One of Canada's largest independent Internet service providers says it is expanding its nascent television business despite almost non-existent profit margins because it can't afford not to.
Matt Stein, CEO of Distributel Communications Ltd., says being able to offer television to customers who already have Internet and home phone services is "the next logical step," adding that all independent ISPs will eventually need to do the same despite the expense.
Small ISPs that rely on regulated access to wholesale Internet services from the incumbent cable and telephone companies have long argued those rates are too high. Although many say they want to offer television using Internet protocol television (IPTV) technology, they argue the bandwidth required to deliver video is so great that they could not make any profit off the service, and have asked the federal telecom regulator to intervene.
Toronto-based Distributel, however, decided it couldn't wait any longer.
"We really felt that somebody had to get going, rather than being in that perpetual chicken and egg situation in front of the [Canadian Radio-television and Telecommunications] Commission, where the commission says, 'Yeah, but nobody's doing it,' and the [ISPs] say, 'Well, but it's so costly,' and the commission says 'Yeah, but nobody's even doing it,'" Mr. Stein said.
"We decided it's right in front of us, we have this ability, let's go for it. Somebody's got to start, so we did."
Distributel, which has about 200,000 Internet and telephone customers in Ontario, Quebec, British Columbia and Alberta, quietly began offering its IPTV service in Ontario and Quebec in October, working with its partner Zazeen Inc.
Mr. Stein said customer take-up has been promising and the company is now beginning a formal marketing campaign.
It would also like to expand the television offering to Alberta and B.C. once it secures licences to operate as a broadcast distributor in those provinces. A recent move by Shaw Communications Inc., however, could complicate that.
Shaw, the dominant cable company in Western Canada, applied to the CRTC in early January for an increase in the tariff rates it can charge its wholesale customers for Internet service. The regulator does not set retail prices but it controls wholesale pricing based on the costs the incumbents incur, plus a markup.
The Canadian Network Operators Consortium – an industry group representing independent ISPs – filed an initial intervention in response to the proposed hikes, pointing out that the increases range from 35.9 per cent to 127.7 per cent, depending on the level of speed offered.
CNOC argued in its filing the proposed rates are not "just and reasonable" and said it is "very concerned that approval of the interim rates at the levels proposed by Shaw will have a chilling effect on competition in the provision of Internet services throughout Shaw's operating territory."
Mr. Stein called the increases "very concerning," but said that alone would not stop the company from launching IPTV in Western Canada.
George Burger, an adviser to VMedia Inc., a startup that also offers IPTV bundled with Internet and home phone services in Ontario, says the proposed increases could force independent players to charge their customers prices close to what Shaw itself charges its retail clients.
"What that means is ISPs are out of business and can't compete because they don't have an alternative to offer customers," he said. VMedia is also seeking television licences in B.C. and Alberta and has not launched an ISP business in those provinces yet.
Shaw argues the proposed new rates are based on its actual costs and use a costing methodology approved by the CRTC. "Wholesale rates must be cost-based to ensure carriers are compensated for their costs of providing the wholesale service," the company said in a filing in response to CNOC.
Spokesman Chethan Lakshman says Shaw has not sought an increase since 2010 and only applied now because it recently updated its retail product lineup for new Internet customers and had to adjust the wholesale rates to reflect the new offering.
"The new [wholesale] rates reflect the significant traffic growth that we have seen since the last review of [wholesale] rates," he said. "For the past several years, we have experienced 50 per cent compound annual traffic growth per year on our network."