Reseller ISPs feeling squeezed in Internet market

Overall Internet service revenues increased in 2010 but the market share of small, reseller ISPs continues to decline, CRTC statistics show. The commission’s annual Communications Monitoring Report, released at the end of July, showed an overall increase in Internet service revenue, from $6.5 billion in 2009 to $6.8 billion in 2010, representing growth of 4.2 per cent. It also showed a move towards service bundling, where companies operating in various markets like television, Internet and telephone can offer multiple service bundles. Approximately 91 per cent of telecommunications revenues were from providers offering all telecom market services, such as mobile, Internet, and telephone services, the report said. The five largest companies in Canada held 83 per cent of the communications industry’s revenue in 2010, with the next five largest companies holding nine per cent. “The continue to have a very small piece of the market,” Tom Copeland, chair of the Canadian Association of Internet Providers (CAIP), an organization representing small ISPs, said in an interview. “Despite the efforts of the industry and the CRTC to ensure there’s ample competition, it’s clear year after year in their monitoring report that something’s broken.” Smaller, reseller ISPs lease network infrastructure from the incumbents so they can sell Internet services to retail and business customers. According to the report, the incumbents’ DSL residential Internet subscriptions grew by 1.5 per cent between 2006 and 2010, with market share declining from 42.9 per cent in 2006 to 38.3 per cent in 2010. Cable providers’ subscriptions grew by 8.5 per cent over the same period, with their market share rising from 46.9 per cent to 54.5 per cent over the four years. Cumulatively, the DSL and cable incumbents’ retail Internet subscribers grew by 5.3 per cent over four years, representing an increase in market share that grew from 89.9 per cent in 2006 to 92.8 per cent in 2010. The reseller providers’ retail Internet subscriptions dropped by 4.1 per cent over four years, while their market share declined from 10.2 per cent in 2006 to 7.2 per cent in 2010. Copeland said the national figures are skewed by the incumbents' out-of-territory areas—such as Bell Canada’s presence outside of Ontario and Quebec—which means the reseller ISPs' share of the market is probably closer to four per cent. “That’s a very good indication that the current regulatory structure for wholesale services isn’t doing what needs to be done as far as competition goes,” Copeland said. “If we’re seeing that decline when the incumbents are increasing their market share, it would indicate to me that there’s a reason that the independents are falling behind. Typically, that’s because of the wholesale cost structure that’s in place today, where there’s just phenomenal margin squeeze being placed on the independents, and the incumbents start bundling all of their various services.” Catherine Middleton, the Canada research chair in communication technologies in the information society at Ryerson University, said there’s a lack of competition in the wholesale market. Independent ISPs in other countries hold a higher market share, she said. “It’s the challenge of the independents being able to sell a service that’s competitive.” Middleton said regulatory challenges like speed-matching and wholesale usage-based billing have made it difficult for resellers to grow their market share. The incumbents' revenues from wholesale access grew by 6.6 per cent from 2006 to 2010 overall, but declined by 0.3 per cent last year. John Lawford, counsel with the Public Interest Advocacy Centre, said the data shows that the incumbents aren’t putting much effort into their wholesale business. “If everybody was growing, I would expect the third party folks would get some market share from the other guys and do some price pressuring and all that kind of stuff. If that were happening you would see wholesale revenues growing. But they’re not,” he said in an interview. “During all this regulatory inertia, it’s been difficult for them. The cable guys don’t sell much. The ISPs don’t like to and they don’t want to and they do only when they have to. There’s no certainty for the little guys—they’re not growing fast, they’re not ordering a lot.” The incumbents say competition is strong in Canada's Internet market and that they continue to invest revenues into improving and expanding their own networks. Bell Canada told CRTC commissioners at a hearing on wholesale usage-based billing last month that its capital expenditures on Internet services in 2010 exceeded its Internet revenues, and that subscribers have remained flat and traffic growth has “exploded.” The company said the model for recovering its network investment costs is broken. Copeland said the incumbents are making up for slower revenues on the wholesale side with revenues from the retail business. He said the CRTC statistics show, as it has in past years, that retail competition is strong between the incumbents but not between the incumbents and reseller ISPs. mburgess@thewirereport.ca

Reseller ISPs feeling squeezed in Internet market

News | August 9, 2011

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