Telus Guest lecture

Vertical integration, open access, copyright and foreign ownership – a new digital paradigmPresentation by Michael HennessytoUniversity of OttawaJan 10, 2011

1
Things change fast in a digital world

2
25 years ago the US government broke up AT&T, the largest communications company in the world, in order to promote competition by reducing its market power in voice communications.Today pieces of AT&T have been reassembled but the market power of the phone company has been fundamentally eroded by technological change.The phone monopoly was an artifact on an analog (voice) world that pre-dated the worldwide web.In the broadband race, the cable monopolies lead in terms of market share and speed.The Internet is digital and IP-based, and in this world applications rule and the highest capitalized companies in communications today Apple, Google and Facebook don’t even run networks.The issues around market power persist…but its less clear where that power resides.

A bit about TELUS
20 years ago, TELUS held a regional telephone monopoly
Our business was limited by monopoly boundaries primarily to Alberta and BC
10 years ago, TELUS bet against the old monopoly phone business in favour of a digital future driven by wireless and the Internet
With $20B in network investment that bet has paid off and wireless is our core business
And notably the distinction between wireless and the Internet is rapidly eroding
Today there are more wireless phones than landline

Strategic focus on data and wireless
$9.7B
Revenue
$6.0B
Wireless
40%
Wireline LD
Wireline
LD
23%
5%
Wireless
28%
74%
Wireless
18%
Wireline
Data
Data
11%
Local and
Wireline
Local
10%
other
Wireline
49%
Data
21%
23%
20001
20101
1 12 months ending June 30, 2000 and September 30, 2010, respectively
Growth in wireless/data offsets erosion in phone business

TELUS strategy has been to enable the Internet experience
Open access to content is a logical result of that strategy

TELUS 3G+ networks cover 95% of the population
New investment has resulted in one of the largest and mostadvancedwirelessbroadband networks in the world

Our business networks have also gone national
Investment in fibre has allowed us to compete head on with Bell in the east

Major contract wins across Canada
Government of British Columbia
Québec Government
Department of National Defence
Government of Ontario
Yellow Pages Group
Ville de Montréal
Public Health Agency
Excellent progress in Central Canadian business market

Our business and team is truly national
Newfoundland
British
Columbia
Alberta
33
6000
Manitoba
Québec
7500
88
Ontario
4500
57
82
118
7500
Saskatchewan
Nova Scotia
New
Brunswick
all numbers approximate
Wireless and fibre investments allowed us to break out of the west

Next up is the cable monopoly
TELUS TV subscribers
266K
0
20001
20101
1 As at June 30, 2000 and September 30, 2010, respectively
Optik TV – revolutionising TV

Optik TV – revolutionising TV using Internet technology
Our Optik MediaroomIPTV platform will allow true convergence between the Internet and TV

And your point is???
Technology has changed our business and is changing debate around market power and rights

Increased risk from vertical integration
TELUS has pursued an investment strategy around broadcast distribution (Optik TV) in order to compete with cable on bundles
The competitiveness of our broadcast distribution strategy is dependent on access to broadcaster content at reasonable prices
With the acquisition of Global by Shaw and CTV by Bell, all of the major broadcast groups in Canada are now owned by our four largest competitors
Bell – CTV, TSN, Discovery, Comedy ++
Shaw – Canwest Global, Showcase, History, HGTV ++
Rogers -- CityTV, Sportsnet ++
Quebecor – TVA, Argent ++
Denial of access to and anti-competitive pricing of content now raise serious concerns which are being considered by CRTC, Heritage Committee and Competition Bureau

Vertical integration and net neutrality
In Canada, debate about open access and net neutrality has tended to focus on preventing ISPs from creating walled-garden like those that prevail in broadcasting
While issues have arisen, the CRTC has always had the powers to deal with undue preference, unlike the Federal Communications Commission (FCC) in the U.S.
General “no-unjust-discrimination” rule in Telecommunications Act available to CRTC to enforce NN principles, if necessary (FCC eliminated these rules in 2005, hence U.S. gap)
CRTC released rules on Internet traffic management practices (ITMPs) in October 2009 that closely tracked the principles that TELUS proposed and has operated under since 2007
CRTC recognizes that ISPs have legitimate need to manage traffic on their networks; capacity expansion and pricing measures are the preferred responses; intervention that singles out a given application is permitted only as a last resort and then only if narrowly tailored; ITMPs employed must be disclosed
ITMP rules extended to mobile wireless data services in June 2010, but details on exactly how rules apply will not be defined until CRTC is forced to rule on a complaint; CRTC recognizes that wireless networks are different
A critical question though is whether unprecedented vertical integration where ISPs and broadcasters merge will create real incentives to discriminate in favour of access to affiliated content

The starting point..where is the market power?
Broadband networks are critical to supporting economic growth as well as cultural and social development
Open access that permits innovation at the edge of networks is a fundamental principle in ensuring a healthy digital economy
Canada now has amongst the best wireless broadband infrastructures in the world and we have one of the highest broadband penetration rates in the world
However Canada now has an unprecedented level of vertical integration in terms of carriage and content
Increased vertical integration and preference for related content may limit diversity and consumer choice
We believe that it is not the control of networks but rather vertical integration that is the concern
Why? Because the Internet drives carriers towards openness but television functions better in a closed space

16
Who has market power?
140
BDUs (cable & satellite,
including pay TV)
Price Index
130
120
110
CPI
100
Telephone services
90
Internet access services
2002
2003
2004
2005
2006
2007
2008
2009
Source: Statistics Canada
Market power is defined by the ability to sustain an increase in price

Cable companies are the last of the dominant carriers
Year after year, consumers are paying less for wireless services and more for cable services
Cable also the leader in broadband with a 60 percent share of the market
Now with convergence in the broadcasting sector, the 3 largest cable companies (plus Bell as a satellite operator) will own virtually all broadcasters and control most of the connections to the Internet
source: TELUS financial reports; Statistics Canada CPI reports
TELUS 2002 voice ARPU of $54.97 recalibrated to 100 to permit comparison to CPI data
Vertically integrated companies have incentives to discriminate in favour of affiliated content

Vertically integrated companies have incentives to discriminate

Vertical integration question #1
Is there an inherent conflict between Broadcasting Act objectives and an open Internet?
Broadcasters in Canada have been granted regulatory protections and preferences to enable contributions to the creation and exhibition of Canadian content. This has had positive results
However, there may be a tendency for vertically integrated carriers to use cultural arguments to block access to unregulated content online like Netflix or prefer affiliated services
That would be unfortunate because an open Internet is central to new content opportunities for digital entrepreneurs
The object should be to ensure access by both consumers and independent producers, distributors and broadcasters on all platforms to maximize audiences, competition and consumer choice
The cultural debate should be about whether a Netflix should contribute to the Canadian system in a similar fashion to Canadian services not whether we should be limiting access or consumer choice

Balanced copyright

If rights holders have the right to monetize their content why can’t they deny access or allow exclusives?
Consumers are agnostic to the networks that deliver the applications or content – but they want both world class networks and the applications and content they can deliver – whenever and wherever they want them
Broadcasting in Canada is not an open market. CRTC regulates the entry of foreign broadcast content and ensures that broadcasters (like CTV and Global) as opposed to distributors/carriers are the preferred buyers of foreign content so that they can use this content to subsidize the creation of Canadian content. By these rules, CRTC has created artificial barriers in the market.
Also to further policy objectives, distributors have been prevented from engaging in exclusive arrangements and this has ensured that producers have access to all distribution channels, competitive distributors have access to content and consumers can access content regardless of their choice of carrier/distributor
Access by competing distributors to content maximizes competition and choice and ensures maximum contribution to the production of Canadian content
While access to carriage or distribution has been required to be open, broadcasters (aggregators of content) have built their business around owning exclusive rights to content like Desperate Housewives on CTV. This works because broadcasters have an incentive to reach the widest audience and no carrier can be prevented from carrying a broadcaster/aggregator like CTV
Vertical integration changes the dynamics of the market and creates an incentive for the broadcaster to limit audience and revenues on the content side to squeeze out competition on the carriage side, e.g. wireless or Internet subscriptions. This is harmful to competition in the carriage market and also diminishes the revenues used to support the Canadian broadcasting system
But note that this is not simply a Canadian issue, the Chair of the FCC has raised similar concerns around the acquisition of NBCU by Comcast

The conflict between an open Internet and cultural protection
The Internet is a gateway to world markets and young Canadian entrepreneurs often only need venture capital to create new business opportunities
Wireless and Internet applications will be one of the biggest opportunities but IP-based applications will know no borders
Canada and the world are our markets; we cannot be inward-looking in the face of the broadband revolution
We need to reassess whether foreign ownership rules and cultural protections are still appropriate or if these undermine innovation and reduce our creators’ opportunities to reach larger markets
That suggests we need to consider whether foreign ownership restrictions are necessary to promote Canadian content production or whether non-preferential access to networks will become a more important issue

Telecommunications Act and Foreign Ownership Regulations
Canadian Holding Co
Foreign Company
66 2/3%
Indirect
(voting)
33 1/3% indirect
(voting)
20% direct (voting)
Canadian Company
80% direct (voting)
Canadian Carrier
Current regulations restrict foreign ownership of the voting shares of a Canadian carrier to 46.7% (through direct and indirect control and with no more than 20% held directly by foreigners)
The Canadian carrier must not otherwise be “controlled in fact” by foreign entities

Industry Canada Consultation on Telecom
Foreign Ownership
Industry Canada has proposed three options for the relaxation of foreign ownership rules:
Increasing the direct limit on voting shares to 49% for both telecommunications and broadcasting
Removing foreign ownership restrictions for companies with less than 10 per cent market share of telecom revenues first, and addressing liberalization for larger players at a later date
Removing foreign ownership restrictions completely for all telecom carriers but not broadcast distributors (eg. cable, Optik TV)
TELUS has proposed a fourth option:
Remove restrictions on all telecom carriers and broadcast distributors at the same time because telecom carriers and broadcast distributors carry traffic over the same infrastructure and as such are direct competitors

Positions on Foreign Ownership Liberalization
Full and Symmetrical Liberalization
rules aren’t necessary to achieve policy goals, Gov’t should act and changes should be the same for all – entrants, incumbents, telco and BDU
if Gov’t chooses to act, we will support terms that are the same for all – entrants, incumbents, telco and BDU
“no official position” but if Gov’t chooses to act, then recommends terms that are the same for all – entrants, incumbents, telco and BDU
Canada is overly restrictive and rules not necessary
support symmetry, but says greatest need is for smaller market players so would support asymmetry for small players if necessary for quick action
needs ongoing infusion of capital and risk capital cheaper outside Canada – main interest is all players play by same rules (says Globalive is offside)
not urgent
urgent
telecom only, TPR / Wilson proposal permitting full foreign control of entrants (less than 10% mkt share), but public interest test for others seeking to exceed current limits
Canadian control is desirable, but current rules are too complex – a simple cap of 49% foreign voting control is sufficient
Concurs with CRTC on simple foreign voting cap of 49% - agrees with other large players on symmetry (new / old / telco / BDU)
CEP (Bell union) and
culture lobby groups
foreign ownership of telecom threatens Canadian culture as the party that controls the carriage controls the content
status quo

Do cultural concerns make decisions around foreign ownership more difficult and support increased market power?
Broadcasting in Canada, whether the distribution market (cable, satellite) or the content aggregation/exhibition (CTV, Global, etc.), is heavily regulated for cultural reasons
Cultural concerns are the primary impediment to neutral liberalization of FDI and this increases the risk of changes for new entrants only
TELUS has pursued an investment strategy around broadcast distribution (Optik TV) in order to compete with cable on bundles but the operating costs of distribution are dependent on the prices charged by broadcasters (CTV, Global, TSN, etc) for carriage rights
Until the last few years, the broadcasters’ business and the broadcast distribution businesses were generally non-integrated and channel pricing was regulated
Now in the face of massive concentration and vertical integration in the broadcasting market, denial of access to and anti-competitive pricing of content raise serious concerns because as long as vertically integrated carriers operate in a protected broadcast market, independent carriers like TELUS are limited in accessing alternative sources of content
We believe there is a solution: Treat carriage and distribution (open) separate from the production and exhibition (protected) of content

CRTC has announced a proceeding in June to consider safeguards to prevent anti-competitive behavior by vertically integrated companies:
Key issues:
Access to broadcast content on all platforms on an non-exclusive basis
Rules to address undue preference in terms of price and quality of content
Rules of process to ensure timely decision-making
Monetary penalties to punish non-compliance and/or interim relief re access disputes
Protection of competitive information – ensuring info provided to programming undertakings as part of negotiations don’t end up in hands of our carrier competitors
Impact of vertically integration on need for Value for Signal/Fee for carriage (i.e. subscriber fees for over-the-air local television signals which have up until now been free to consumers or for retransmission)
New alliances
This hearing will likely bring together an unprecedented collection of parties that have common interests in access even if they have had historical differences in the past
TELUS will be one of those parties
Vertical Integration

What are the remedies to restrict market power?
No blocking/throttling of over-the-top services
No exclusivity on any platform
Reasonable commercial terms for content
Separation of marketing and wholesale activities with confidentiality provisions
Timely resolution of disputes
Meaningful penalties for non-compliance
Fair rules to prevent abuse of market power are a small trade off for permitting unprecedented vertical integration

Thank you.
Questions?
January 10, 2011

Telus Guest lecture

by mgeist on Jan 21, 2011

Accessibility

Categories

Upload Details

Usage Rights

1 Embed 69

Statistics

Telus Guest lecture — Presentation Transcript