CRTC's Key Decisions (vice-chair, telecom & CDNA)

Canada's telecommunications regulator is expected to make two decisions as early as this week that could have a major impact on how the $32-billion industry develops at a time when new technology is disrupting the competitive environment.
It is anticipated the Canadian Radio-television and Telecommunications Commission will name a new vice-chair, telecom to replace David Colville, who retired last month. The vice-chair will play an important role in setting a tone for the CRTC's regulatory and policy framework. Mr. Colville made his mark by encouraging more competition.
The CRTC is also expected to release its decision on competitive digital access services (CDNA), which involve how much competitive carriers such as Call-Net Enterprises Inc. pay to lease essential services from rivals such as Bell Canada and Telus Corp. For competitive carriers, a decision in their favor could save them millions of dollars a year.
It is unclear when the CRTC will unveil its decisions but there is rampant speculation within the industry it will happen soon. In particular, there is chatter the leading candidates to replace Mr. Colville are Ian Scott and Richard French. Mr. Scott is vice-president of federal government affairs and broadband policy with Telus Corp. Mr. French was a former executive with Bell Canada and a cabinet minister with the Quebec government in the 1980s.
Brian Sharwood, an analyst with Seaboard Research, said Mr. French could be the front-runner because he has a broad resume that includes working in the wireless industry in India, and helping develop regulatory regimes in other countries. “He has more of an international perspective and can offer what are we doing right, what are we doing wrong, and what can we learn from India, Europe and the U.S.,” Mr. Sharwood said.
Janet Yale, executive vice-president, legal, government and regulatory affairs, said regardless of who becomes vice-chair, it is important to have a person with a deep understanding and knowledge of the telecom industry.
“We need someone with vision and ability to think about the big picture perspective of where industry growth and public policy are going, and have the ability to stay the course,” she said.
Where Mr. Colville helped create a more competitive landscape, Ms Yale said the new vice-chair faces a major challenge to manage an industry where the lines between telecom and cable companies are blurring as carriers move into television and cablecos get into telephony.
“It's not just about telco anymore but the regulation of telecom and entertainment services that people will get from that pipe coming into their homes,” she said.
While the CDNA decision is far less sexy than a new vice-chair, it is important from a financial and strategic perspective. The issue dates back to the 2002 price-cap regime where the CRTC created a new class of essential services that competitive carriers buy from incumbent carriers at cost plus 15%.
Shortly after this decision, Call-Net filed an application to have more services deemed as essential so prices would be reduced. Analysts estimate that of the $40-million Call-Net currently pays incumbent carriers for digital access services, the company could save as much as $10-million if the CRTC approves its application.
Telus and Bell argue the entire CDNA regime makes no sense because its runs counter to the CRTC's philosophy to support telecom carriers who own and operate their own facilities – rather than those who lease network services from rivals.
Ms. Yale said it would be wrong to expand the CDNA portfolio because these services can now be bought from several suppliers. In Western Canada, she said, Call-Net can lease services from Telus, Bell West and Alberta's SuperNet.
With the exception of situations where there is only one supplier serving a remote community, Ms. Yale said the CRTC should let competition set prices. “At the very minimum, we want to keep the status quo but, obviously, our preference is not at all,” she said.

TotalTalk Trial

Maybe it's a bad case of demo karma but my experience with AOL Canada's TotalTalk has been frustrating. After following the installation instructions, I got a dial tone but every time I tried to place a call, it would ring once and then give me a busy signal. The support folks bent over backwards to help me but had no luck – at least so far – fixing the problem. If the service worked properly, I would give TotalTalk passing grades for easy installation and fairly good service quality but I still think it's too expensive to compete against Vonage.

VOIP's Impact on Prices

There has been a lot of focus on how Internet telephony service providers such as Vonage are offering plenty of features at low prices but perhaps more attention should be ont their impact on incumbent carriers. To compete, ILECs will have to lower prices, add more features and value-added bundles or offer VOIP. Valued-added services such as voice-mail offer ILECs huge margins but this business could shrink as VOIP grows. According to SeaBoard Group, Bell Canada raked in $931-million from value-added services in 2003, and $706-million during the first three quarters of 2004. You have to believe Bell – and other ILECs – are wondering if they're facing the long-distance/market erosion thing all over again. For more on the impending price war, see below.
The Internet telephony market is expected to gain more momentum this year but incumbent carriers like Bell Canada and Telus Corp. will not be able to fight back with lower prices until regulatory changes are made, according to a new report from Seaboard Research.
This means players like Vonage Holdings Corp. and Videotron Ltee have a window of opportunity to use low prices and feature-rich service to attract consumers. Seaboard, however, believes a price war may occur if the rules are changed when the Canadian Radio-television and Telecommunications Commission conducts a telecom policy review next year.
Seaboard said incumbent carriers would then be forced to rethink local service and feature prices.
“With the VOIP carriers including all their features — voice mail, call display, call waiting and such — as part of the package, it will be an impossible challenge for telcos to continue to expect customers to pay the current rates. The value proposition will have been eroded. The present rate structures will be untenable.”
Until the telecom rules are amended, however, incumbent carriers have little pricing flexibility. Any changes they want to make to the cost of local service or features have to be approved by the CRTC. This means they are unable to respond quickly to new offers from unregulated rivals like Call-Net Enterprises Inc. or Vonage.
Seaboard expects more consumers will be drawn to low-cost Internet telephony plans. Vonage is selling its basic residential service, which includes many features, and 500 minutes of long-distance in North America, for $19.95 a month. Bell charges nearly $50 for the same package.
Bill Rainey, president of Vonage Canada, said lower prices for local service are a result of new technology. “The pressure on [carriers] will be tremendous because they have been over-charging for years and years,” he said.
“[Incumbent carriers will] have to aggressive to be competitive. They will have to adjust. It means adapting in ways that will be uncomfortable compared with the past.”
Seaboard expects there will be 2.12 million Internet telephony customers by 2008, compared with 32,800 in 2004. It expects cable companies to have more than half the market in three years, while telecom carriers and independents like Vonage, will each have 20% to 25%.
Roy Graydon, Call-Net's chief financial officer, said the company added more than 100,000 local customers in the third-quarter, and any inroads made by cable companies in 2005 will not be a “huge disruption” to the local market. “We have not noticed any competitive impact from VOIP,” he said.
That may change now that Videotron has launched a service offering discounts of more than 30% for customers who also have its cable and broadband services.
Iain Grant, Seaboard's managing director, said incumbent carriers have two options in the local market: they can reduce prices when the regulations change, or they can get on the Internet bandwagon and compete on price and value-added features.
Mr. Grant said Bell will continue to sell local service to people who have no interest in new services, but it will have no choice but to gravitate to the Internet to pursue consumers who want more features.
© National Post 2005

If not 8×8, Then Who?

To pursue the 8×8 train of thought a little more, I'm wondering how investors can leverage the emergence of VOIP. Do they take advantage of industry growth by pursuing companies in the hardware, software, security or service sectors? If so, do they stick with well-known brand names such as Symantec, Juniper, Cisco and Nortel, or are there interesting niche players out there? Any feedback/ideas would be much appreciated – not from a personal investment point of view but in terms of getting a better handle on whether the investment opportunities out there come anywhere near the hype surrounding VOIP.

More 8×8 Math

If you haven't read the comment on this blog about 8×8 Inc. and its third-quarter results, check it out. “Inspired” – I use that word loosely! – by my posting, someone did some more number-crunching on 8×8's balance sheet and looked at things such as cost of acquisition and sales per day per subscriber ($1). It's not a pretty picture, which makes 8×8's $130-million market capitalization looks more and more suspect. For all the talk about 8×8's video service, people really need to scratch beneath the surface. Sure hope Jennifer Garner didn't take 8×8 shares for appearing the company's new advertising campaign.
Addendum: Andy Abramson has a posting that talks about 8×8 suffering terrible technical problems, including dropped calls. Yikies!

Nortel's Letter to Shareholders (2003)

Take a look at Nortel's 2003 letter to shareholders . It's a pretty strange read because CEO Bill Owens is talking about a period of time that happened 13 to 25 months ago. There's not much in the way of strategic insight but lots of optimism about the future, including a nice, warm-all-over conclusion that: “Nortel is poised for growth and renewed success, supported by a compelling vision already endorsed by customers worldwide.”
There is nothing in the letter about Nortel's second internal investigation into revenue recognition, the flurry of class-action lawsuits it faces, the investigations by the FBI, RCMP, SEC and Ontario Securities Commission, the need to post 2004 results and, finally, when it plans to hold an annual shareholders meeting.