Landmark CRTC broadband ruling avoids price regulation

Share

In a sweeping new policy aimed at improving rural connectivity, Canada's telecom regulator decided against setting retail Internet prices, sparing the industry further pain while it is still smarting from another broadband ruling earlier this year.

Although the Canadian Radio-television and Telecommunications Commission declared high-speed Internet a "basic telecom service" in a landmark ruling this week, the decision is expected to have a neutral impact on the country's largest telecom companies.

The policy establishes new funding measures to bridge the digital divide that will draw on the broadband revenues of large companies, but the CRTC does not plan to regulate the rates that customers pay for Internet services – an outcome that analysts say would have been far more disruptive.

Shares in Rogers Communications Inc., BCE Inc. and Shaw Communications Inc. all gained more than one per cent on Thursday, the first day of trading since the CRTC ruling, while Telus Corp. and Quebecor Inc. also traded higher.

Scotia Capital Inc.'s Jeff Fan said that although the ruling will force Internet providers to offer unlimited data options, the companies will be able to charge whatever they want for such packages.

Suggesting that "logic actually prevailed" at the CRTC, Mr. Fan called it a "balanced decision" that won't discourage investment in new Internet infrastructure.

Desjardins Securities Inc.'s Maher Yaghi said the new policy has the potential to "lead to improved high-speed Internet coverage in Canada" as urban customers subsidize rural Internet users.

The money for a $750-million fund over five years will come in part from an existing levy on land-line telephone and wireless revenues that was used to expand voice services in hard-to-reach areas. The new fund will also include a new levy on Internet revenues and will be used to improve broadband services in rural and remote areas.

That will be an added cost for telecom companies, but the ruling "should not cause pressure or disruptions to the telecom companies' business models," Mr. Yaghi said. "While regulating retail prices or implementing a low-end entry point would have been seen as a win for consumers, we think that over the long term it would have led to lower investment by telcos and, eventually, lower overall competition and higher retail prices in the market."

The commission said it is following a long-held policy of relying on market forces to dictate retail prices while at the same time regulating on the wholesale side, aiming to promote choice and better prices through more competition at the retail level.

In fact, another ruling in early October has the incumbent telephone and cable companies far more worried about broadband revenues. In that decision, the CRTC said the wholesale rates the large Internet providers proposed to charge smaller competitors for access to their networks were unfairly high and slashed them on an interim basis.

Following that decision, shares in telecom companies dropped and analysts adjusted their price targets down slightly, warning that competitive Internet providers could reduce their prices and put downward pressure on the rates the incumbents charge.

TD Securities Inc. analyst Vince Valentini created a model based on the reduced rates that suggested a new wholesale player could enter the market and with peak funding of $156-million, could have a business generating operating income of about $83-million by year five.

Earlier this week, one of the existing smaller players, TekSavvy Solutions Inc., said it was cutting its prices and increasing some speeds, passing the wholesale cost savings along to its customers.

In his report this week, Mr. Fan noted investors "should still pay close attention to the price reduction recently implemented by TekSavvy and the potential impact it could have on the market."