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.

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.

It was not a good week for the diet, as my love of candy and deals conspired with the arrival of half-price Halloween candy. Combined with more than a few all-nighters as I struggle to make timely progress on that thesis thing, and the end result is that I’ve gained back all the weight I lost at fat camp the Turkish conference.

The Ontario government just came out with a lucrative scholarship program… for foreign students. At $40k/year, it is a very rich scholarship indeed. For comparison, the next-best provincial scholarship is the OGS program at $15k/year (which foreign students are also eligible for). I’m not opposed to the government trying to recruit foreign students, but I don’t think a program that’s nearly three times as lucrative as what’s out there now should be exclusive to foreign students… why not allow Canadian students at Ontario schools to compete side-by-side, as with the OGS? Don’t we want to recruit the best students period to Ontario universities, no matter whether they’re from Ontario, the rest of Canada, or a foreign nation? Plus there’s always the issue with foreign students that we may be putting out the money to educate them, just to have them take that investment back to their home country when they graduate. A better program for getting talent to Canada may be the other Ontario initiative of late, allowing master’s students to apply for permanent residency without needing a job offer.

Canadian Capitalist embedded a good lecture about index investing in his latest wrap-up post. One of the minor points made was that index investing doesn’t make for good newspaper or magazine articles, so there’s a whole industry that has an interest in reporting on active management. I have to say it’s the same for bloggers — though I do index a large part of my portfolio, I only ever seem to talk about the stock picking side.

The Globe has a short article about Toronto’s condo market. True to form, I will pick out parts, and then proceed to spread fear. “Insiders suggest that, in some areas, investors accounted for up to 60 per cent of sales in those newly launched projects and with about 4,000 new suites coming to market, the impact was indeed profound.” Yowzah, on one hand, that’s a lot of investors. On the other hand, why aren’t the other 40% also investors given the issues with pre-construction? Anyhow, what I found even more alarming: “So what drove investors to […] plunge back into the market? The chief factor […] was price. Believe it or not, the index price for condos actually dropped $14,608 in September from August to stand at $410,730. Bit of smoke and mirrors really. Average price per square foot stayed nearly constant at around $493. The price drop came from builders creating smaller suites – about 831 square feet or 10 per cent smaller than August.” I’m already appalled by how small the new condos around are. Granted, I like my space and my stuff (after all, right now I’m filling a small 2-bedroom apartment all by me onesies), but I don’t think that this is going to go well for people when the units are actually built at some indeterminate point in the future and find out how small 10% smaller than “already too small” is. Plus of course, the implication that even “investors” are getting priced out of the market.

Speaking of being a housing bear, MoneySense has an article on Canada’s housing market online now. It’s 4 pages, because of course putting it all in one or two wouldn’t fit on the internet. As you can probably guess, I agree most with the advice about just simply waiting longer if you don’t already own a home — even most of the bulls don’t think the market’s going to run away from you, so there’s no rush. I agree least with the advice about shorting the banks or home furnishing companies to hedge against a falling market. While I can totally see the logic behind the banks doing poorly if the housing market goes down, it’s a dangerous trade to get into, which kind of goes against the idea of hedging your housing exposure.

Even the CREA is now calling for activity and prices to decline next year.

All that negativity out of the way for the Canadian side, if you haven’t been paying attention to the foreclosure crisis in the States (and it’s always a “crisis” these days), then you should be. Yes, it’s another example of just how deep into the lake of batshit crazy the US system went — which doesn’t help my recurring theme — but it’s just insane that these companies are basically stealing houses. Foreclosing on houses without mortgages even. Even when a house should be foreclosed on, they’re not engaging in the proper notice procedures, which would give people the chance to defend themselves, or at least move out (there was one case of a locksmith showing up to lock the person being foreclosed on in the house; they didn’t even check if the house was empty before changing the locks!). Barry Ritholtz has been providing good summaries of the stories as they come out, including this one about the process servers lying in their affidavits that testify that they did indeed serve notices to the homeowners. Cases are coming to light where that is demonstrably false, including some where people have visa stamps in their passports that prove they were out of the country when the alleged serving took place.

Like Netbug, I played Force Unleashed 2 and found it lacking. It was short, but moreover, kind of boring. I found the various large mech enemies annoying — while they could be killed in fairly traditional ways, you generally had to find a way to trigger their special quicktime event sequence death scene. If you didn’t, they were incredibly powerful. The regular stormtroopers were very weak (which I suppose is to be expected), and kind of fun to find new ways to kill them, but I also found some of the other enemies tough. The snipers in particular seemed to do way too much damage from way too far away, and the other force users were too good at defense. There was really no middle ground when it came to the opposition. In general I found that there was no technique or timing to the basic lightsabre attacks/combos, which did seem to be present in FU1 — this time around, just mash X until you get lucky and slip past their defenses. Also, every one of the other lightsaber-wielding enemies had two sabers. Come on, Lucas. And as to the length, it was not only a short game overall, but very poorly paced — it seemed like fully half the playtime was spent in that epic go-nowhere duel with Vader at the end. So, how short was it? Well, I didn’t time it, but I finished the game in a week. The same week I spent in all-night thesis sessions at the lab, with all my free time from two nights spent at curling. I had maybe 4 hours of playtime, mostly interrupted time at that, as I was mostly playing while dinner was in the oven, and then again for a bit as I was digesting before heading back to work…

Rogers is getting into the home security field. Interestingly enough, over 2 years ago I was part of a survey that was asking about how to brand and price a Rogers home security offering. I’m surprised that it took so long from that step to the roll-out. The paranoid part of me wonders if maybe it’s somehow deeply flawed.

An interesting science article in the Globe today as well about electrical stimulation improving math skills. The MSM article didn’t cite the publication, so here’s the abstract. When I read the Globe’s story, I thought they were talking about a direct electrical stimulation (i.e.: DBS), but it turns out to be a non-invasive transcranial stimulation. I’m surprised a weak, external, DC stimulation does anything at all. I’m going to have to read more on TDCS… some other time.

Canadian Dream (free at 45) is having a 1000th post contest, giving away a Kobo e-book reader.

Finally, a request of you: please suggest a topic for me to blog on. I feel like I may be getting stale railing against real estate, but at the same time it’s just so easy to do since these articles tend to get under my skin somehow. I’d like to blog more while thesising to keep the fingers moving (and hopefully the other writing muscles to get this thing done), but often feel just as blocked here as when staring at the flashing cursor in Word. Also, if anyone knows of a good easy-to-use captcha plug-in for WordPress 1.5 I’d be happy to try it, as the spam comments have been getting ridiculous lately (200/day and climbing!).

Well, in my last update I reported that the trip to Turkey helped me lose over 5 pounds. Unfortunately I caught a cold on the plane, it’s Halloween which has lead to much candy eating/poor dieting, and of course I haven’t been working out every day like I was there, so I’ve already put 2 of those pounds back on :( Ah, well, on to the links:

Mike at Money Smarts puts up summary tables to review of all the online brokerages in Canada. I’m of course still a fan of TD Waterhouse (which now offers the lowered commission rate to slightly more households with the threshold of $50k), in part because of the ability to easily buy e-series funds, and in part because once you do get a live person on the phone, they’ve been great every time. Knowledgeable, interested in getting problems solved, and just generally helpful.

Preet asks the perpetual question “Is a variable rate always best?”. One important thing to keep in mind when making that decision is not just whether rates will go up, but how high they’ll go, and how fast they’ll do so. One really rough rule of thumb is to consider the case of rates that go up in a constant, linear way. In that case, you save money in the first bit of the slope vs. a fixed rate, so by the end of the 5-year (or whatever) period, rates have to go up to be as much over the fixed rate as they were below the fixed at the beginning to break even. So for example today, with a fixed at about 3.4%, and a variable at about 2.3%, you’d have to expect the variable rate to be over 4.5% at the end of 5 years to make going fixed worthwhile. The real world is a more complicated place, so of course rate changes won’t be smooth like that, and there’s also the impact of paying down your mortgage, which helps the variable case more: lower rates earlier on are more effective than the higher rates later on. You can always make a spreadsheet to figure it out, but I don’t think the finer points of the math is as important as the very uncertain rate predictions.

Canadian Capitalist has a good post on where some of the tracking error of currency neutral funds comes from. The research shows that it’s not likely that the tracking errors are purely random, so one shouldn’t expect them to cancel out in the long run. Michael James provides a good potential explanation for where this negative correlation comes from.

MacLeans has an article on the rent vs buy decision, quoting Patrick from A Loonie Saved (HT to Patrick who sent me the link :) Here’s his part:

Patrick Doyle, a Toronto software developer who writes the personal finance blog A Loonie Saved, has crunched the numbers for himself and believes it just doesn’t make sense to buy at today’s prices. Especially after factoring in all the extra costs that come with owning a home, like property taxes, insurance, utilities and general upkeep, which can quickly add up. “I choose to rent because I already have a day job, I don’t want to be a property manager, I don’t want to be a real estate speculator, I don’t want to be a highly leveraged investor and I don’t want to be responsible for repairs and maintenance. I just want a place to live,” says Doyle. “If I were to consider giving up these advantages to buy a house, it would have to save me substantial money. Instead, it costs more. For me, that makes the decision a no-brainer.”

Well-put, Patrick! Of course, I’ve got to nit-pick some parts of the article:

Above all, most proponents of home ownership argue that buying a place of your own is an ideal form of forced savings. Canadians clearly aren’t up to the task on their own. In a typical year, fewer than one-third of Canadians make use of their registered retirement savings plans, and even fewer make use of tax free savings accounts, first made available to much fanfare in 2009—though the reason for that could be because so much of their income goes toward mortgages and renovations.

As I’ve argued before, paying down a mortgage is a form of “forced savings” (which to put it another way, means that people are so bad with money that they only way they can save is if threatened with homelessness), but that’s a very poor solution to an inability to save: actually saving is better. Yet here MacLeans’ goes further and adds in renovations. But, generally speaking renovations cost money, and you don’t get that money back when you sell. The urge to renovate should be a point against buying a home for the financially strapped young Canadian.

Either way, observers like Milevsky at Schulich believe the debate between renting and buying has gotten sidetracked in recent years by talk of investments, returns and portfolio allocation. “This debate has become so financial,” he says. “It’s lost the qualitative lifestyle aspect that should drive the decision. When a 22-year-old kid comes out of college and immediately asks, ‘Should I buy or should I rent?’ the question should be, ‘What do you want to do with your life—do you want to start a family, explore the world, build your career?’ That’s more important than the few hundred you may or may not save each month by doing one versus the other.”

I disagree with Moshe — the bloggers and forum lurkers like myself have perhaps been getting overly financial in the debate, but the general public has not. Or, if they have — with dreams of increasing real estate prices and easy roads to financial freedom — it’s because the financial debate has been very superficial. Far too often I’ve seen the old “rent is throwing your money away” line, or comparisons that forget to include big items like property tax, maintenance, or transaction fees. A financial notion only, not backed by any math. The debate is not nearly financial enough for most people. Indeed, I suspect that is how we got to a ~70% homeownership rate, a level that’s even higher than the peak in the US, where people now openly admit that banks loaned money to people who had no business buying a home: by people deciding that they wanted the ownership lifestyle aspect without taking the time to do the math. Plus, those lifestyle decisions — when to move, how much space will be needed for a family and when — should factor into the financial equations anyway.

Rob Ford won in Toronto. Part of the platform was to remove the Miller taxes on car registration and land transfer. I was in favour of the vehicle registration tax when I first heard about it, but am firmly against it now that I saw how poorly it was implemented: it wasn’t a small surtax, but a big charge that was as much as the provincial registration fee to begin with, making it twice as expensive to register a car in Toronto. Plus, it was easy to avoid if you had a friend or relative that didn’t live in Toronto, so it wasn’t good on the fairness front, either. It’s a bad tax, and I won’t be sad to see that one go.

I think the land transfer tax was a good one though: it was introduced at a time when real estate prices in Toronto were climbing double-digits per year, so the 1-2% tax was easy to sneak in, and it was basically just lost in the noise of the market moves. Since it’s not an ongoing tax, it’s also been priced in now, so there’s no reason to get rid of it.

At curling last night, one guy shared the “factoid” that this October has 5 weekends and (5 fridays)… and that it won’t happen again for over 800 years! I naturally called bullshit: October has 5 weekends any time Halloween falls on a Sunday, which should happen approximately 1 in 7 years. Even in the full force of my overwhelming logic, he said no, he read it on the internet that “because of the leap years and stuff”, it won’t happen again for 800 years. Well, a quick scroll through my BB calendar shows that 11 years is all it will take (2021) for that to happen again. Besides, the extra days from leap years don’t get added to October. When I got home I tried to Google it, and sure enough the bullshit is prevalent enough that as soon as I typed “October 5 we…” it automagically filled in “5 weekends 823 years”. 81k results. I weep for humanity.

On the theme of running down of mysterious and wrong-sounding numbers spewed on the Internet, Barry Ritholtz looks into the “average holding period is 11 seconds with HFT” meme, and finds the evidence to be lacking.

Hope everyone has a fun and safe Halloween!