Any time you write about local competition in Canada, there is a tendency to cite the 95% or so of the market share controlled by incumbent carriers such as Bell or Telus. In an apples to apples world, this makes complete sense if you want to compare competition within the traditional wireline world. The wireline market continues to be focused on because most people still have wireline service despite all the talk about how young people are moving en masse to wireless phones. The flaw in this approach – according to the ILECs – is local competition also has to take into account wireless, e-mail, instant-messaging and Internet telephony. When all of these are considered, the ILECs contend their market share is closer to 80%. Of course, this math is powerful ammunition for the ILECs to turn around to the CRTC and plead their case that competition is alive and well. If this is the case, they argue, regulation the local market makes no sense. The efforts of the ILECs are gaining more urgency as the CRTC ponders over the future of Internet telephony. To regulate or not regulate that is the question. Given the CRTC appears to be leaning towards an environment of regulating the ILECs and letting the competitive carriers run free, you can see why Bell et al are driving hard on the “there is plenty of competition” mantra.

So how do you gauge the success of Call-Net Enterprises Inc. in the local telephony market? The company added about 34,000 new customers in the third-quarter, which brings its subscriber base to about 370,000. It's not a bad number but barely registers when you consider there are about 12 million residential households in Canada. One way of looking at it is Call-Net has plenty of room for growth; another is it is a bit player struggling to establish a viable business. Personally, I think it's interesting that Call-Net is adding real customers while a growing variety of Internet telephony service providers talk the talk. Until Internet telephony emerges from hype to reality in Canada, I'm going to give Call-Net the benefit of the doubt.

Looks like the telecom carriers in their search for new revenue sources are looking to jump on the porn bandwagon. In a new report, the Yankee Group suggests that revenue from “adult content” will climb to US$90-million in the U.S. and US$1-billion globally by 2008. In the U.S., the carriers will have to deal with child-protection legislation but they will likely get around the law by acting as a middleman rather than the content supplier. For those who has doubts about wireless porn, the Yankee Group says PhoneBox Entertainment gets more than 75 million hits a week. The two things I have learned about the porn industry – from a business perspective, that is – is do not under-estimate the industry's size, or its ability to use technology to deliver new prorducts and services. It was the porn industry, after all, that was among to capitalize on the VCR, e-commerce, and DVDs. See today's National Post (A3) for more.

I'm into new technology as the next guy and willing to concede there are all kinds of tech toys destined to be popular that I would never find useful. One of these items may be a wireless phone that can received high-definition TV signals. Texas Instruments Inc. has apparenetly come up with a new chip, and plans to have sample phones available within two years with a commercial launch in 2007. Maybe it's just me but I barely have the need to check e-mail while away from the office, let alone watch TV. But who knows what teenagers and couch potatoes will buy.

This may be an extreme position but a fundamental part of the telecommunications industry appears to be doomed.
The culprit is Internet-based technology, otherwise known as IP, used to send bits of information along high-speed networks.
While IP technology will provide new and innovative services to residential and business customers, it will also increase competition dramatically and make it hard for carriers and cable companies to grow sales and profits.
This is a harsh take on an industry looking to get back on its feet again, but the impending signs of disaster are becoming more evident. Last week, for example, the U.S. Federal Communications Commission approved rules that will let electrical utilities offer high-speed Internet services. The decision means carriers and cable companies will see more competition at a time when the competitive boundaries between carriers and cablecos are blurring.
If the utilities become serious about providing IP services, it could easily lead to a nasty battle as carriers and cablecos defend their turf while they try to expand into new areas themselves.
The environment is already intense as cablecos such as Rogers Communications Inc. look to get into the telephony market, while carriers move into the digital television business.
Meanwhile, companies such as Vonage Holdings Corp. are capitalizing on the growing popularity of high-speed access to offer services such as Internet telephony, video-on-demand, software-on-demand and streaming music. Many of the new service providers do not need alliances or joint ventures to reach consumers. All they require is a healthy marketing budget and consumers with a high-speed connection to the Net.
If IP and high-speed networks continue to become more pervasive, consumers and businesses will have many ways to access services. If you don't want traditional telephone service from Bell Canada; Vonage or Primus Telecommunications Canada Inc. will be happy to provide an Internet-based alternative. If you are unhappy with Rogers Cable Inc. or Shaw Communications Inc., Bell and Telus Corp. will have a digital television service. Down the road, you may be able to get these services through a large utility, such as Toronto Hydro.
With more competition and ability to pick and choose IP-based services from hundreds of suppliers, prices are bound to tumble. Look what is happening in the Internet telephony market where Vonage recently dropped its prices again — offering more evidence Internet telephony is destined to become a cheap, commodity based business with razor-thin or no profit margins.
For carriers and cablecos that have to maintain and upgrade high-speed networks, lower prices are a troubling development. If sales and profits are not growing, will anyone have the resources or the incentive to spend money to improve networks?
If carriers and cablecos pull back on network spending, this could be a nightmare for equipment makers such as Nortel Networks Corp. because there will be less demand for new technology. As Duncan Stewart wrote in this space last week, consolidation among equipment makers seems unavoidable.
It may be that network operators will have to reinvent themselves into “big pipe” operators, and let smaller, more flexible rivals provide many of the next-generation services. This may be an extreme scenario but there are markets such as long-distance where the business fundamentals are quickly eroding.
The competitive dynamics of the telecom industry could force many carriers and cablecos to make bold strategic moves to remain competitive and viable. A good example is Bell Canada's $200-million bid to win the telecom contract for the 2010 Winter and Paralympics Games in Vancouver. Bell's desire to capture the high-profile contact was highlighted by its eye-popping offer of $90-million in cash to the Vancouver Organizing Committee — nearly twice the $50-million proposed by rival Telus.
Michael Sabia, BCE Inc.'s CEO, made it abundantly clear a key part of Bell's decision is based on the idea that as technology makes it easier for suppliers to deliver telecom services, brand will become a more important tool to keep customers.
“What will differentiate us will be brand, and under brand will be service,” he said. “That brand power can increase customer demand for our products and, two, make customers more loyal to our products. Given the importance of churn in the economics of this business, anything to enhance customer loyalty is very powerful.”
At the end of the day, the emergence of IP and high-speed networks will be wonderful for residential and corporate consumers: more choice and lower prices.
But for carriers and cablecos, the future does not look good. There will be so much competition for business, it is difficult to believe anyone who is not lean, mean, flexible and lucky will survive.

Motorola Inc. may have taken the air out of the telecom equipment industry's recovery hopes when it talked about slower growth in the fourth-quarter – after posting slightly better-than-expected third-quarter profits and a 26% sales increase. The company said it expects to boost its share of the wireless phone market with the introduction of 17 new devices that hit the shelves this quarter.
Some more encouraging news came from Lucent Technologies, which had strong third-quarter results on strong wireless sales. The quarter marks the fifth consecutive profitable one for Lucent, and its first profitable year since 2000.
Next up (apparently) is Nortel Networks Corp., which is expected to release its third-quarter results later this month – likely on October 27th when it posts its bi-weekly update to the Ontario Securities Commission.