Functional separation in Canada? It’s complicated: Report

A new report by a leading Canadian communications scholar says that functional separation wouldn’t shake up the Canadian broadband market the way it has in other jurisdictions, where it’s left more room for independent ISPs to compete. Catherine Middleton, a Ryerson University professor and Canada research chair of communications technologies in the information society, said she recognizes the merits in the regulatory approach known as functional separation, where an incumbent Internet service provider’s (ISP) retail and wholesale operations are separated into divisions under the same ownership. Variations of the method have been employed in the United Kingdom, Australia and Sweden, among other countries, and former Liberal industry critic Marc Garneau said this month that a Liberal government would adopt it in Canada. In the paper, released Thursday and to be published in an upcoming book by the Canadian Centre for Policy Alternatives, Middleton notes the high level of concentration in Canadian broadband services, with 94.3 per cent of Canadian households served by incumbent telephone or cable companies. By contrast, in the U.K.—where functional separation was adopted—small or entrant ISPs are investing in their own infrastructure and prices have dropped dramatically, she writes. “By the third quarter of 2009, no ISP had more than 30% market share, and five providers had a market share of 10% or greater indicating a fundamentally different market structure than in Canada,” she wrote. Middleton cites the usage-based billing controversy in Canada as an example of “how incumbents operating in both retail and wholesale markets make it difficult for wholesale customers to develop their own viable retail products.” “Regardless of the final determination regarding usage-based billing in the Canadian broadband market, the issue illustrates the difficulties in establishing competitive retail offerings by means of regulated access to incumbents’ networks,” she wrote. “It is for this reason that functional separation is often proposed as a viable remedy.” Middleton also alludes to years of evidence presented to the CRTC showing that incumbents discriminate in selling wholesale network access to small reseller providers. But she wrote that she isn’t convinced functional separation would work in Canada. Canada does not have a single telecom incumbent, Middleton writes, and applying functional separation to both telecom and cable broadband incumbents would make the system more complex in Canada than it has been elsewhere. “Establishing functional separation in the Canadian broadband market would be complicated, but based on the results of functional separation in other regimes, it would be likely to foster more competition in the broadband market, particularly among DSL providers,” Middleton writes. “In other markets, functional separation was introduced earlier, allowing market entrants to build their businesses to a point where they are able to compete with incumbents.” Although the CRTC requires incumbents to allow competitor access to next-generation infrastructure, Middleton writes that “the bigger question is whether competitors can establish sufficient market share to stay in business into the future.” Middleton writes that independent, reseller ISPs’ prospects aren’t good with or without functional separation. “Even if the Federal Government were to follow the lead of other countries and require functional separation, by the time it was implemented, it is not clear how many independent ISPs will remain to benefit from this change to the wholesale regime,” the report says. news@thewirereport.ca

Functional separation in Canada? It’s complicated: Report

News | April 21, 2011

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