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Prime Minister Stephen Harper answers a question in the House of Commons Wednesday


The Harper government's sudden interest in Internet pricing has become a political headache for telecommunications companies. Soon enough, it could be a financial headache for them, too.

Ottawa signalled late Wednesday night that it's prepared to reverse a federal regulator's decision that effectively sounds the death knell for "unlimited use" Internet plans.

This comes as Bay Street's attention is turning to the possible damage to the revenues of the cable and phone companies that dominate the market for high-speed Internet in Canadian homes.

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Industry Minister Tony Clement announced late Wednesday he will scrap the CRTC decision if the regulator doesn't rescind the ruling by itself.

The late January ruling allows large Internet service providers (ISPs) such as Rogers Communications Inc. [[entity]]ogers Communications Inc. [[/entity]]CI.B-T and BCE Inc.'s [[entity]]CE Inc.'s [[/entity]]CE-T Bell Canada unit to charge "per-byte" pricing to smaller competitors that lease space on incumbents' networks. Industry players say the practical effect of that decision is to make it impossible for those smaller companies to offer flat-rate, unlimited plans to residential customers.

Overturning the ruling by the Canadian Radio-television and Telecommunications Commission - a move popular with consumers downloading increasing amounts of video and small businesses transferring vast amounts of data - would represent a dramatic departure from current regulatory policy. But the government has shown a willingness to veto the regulator's decisions rulings before, and that has analysts pondering the potential fallout for cable and satellite TV distributors.

The fallout could include everything from lost Internet revenues to a boost for online video services such as Netflix.

"While this federal cabinet has been vocal on wireless competition, this is the first time we have seen it potentially interject on an Internet-related issue," Dvai Ghose, an analyst with Canaccord Genuity, wrote in a note to clients before Mr. Clement's Wednesday night revelation.

"If the recent CRTC decision is reversed and telcos and cablecos have to sell to ISP resellers on an unlimited usage basis, they may be forced to lift bandwidth caps for their own customers over time," he added. (The major providers of Internet service, including Rogers, Bell, Shaw Communications Inc. [[entity]]haw Communications Inc. [[/entity]]JR.B-T and Telus Corp., [[entity]]elus Corp., [[/entity]]-T have for years put limits on downloading activities, charging their customers by the gigabyte when they exceed monthly caps.)

That, Mr. Ghose notes, could mean deteriorating average revenue per user in an already-maturing Internet business. It could also mean that Netflix and other online rivals to the traditional TV and broadcasting services may have an easier time in Canada, because monthly download limits act as a disincentive for viewing large amounts of video content through Internet connections.

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The average Canadian high-speed Internet customer spends about $36 a month on the service, according to a Scotia Capital report that cited CRTC data from 2009.

Some analysts are already referencing the dramatic reversal Mr. Clement orchestrated in December, 2009, when the CRTC ruled that Globalive Wireless Management Corp., which now operates the Wind Mobile cellphone brand, violated foreign ownership rules and couldn't launch its service. A government tweak of the Internet billing decision could again allow small providers to offer unlimited plans.

Given this ultimatum from the Tories, the options facing the independent regulator are to reconsider the ruling of its own volition or see the cabinet use its power to reverse it.

The situation is complicated by the Conservatives' policy direction to the CRTC in 2006, which asked the regulator to be more hands-off and rely on market forces.

Scotia Capital analyst Jeff Fan said that if the government tears down the usage-based billing decision, it would essentially break the link between Internet traffic volume and revenues, and could discourage network investments by large telecom and cable companies.

Mr. Fan added that current estimates - that it costs less than a penny to transport a gigabyte of data, while companies such as Bell want to charge as much as $2.50 per gigabyte when customers go over their limits - may not hold true as traffic increases on networks where there is no investment.

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"Without building more capacity, that math, or that cost-per-bit, probably wouldn't be sustainable," Mr. Fan said. "It's become political, but I'm not sure the politicians have thought things through."

Today, MPs will get the chance to make their own inquiries, as the House of Commons industry committee will question the chairman of the CRTC, Konrad von Finckenstein, about the decision.

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