Tech

Why is internet so expensive in Canada?

Cansumer Staff

Updated on

Access to affordable, reliable and high-speed Internet is a necessity for all Canadians.

The CRTC (Canadian Radio-television and Telecommunications Commission) is the regulatory body in charge of setting and enforcing the rules in Canada’s broadcast and telecommunications industries. It declared broadband internet a basic service in Canada in 2016, and connectivity is increasingly vital for competing on the global stage and ensuring the continued growth of the Canadian economy.

We put together this timeline of the actions taken by the CRTC, the Government and telecom companies to figure out where things currently stand and how we got here.

The Government has promised Canadians internet affordability for years, but recently gave in to threats and warnings made by the major Internet Service Providers (ISPs) (Bell, Telus, Rogers, Shaw Communications, Eastlink, Cogeco, and Videotron) that they would cut their investments into rural service infrastructure if wholesale internet rates were increased. This has already made internet more expensive for Canadians.

Canada’s internet services market

Canada’s telecom oligopoly of Bell, Rogers and Telus receives 90.7% of the mobile market revenues and the Big 5 (Bell, Rogers, Shaw, Telus and Videotron) receive 71.7% of internet service revenues.

This is a market in which while rates are decreasing slightly year over year, Canadians still pay some of the highest rates for mobile data and internet in the world. And where internet prices at each level of service are basically the same across the board for each provider.

What is the wholesale services framework?

The CRTC’s wholesale services framework outline the ‘rules of the game’ that determine how the Big 3 network operators are required to provide access to the physical networks that they own, operate and maintain to smaller, independent ‘wholesale ISPs’ such as Teksavvy, VMedia and Distributel with the goal of maintaining competition, giving Canadians options and keeping prices in check.

Its objectives are:

  • Facilitating vibrant and sustainable retail competition that provides Canadians with reasonable prices and innovative services of high quality that are responsive to their evolving social and economic requirements;
  • Incenting efficient network investment to further the development of facilities-based competition;
  • Considering network efficiency, competitive neutrality, and technological neutrality when establishing wholesale regulations; and
  • Recognizing differences in regional markets.

So, let’s see, where do we stand now?

What is the wholesale internet rate?

The wholesale internet rate is the regulated price determined by the CRTC at which the major network operators must sell access to their network in bulk to smaller, independent ‘wholesale ISPs’ such as Teksavvy, VMedia and Distributel. The price is determined through a comprehensive review, analysis and consultation with industry stakeholders and ISPs who were asked to file their own cost studies. The goal of the CRTC’s review is to ensure the cost models used to determine rates were still effective at determining “just and reasonable rates”.

Increasing the wholesale rate

If the rate is increased by the CRTC, the network operators’ get to charge resellers more for the same amount of internet access, so their revenue increases and wholesaler ISPs expenses increase. This makes it less attractive and more difficult for smaller companies to compete with the Big 3 – decreasing competition and choice.

Decreasing the wholesale rate

If the rate is decreased, the network operators’ have to charge resellers less for the same amount of access, so their revenue decreases and wholesaler ISPs expenses decrease. This makes it more attractive and easier for smaller companies to compete with the Big 3 – increasing competition and choice.

Timeline

How did we get here? Let’s take a look at the timeline so far:

March 2016 – CRTC reviews the costs required to provide wholesale access

October 2016 – CRTC reduces wholesale rates

CRTC reduced, on an interim basis, some of the wholesale rates that internet providers can charge independent ISPs for access to their networks.

Major ISPs submitted their own cost studies and proposed wholesale rates, but the CRTC found that they did not do the studies in accordance with the standard costing principles outlined in their Regulatory Manuals, and did not provide justification for not using those principles and methodologies.

CRTC expressed significant concern that most of the major ISPs chose to disregard the CRTC’s guidance, the Manual, and past Commission determinations.

CRTC held the reduced interim rates they set in order to ensure they were not based on the overstated costs submitted by the major ISPs.

Source: Telecom Orders 2016-396 and 2016-448

June 2019 – Government asks the CRTC to place consumer at forefront of telecom decisions

The CRTC was asked by the Minister of Innovation, Science and Economic Development in June 2019 to consider competition, affordability, consumer interests and innovation in all of its telecommunications decisions and the extent to which these decisions can encourage all forms of competition and investment.

August 2019 – The CRTC set new, even lower wholesale rates

On August 15, 2019, the CRTC further reduced the wholesale rates, with retroactive effect back to March 2016. The final rates announced were lower than the interim rates and retroactive to the date they were set in 2016. The monthly capacity rates were 15% to 43% lower than the interim rates. As for the access rates, they were 3% to 77% lower than the interim rates.

In my case, savings were passed on immediately to me by Teksavvy. I received a reduction of $8 (almost 13%) from $62.95 to $54.95 on my next month’s bill.

November 2019 – Telecom companies file petitions against the decision

The major ISPs immediately appealed the decision. They argued that the rates were too low and said that it would undermine investment in high-quality networks, particularly in rural and remote areas:

  • Bell said it would reduce the scope of broadband internet buildout for smaller towns and rural communities by 20%, or about 200,000 households.
  • Telus emphasized that having such low wholesale rates will reduce the incentive for facilities-based carriers from wanting to invest in expanding network infrastructure.
  • Rogers, Shaw Communications, Eastlink, Cogeco, and Videotron (cable companies) argued in unison that this will affect their business and their willingness to invest in network expansion particularly in rural and remote areas. And that it will reduce “operating margins by an amount that translates to as much as 54 percent of their planned investments in expanding and improving their broadband networks over the next five years.”

The Minister of Innovation, Science and Economic Development, said in a statement earlier this week that he was “deeply disappointed” in Bell’s decision to cut 200,000 homes from a wireless broadband rollout, but that he expects broadband infrastructure will continue to expand:  

“This will not distract from our government’s commitment to connect every Canadian to affordable high-speed internet by 2030, and I am confident new competitors will step up to make these investments.”

Source

The rates were put on hold by the appeal court:

Bell Canada and five major cable carriers (the Applicants) have obtained leave to appeal the Decision from the Federal Court of Appeal. The Federal Court of Appeal has also granted stay of the Decision until it makes its final ruling. The Applicants and TELUS Communications Inc. (Telus) further appealed the Decision to the Federal Cabinet and have filed review and vary applications of the Decision with the CRTC. As a result of the stay, the impact of the Decision has not been recorded in our 2019 financial statements.

Bell 2019 Annual Report

August 2020 – Innovation Minister sides with major ISPs and fails to uphold these rates

On August 15, the cabinet gave in to the pressure and threats made by the major ISPs and chose not to uphold the Internet wholesale rates set by the CRTC in 2019 while echoing the same reasons given by the major ISPs as justification for their decision.

“On the basis of its review, the (cabinet) considers that the rates do not, in all instances, appropriately balance the policy objectives of the wholesale services framework and is concerned that these rates may undermine investment in high-quality networks, particularly in rural and remote areas,” 

Statement made by Minister Navdeep Bains (emphasis ours)

This came less than 2 weeks after Bell Canada reported in its Q2 earnings call that profit fell 70% as the pandemic took a bite out of revenues.

This decision will inevitably lead to higher Internet prices for Canadians. In my case, I was notified by Teksavvy that as of October 1, 2020 my internet package of 60 Mbps with Unlimited GB would increase by $10 (almost 17%) – from $59.95 to $69.95.

TekSavvy is left with no choice but to interpret this announcement as an expectation from the government that retail prices should be raised, specifically to protect Incumbent investments. We are therefore making a difficult decision in order to continue providing you with the service you have come to expect.

August 25 email notice from Teksavvy

September 2020 – Federal Court of Appeal dismisses appeals by big ISPs

The Federal Court of Appeal reviewed and upheld the CRTC’s 2019 rates – adding that the companies’ arguments were of “dubious merit.” The Supreme Court of Canada and the Cabinet similarly opted not to modify it.

The court also ordered Bell, Rogers, Telus and others to pay costs of the appeal to TekSavvy Solutions Inc. and an association of independent internet companies because they hadn’t been successful in convincing the three judges on any of the issues.

May 2021 – CRTC reverses their decision to lower wholesale rates, reverting to original 2016 rates

In a complete 180° from their stance and statements for the past almost 5 years, the CRTC says it made errors when it ordered major ISPs decrease their wholesale internet rates.

What we did (during the review) was an extensive re-examination of the costing models, and the application of the costing principles to those carriers rates, and the results speaks for itself, they’re laid out in the decision.

We went back, we did the requisite detailed analysis and reached the conclusions that we reached.

Ian Scott

The 2019 rate changes have been rolled back and the majority of the higher 2016 wholesale rates will remain in effect, with the exception of a markup by phone companies.

This decision greatly favours the likes of Bell, Telus and Rogers and will save them hundreds of millions of dollars (at least $325 million) that they would have had to pay to independent ISPs for overcharging them over the last 5 years.

Teksavvy petitioned the Government to overrule the decision and publicly called for Ian Scott to be fired.

OpenMedia.org has set up a petition that has collected over 22,000 signatures so far. (Feel free to add yours)

The federal government said it is reviewing the decision to ensure it aligns with its priorities of affordability, competition and innovation in the sector. Federal Cabinet has the power to override the decision. The ball is in your court, François-Philippe Champagne.

Our take: 2 tales of “About, face!”

CRTC

  • 2016 – “wholesale rates should be lower”
  • 2019 – “yeah, even lower than that”
  • 2021 – “nevermind, forget everything we said the past 5 years”

The CRTC has thrown out 5 years of evidence-based analysis, studies and reporting and given a huge win to Big Telecom. There are only 2 reasons I can think of for this:

  1. They’re incompetent, or
  2. They’re toothless (or worse, captured)

Side note: The Government (Heritage Minister Melanie Joly) appointed Ian Scott – a former Telus executive and registered lobbyist (as well as short stints at lesser positions at the Competition Bureau and CRTC) – as the head of the CRTC in 2017 for a 5 year term.

Can anyone say “regulatory capture“?

When regulatory capture occurs, the result is that an agency, charged with acting in the public interest, instead acts in ways that benefit incumbent firms in the industry it is supposed to be regulating.

Either way, with no decrease to the wholesale rate, and the anticipated retroactive payments cancelled, this will undoubtedly lead to 3 things: less competition, less choice and higher prices.

The CRTC’s decision not to uphold the wholesale rate changes should be considered a huge failure of their stated mission to: regulate and supervise broadcasting and telecommunications in the public interest. They have placed the interests of major ISPs above the interests of Canadians.

Their disregard for both their mandate from Cabinet, as well as Cabinet’s mandate from the Prime Minister, makes it clear that they CRTC actively undermined the Government’s agenda and promises to Canadians.

It is clear that internet affordability is not something that the CRTC can be relied on to provide Canadians. The Commissioner of Competition must conclude its investigation into the incumbents’ abuses of dominance and enforce its governing statute. 

Federal Government

  • 2019 – As the major ISPs appealed the CRTC’s rates, the Minister said he expected broadband infrastructure to continue to expand and were “confident new competitors will step up to make these investments”.
  • 2020 – the Minister all of a sudden flips and is concerned that rural investments may be at risk.

The Government’s decision to not uphold the rates should be considered a failure in negotiation as it appears to yield to the collective threats made by the telecom companies – including Bell’s threats to hold the broadband wireless Internet access of 200,000 Canadians hostage – and by echoing their reasoning as justification for the Government’s decision.

How the government could negotiate lower rates for Canadians

There are several ‘bargaining chips’ the Government of Canada could use to accomplish both its platform to build out universal high-speed and stated commitments to keep things affordable:

The Government is investing into high-speed internet infrastructure

“Our government has made significant investments to support the building of Internet infrastructure in rural and remote areas so these communities can succeed in the digital age” 

Through the High-Speed Access for All Strategy, the Government is delivering up to $6 billion in investments in rural broadband over the next 10 years.

While the Government’s intent to target its investments to areas where there the business case for investment by the private-sector is limited, these funds bring additional customers online and produce passive infrastructure assets. Surely the major ISPs and their subsidiaries stand to benefit in some way from these invested funds?

Put the impact of wholesale rates into perspective

“[wholesale] rates may undermine investment in high-quality networks, particularly in rural and remote areas”  

A fair question to ask would be: How much of an impact do wholesale rate changes actually have on rural investments?

Surely the revenue lost is in some way proportional to the rate reductions, but one would assume this impact is lessened considering their wholesale business is the smaller part of their total internet business? Wouldn’t rural investments be based primarily on expected first-party subscriber revenues and to a lesser extent expected wholesale internet revenues (if a connected customer chooses an independent ISP)?

Rogers said the retroactive rate change will cost it $140 million. Bell put its cost at $100 million, Vidéotron at $50 million, Cogeco at $25 million and Shaw at $10 million. Eastlink didn’t put a dollar figure on its expected cost. Telus Communications declined to comment.

CBC compared these impacts to the companies’ previous quarter’s earnings:

“the amounts cited above translate to 24 per cent of Rogers’ $591 million profit; 13 per cent of Bell’s $761 million profit; 14 per cent of Cogeco’s $182 million profit; and four per cent of Shaw’s $229 million profit.”

However, this is not an accurate way of looking at the cost impact of the wholesale rate changes – more like comparing apples to wrenches.

Let’s take Bell as an example. First of all, the $100 million estimated cost is the total accumulated retroactive effect back to the decision on March 2016 – so about 2.5 years (and counting) worth of impact. So that’s roughly $40 million per year on average.

That annual figure should then be compared to Bell’s annual profits, which are as follows:

LineAmount
Revenue$23,964,000,000
Wireline Revenue$12,356,000,000
Data Services (Internet) Revenue$7,684,000,000
Net Earnings$3,253,000,000
Source: Bell Canada 2019 Annual Report

So in Bell’s case, the $40 million annual cost of the wholesale rate changes would amount to:

  • 3.83% of the estimated portion of annual profit produced by Data Services (Internet)*
  • 1.23% of their total annual profits, or
  • 0.316% of their total annual Wireline Revenue
  • 0.167% of their total annual revenues

*Based on an estimate of the portion of Net Earnings that could be attributed to the provision of Data Services (internet) of $1,043,066,731. It assumes the same profit margin as BCE Inc. (Net Earnings/Revenue = 13.575%). This is a rough guesstimate made for for illustration purposes and is not reported in Bell’s annual report.

Increase competition by reducing wholesale rates

“Wholesale broadband is a proven regulatory tool for enabling retail competition”

Increasing the wholesale rate:

  • Reduces competition in the internet services market.
  • Increases prices for Canadians
  • Increases the profits of some of the largest and most profitable companies in Canada.  
  • Doesn’t seem to materially increase the appetite for rural investment.

Decreasing the wholesale rate:

  • Increases competition in the internet services market.
  • Has been proven to reduce prices for Canadians (Teksavvy gave 85% of its customers a rate decrease).
  • Reduces the profits of some of the largest and most profitable companies in Canada.
  • Seems to significantly reduce rural investment commitments.

The wholesale rate lever works both ways, so why not use it to apply additional financial and competitive pressure? Lower wholesale rates would indeed gradually shift ISPs’ first-party subscribers to lower margin wholesale subscribers which would certainly reduce their profits, but given:

  • Their focus on areas including revenue and subscribers in earnings reports 
  • Their Strategic Imperative 1 is to “Build the best networks”
  • Capital markets strategy of continued growth in free cash flow and a strong balance sheet, supporting a healthy level of ongoing capital investment on advanced broadband networks and services that are essential to driving the long-term growth of our business.

Their investments in infrastructure (including rural) would certainly continue, just maybe not at as fast a rate.

Giving an ultimatum

In March 2020, the Government announced that telecom companies will get two years to slash their cell phone plan prices by 25%, or face the consequences. Why isn’t a similar approach being used for home internet?

If the Government does not have enough leverage to compel these companies to invest in their own internet networks in order to provide access to Canadians at speeds expected of a developed country, then their status as an oligopoly should be called into question.

As a citizen, taxpayer and internet subscriber, I expect my Government to find the middle-ground upon completion of the CRTC’s review of the rates. As the previous prices did not balance objectives “in all instances”, surely they were not too far off and that some minor modifications (not complete reversal) are all that is necessary.

Take action

If people want to truly make a difference they need to contact Minister of Industry, Science and Economic Development), and ask for CRTC and Competition Bureau intervention.

An example of what to write:

“Minister, I’m a Canadian deeply concerned with the flaws in the regulation of internet services. We have a system whereby competition is not present and as a Canadian I’m formally requesting you respond and am formally requesting this letter is sent to the Competition Bureau”.

OpenMedia is a registered non-profit that works to keep the Internet open, affordable, and surveillance-free.

Follow them to keep up to date on regulatory and government decisions and take action by signing petitions and sending emails to your Members of Parliament.

Over to you

What are your thoughts? How much do you pay for internet and what do you get for it? Have your internet rates gone up and if so, by how much?

About the author

Cansumer Staff

Cansumer Staff

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