not fall within its scope of regulation, as it was a niche product, and Canadians could still access the internet through dial-up, which was a competitive market. Eventually, a kind of compromise was reached when it was realized that broadband was rapidly becoming mainstream, and that it would also never become competitive like dial-up. Like with phone service, Bell and Rogers had to lease their last-mile lines to independent ISPs, so broadband is largely deregulated, with the one condition that fair wholesale rates have to be provided by the incumbents to the independents — these wholesale rates are regulated.

The most expensive part of delivering internet access is the “last mile”: physically laying down copper from some connection node to a person’s house. It makes no sense to require every potential competitor to lay down wires: it’s expensive, it leads to a messy infrastructure, and it’s wasteful. Besides, much of the copper in the ground was put there in the first place with government help (a protected, regulated monopoly). So while the CRTC isn’t regulating retail internet, it did require that the owners of the last mile of copper lease out this part of their network to independent ISPs, just like with phone service when it was deregulated.

Around now-ish broadband: As families find they have more computers in the home, with more people using them for more things, the ISPs have to provide more capability to networks by upgrading their infrastructure. To avoid paying for upgrades, another option is to reduce speeds and the quality of service to make do with the infrastructure already in place. The technology behind Rogers’ cable modems kind of did this automatically: at prime time, with everyone on the network using the internet, everyone’s speed went down if the network was over-saturated.

Instead, the incumbents turned to throttling: degrading the connection of “heavy users” to improve the quality of service for everyone else. I never disagreed in theory with this notion of trying to conserve bandwidth, but I did vehemently disagree with the implementation: first off, Rogers and Bell identified certain internet traffic (e.g., bittorrent) as being “bad”, while other internet traffic was “good” (e.g., xbox live, youtube, rogers home phone). That was not a good thing: some executive shouldn’t be able to arbitrarily decide what traffic was allowed on the internet. Even then, I disagreed even more with the second part of the implementation, the connection “shaping”: instead of just dialing down a “heavy users'” connection (and I put that in quotation marks because you could be a huge user fully maxing out your connection but not be touched if it was for “good” traffic, and still feel the hammer if you were only using a fraction of your connection for “bad” traffic) to something that struck a balance between conserving bandwidth and still allowing that user to have some functionality, they basically killed their connection completely. Plus, they were largely trying to manage the peak hour demand, yet still throttled “heavy users” that were good neighbours, only running their downloads in the middle of the night.

Eventually, work-arounds were found for this targeting of torrents: the biggest advance bing encrypted traffic. The torrents aren’t really an issue any more though, as now more people turn to the internet for music videos, TV, videochat, and gaming. The usage is still there, but is nigh impossible to distinguish from plain vanilla web surfing. The throttling tools are still there, though, and they still work poorly: many gamers for example find that they are randomly dropped from World of Warcraft for example when the throttling tools decide to kick in. Indeed, that highlights another aspect of the throttling implementation I disagree with: instead of reducing the speed of the connection, the throttling hardware simply “drops” packets, which is way more disruptive to the network and the user’s experience.

The ISPs can still slow down a user’s connection if they want to manage the load heavy users put on the network.

Usage-based billing: And that brings us to today, where the latest strategy of the incumbent ISPs is to charge usage fees for data transfer. The fees they want to charge though are astronomical: they bear zero resemblance to the actual costs of data transfer. They’re not time-of-use based, so they don’t discourage in any way using the internet in peak demand periods.

The point where this gets really interesting is the latest CRTC decision, which forces reseller ISPs (like Primus, Teksavvy, etc.) to pay UBB as well, even though they already lease the lines and pay for a connection between their data centres and the end-users homes. They pay for a line with a certain capacity, which they can then partition down for their customers. Usage based billing has no bearing whatsoever on the costs of doing business: the usage is already paid for in the capacity purchase. Whether a line is sitting idle or running at full capacity does not cost Bell any more or less, and they don’t charge less for independents renting a wholesale line and leaving it fallow (nor, on the retail side, does a user who uses less data get a rebate).

For basically all portions of the network, the cost structure involves fixed-cost items to provide capacity (e.g., a switch that can handle 1 GB/s of data for a neighbourhood), and there is essentially no incremental cost of data transfer. [Further upstream, there’s peering, but again, the independent ISPs already handle this on their own.]

“We are discouraged by the decision by the CRTC to force us to charge virtually the same amount to our customers for the bandwidth they use that Bell does,” said Rocky Gaudrault, TekSavvy CEO. “This essentially gives the opportunity for incumbents like Bell, at zero cost, to increase their margins and stifle competition. If Bell wants to charge an economically unjustifiable amount for downloading to its customers, that is their business. However, we should not be forced to do the same.

Even worse, the CRTC decision means wholesalers may end up paying more for access to just a part of the network than Bell’s own retail customers! The independent ISPs get no breaks from the UBB fees, though the incumbents retain the right to waive the fees for their retail customers as part of any “promotions”. That sickens me.

So I fully disagree with Bell imposing UBB on their own retail customers: the cost structure is illogical, bears no resemblance to the costs of data, and isn’t even set up to achieve their stated goals of managing congestion. However, it’s their legal right to abuse their retail customers if they can get away with it (though I do retain my right to call them assholes for it). But what’s happened here is the CRTC has allowed these fees to be applied to the regulated wholesale tariffs charged to the independent ISPs. The wholesale network is supposed to be on a cost-plus basis: Bell makes a decent return for its infrastructure investment, but still leaves room for the independents to create a viable and unique retail offering for their own businesses. But if the same UBB charges as retail are passed along, they simply can’t compete, and it goes against the very idea of offering fairly priced, regulated wholesale leasing of the last-mile lines.

FAQ:
But don’t UBB fees only target heavy users?
No, it’s actually not targeting the heavy users. The UBB fees go down when you get to the high end connection speeds (the ones that actually have the ability to congest the network), and there’s a big gap in the range where most heavy users would fall where there are no UBB fees (fees are charged per GB up to $60 max, then there are no fees from [depending on plan] 26 GB [or 55 GB] to 300 GB under Bell’s plan, and now the independents as well). It’s the average to slightly-above-average users that will end up paying the most on a per GB basis.

What about the usage monitor?
Ah-ha, another bone of contention: if the incumbents are to charge by the byte, there has to be some way of monitoring usage. But, the usage monitors are flawed: at the very least, they are not updated to your account page in real-time. They also can count traffic that you have no control over (e.g., if a third party decides to try to access your IP or launch a DoS attack, you’ll pay for that usage). There is some debate as to whether they also count packets that then get dropped by the throttling hardware, that is, data you never get because of another component of the failed implementation for traffic management.

What about the conspiracy theory stuff?
You mean like how Bell and Rogers are also TV companies, phone companies, and content providers, and UBB protects those entrenched high-margin businesses? How coincidental it was that the caps were lowered the very week Netflix announced it was coming to Canada? Or how the CRTC suffers from regulatory capture? Yeah, there’s a lot more weight there than there are to other conspiracy theories, but you don’t even need to get into that to see that UBB is bad.

I’ll try to update the FAQ as I encounter well, more FAQs. This was all from memory of a long history following the development of the internet in Canada. Some details might be off, but the gist of how our system works is here, to give you a baseline for the current UBB fiasco.

I’m working on another UBB update post, but it got kind of rambly, so here’s the TL,DR version:

Important points:

1. The CRTC does not regulate retail internet because it is, supposedly, a competitive market. That condition only holds because wholesale internet is regulated, which allows for independent ISPs to offer service without having to lay that last mile of cable to every household.
2. The outrageous UBB fees being charged have no bearing at all in the actual costs of data transfer. They are purely for profit and punitive reasons.
3. I strongly disagree with the UBB of the incumbents, and reserve every right to rant about it here anyway, but ultimately, their retail pricing decision is theirs, and I can move to a competitor if I don’t like it.
4. But, the latest CRTC decision also forces the independent ISPs to mirror the incumbent UBB plan. This is a massive regulatory failure. Though the CRTC supposedly does not regulate retail internet, by forcing the independents to pay what is a punitive fee with no basis in wholesale cost just like Bell’s retail customers, the CRTC is creating a de facto retail regulation, and a bad one at that. It’s killing the competitive marketplace. This is the big reason why I’m stepping up to sign petitions, mailing my MP, and even mailing my MPP*. I encourage you to do the same.

So, send your MP a letter. A paper letter supposedly carries more weight than an email, but please do contact them in some way. Remember that there’s no postage required to send a letter to your MP. If you don’t know who your MP is, you can look up their address here. My letter was put up in the last update, you’re free to copy as much of it as you like, or better yet write your own in your own words. Some bullet points to mention:

• UBB is bad for everyone except the incumbents (bad for end users, bad for content creators, bad for innovators, bad for telecommuters, and bad for independent ISPs).
• The CRTC ruling is anti-competitive, in effect forcing a regulation of retail internet service, and removing the ability of independents to set prices, differentiate their products, and in a word, compete. [This, I think, is the main point]
• The UBB fees are not related in any way to the costs of delivering data or maintaining infrastructure, and should not be forced on independent service providers.
• By having the independent ISPs hand over UBB fees to the incumbents, that’s pure profit for them, while at the same time removing the ability of the independents to compete. If the incumbents argue that UBB is needed for behavioural reasons, there’s no reason the independents shouldn’t keep those fees.
• Even on the incumbents’ own networks, the purpose of UBB was anti-competitive: to make competing internet services for their traditional media and telephony arms less viable.
• The implementation does not jive with any of the stated reasons for UBB: heavy users are not targetted (medium users pay more per GB than heavy ones), congestion is not alleviated by financial incentives (there’s no time-of-use component, so the network will be just as congested in prime time), and the costs of data delivery are not in line with the UBB charges.
• The implementation is unfair, as the independents are forced to pay, while the incumbents have the option of waiving UBB on promotional bases.

* – the quick note I sent my MPP: “The recent CRTC decision forces independent ISPs to adopt the retail pricing structure of the incumbent duopoly (Bell & Rogers). This was an anti-competitive move by the federal regulator that is strongly not in favour of Canadian consumers, content providers, independent ISPs, or innovators — only the interests of Bell and Rogers are served. The federal government has abdicated its responsibilities to regulate the telecommunications industry and protect Canadians. Will the Ontario government step up to fill the void and introduce a bill to protect Ontario internet users from usurious usage fees that have no basis in the costs of operating the networks?

I realize that Ontario, unlike Quebec, has often not wanted to step on the toes of the federal regulators, so action on protecting consumers from usurious UBB is unlikely, but nonetheless I ask that you consider it. “

An individual has submitted a fairly informative petition regarding the UBB issue. And here’s an updated CBC report.

Here’s my letter to my MP. Feel free to adapt to your own uses, and please contact your MP! I don’t know how true it is, but they say a printed, signed letter has more bearing than an email, and you don’t need a stamp to send a letter to your MP.

Canadians, like people all over the world, are using the internet more and more every day. Widespread access to high-speed connections has allowed innovators and content providers to provide ever-more video content, and cloud computing is fast becoming the new way that people access and process their data. However, these tools and multimedia uses consume a lot of data, and the incumbent Internet Service Providers have recently begun charging extremely high fees for data usage (usage-based billing, or UBB).

The recent CRTC decision forces independent ISPs to adopt the retail pricing structure of the incumbent duopoly (Bell & Rogers). This was an anti-competitive move by the federal regulator that is strongly not in favour of Canadian consumers, content providers, independent ISPs, or innovators — only the interests of the incumbents (Bell, Rogers) are served. The federal government has failed in its responsibilities to regulate the telecommunications industry and protect Canadians.

To be clear, I am not against the idea of usage-based-billing in theory. However, the proposed charges by Bell and Rogers are usurious: the best research I can find indicates that the incremental cost of 1 GB of data is in the range of 1-3 cents, yet Bell is charging up to $2.50/GB, and the CRTC decision allows them to force independent ISPs to charge no less than 85% of that, removing choice and competition from the market.

The incumbent telcos have also been very duplicitous in their messaging to Canadians in regards to UBB. In an interview with the Globe and Mail, Mirko Bibic, a Bell VP said: “A bit is a bit is a bit. If you’re a heavy user, regardless of what’s causing the heavy use, you will pay more. That’s the concept.” However, a bit is not a bit when it comes from another arm of Bell or Rogers: UBB fees are not being charged on Bell’s IPTV (“Fibe”) service, nor is Rogers levying them on their own digital home phone or on demand TV service, even though the underlying technology that runs those services operates on the same supposedly congested networks. Yet competitive options, such as using Netflix over a reseller’s internet connection, would be, which puts those alternatives at a severe competitive disadvantage. Also, in other cases the implication is made that UBB is to help improve the quality of internet access, to relieve congestion. However, that is not the case: if it were, UBB would also be time-of-use billing, to correspond with the congestion that can occur at peak times. Indeed, the ISPs already have implemented tools such as throttling (“QoS”) and deep packet inspection (DPI) to manage issues of network congestion.

At the very least, the independent internet service providers should be free to set their own pricing based on the actual wholesale cost of data transfer, and not be forced to adopt the retail pricing structure of the incumbent telecoms.