Open Letter to the CRTC and Telcos

Drive Innovation and Long-Term Profits


Recently, the CRTC opened Canada competition, and the three major wireless providers launched a united campaign opposing unfair rules for a January 2014 wireless spectrum auction. Steven Globerman of the Fraser Institute, Kaiser Professor of International Business at Western Washington University, previously at Simon Fraser and York University, wrote a release indicating the rules for Canadian ownership handicapped Canadian operators unfairly with a 10% restriction on foreign ownership, on August 26, 2013.

The CRTC annual report indicated the Canadian wireless industry was competitive and “well served” based on prices compared to the US. However, a time-study calculation of the Herfindahl-Hirschman Index (HHI) by Canadian Media Concentration Research (CMCR) project indicates the Canadian wireless industry is too concentrated. For 2012, the HHI for Canada for wireless was above 95% which indicates very high concentration. In the US, a HHI of 25% is considered highly concentrated: [1]

The fact that all three major wireless providers placed an ad together is the further sign of collusive behaviour contrary to Canada’s Anti-Competitive Act, and possibly a strategic error by their respective CEOs. The CRTC had announced in December 2013, of a probe at wholesale roaming rates, terms and conditions in Canada[2] because of complaints by smaller wireless carriers.

The argument raised by major operator-innovators is that they should enjoy the extraordinary profits to funding new innovation. However, because Canadian firms buy LTE technologies and do not “self-develop equipment and never have, but develop innovative billing and services for the equipment they buy” stated Rob Wood, an ex-Nortel Executive now President of RGW Telecom, a consultancy for tech startups.

I argue that their “innovation” profits should be significantly lower than monopolistic or oligopoly profits seen today.

LTE was first launched by Telia Sonera in Stockholm and Oslo in 2009, and adopted in the US by Verizon in 2010, as a close 4g solution. Japan and India are adopted LTE and it will likely become the first 4g global platform. Rogers was the first Canadian telecom provider to adopt LTE in March 2013, 3 years after Stockholm and 1 year after Verizon.

If Canadian telecommunications firm employed Canadians at a higher rate, there may be an argument that the profits go to economic development and job creation, increase the tax base and fund government programs. However, this has shown not to be the case with major firms failing to hire as quickly. Job growth has staggered and remained flat through 2011 and the Canadian government announced this week to expect slow growth through 2014.

Large firms, “sitting on hoards of cash,” are not hiring despite a request by former Dean Roger Martin, University of Toronto and head of the Martin Prosperity Institute, a Toronto-based think-tank. Information and Communications Technologies (ICT) industry-wide revenues have increased consistently through 2011 to well over $57 billion[3] but employment has stagnated and declined to 2011. Therefore, the revenues are not creating more jobs.

So, where are these revenues for innovation going?

The Total R&D expenditures by communications services amounted to 14.2% of $4.8 billion[4] or $680 million in total in Canada. Arguably, this is not nearly enough to drive leadership in global telecommunications innovation.

According to Booz&Co., Samsung will spend $10.4 billion, more than all three Canadian telecoms combined; Ericsson and Huawei spent $4.9 billion.[5] Ericsson is leaving the smartphone business. Nokia spent $6.1 billion, and Apple spent $3.4 billion. Huawei spent $4.9 billion and 13.7% of its workforce is in R&D.

Samsung pre-announced its success of 5g development targeted for 2020, on a 28 GHz (millimetre bandwave) transmission with speeds up to 1.056 GBps with a distance of 2 km, and the download of 3D movies in seconds.[6] However millimetre bandwave does not penetrate walls.[7]

Canadian Innovation

I asked Robert Wood, Robert Wood, former VP Data Products at Nortel, currently with Ontario Centres of Excellence, and President of RGW Telecom, on the Google investment in Nest for $3.2 billion and how Canadian investments in mesh networking technology may be impacted by this event, a company he had been following for several years.

He stated innovations recently in mesh network technology including Zigbee has not been as successful as anticipated.

“Appliances have long life cycles and network connection doesn’t yet offer clear services that people need or want. I think it’s something like the home PC. It took a long time before really useful applications came along that drove adoption.”

He continued, “It may be that the market need for its characteristics have been slower to develop than anticipated or it might have enough rivals in Z-wave and low power Blue Tooth.”

Talal Ghaith, Marketing Director at Orange conferred, “mesh and Zigbee like networks which are stationary back boned, will mean that more mobile broadband will be needed at the end user level; therefore more pressure on BW allocated, growth is there but will need 5-10 years.”

Wood added, “Home use of Zigbee does not require a mesh. Distances are short enough that there tends to be a master with internet connection (usually Wi-Fi) and slaves that communicate directly (rather than through mesh hops) to the master. Homes have low cost wireline internet so data traffic is generally directed into the wireline network from a mobile via Wi-Fi avoiding the expensive cellular network. Home security devices tend to offer cellular data back-up in case the intruder cuts the internet cable.”

“The new bandwidth auctions focus on 700 MHz which has better propagation through obstacles than the existing cellular frequencies improving coverage in hard to reach areas like elevators. In parallel, the cellular equipment providers have been developing smaller and smaller base stations that allow deployment in building to address propagation and coverage issues with the existing frequencies. Using a lower frequency probably is a lot cheaper than deploying small localized base stations.”

Michael Dr. Mallien, Head of Consulting and Product Management at the Quality Group of IT Vision GmbH, does not see an impact of mesh networking technologies to 4g or 5g, “since both technologies serve different worlds.”

Arguably, then, Canada’s investments in R&D have less impact than our US and Korean counterparts with global deployments. If 700 Ghz wireless is available, by 2020, then Zigbee and mesh networks will have limited use as that bandwidth penetrates walls well. An entire set of technologies developed may be obsolete in 7 years, inside the home.

Does this matter?

If it does, to keep an accelerating momentum for our innovation, Canada should drive intense competition and inject more resources and increase R&D tax breaks in attracting R&D scientists and net employment.

In Canada, Blackberry—focused on a form factor-platform war with Apple—but should have seen Samsung coming—taking share away from Nokia and Blackberry—while Apple held steady and defended itself.

In December 2013, The European Commission announced its 5g Infrastructure PPP announced the next generation of communications networks will be “Made in EU” in December 2013.[8] The only Canadian entry into the 5g development is based in Ottawa: however, this firm is actually Huawei, and poses a conflict of interest with Canadian security and was excluded from a Wind Mobile joint venture in the bidding for the 700 MHz wireless spectrum because of concerns with CSIS and international hacking originating from Chinese government IP and computers[9] and Huawei’s founder having close ties with Chinese military.[10]

The Canadian Government and the CRTC must take a leadership role in deciding how to proceed. Wood believes that Rogers and Blackberry with approximately 1000 ex-Nortel scientists in R&D in Ottawa should partner with Ericsson to gain a seat the table with Europe’s 5g PPP.

Canadian nationality aside, Bell has American roots and a longstanding relationship with Verizon is not a good argument as George Cope highlighted in his letter to all Canadians, in response to Bell Canada’s letter.[11] Inviting Verizon, ATT, Sprint or T-Mobile to participate is another option.

Vivek Raval, Solution Manager at Ericsson AB, indicated, “I think it is industry requirement which will drive need for 5G rather then [sic] devices itself. So to say latency requirement, data rates requirement for services will need one technology or other.”

A CBC chart showed that a small country like Denmark had annual phone bill of $141.91 per year[12]

Canada ranked last for roaming fees of all OECD nations, and Canadians pay $175 more than the OECD average for a mid-range cellphone package each year, and ranked as the third most expensive of all OECD nations for a “low” usage plan.

The CRTC has a leadership role to play.

The Canadian Radio-television and Telecommunications Commission (CRTC) is an administrative tribunal that regulates and supervises broadcasting and telecommunications in the public interest.

We are dedicated to ensuring that Canadians—as citizens, creators and consumers—have access to a world-class communication system that promotes innovation and enriches their lives.

Currently the only people enriched are the employees and shareholders of Rogers, Bell and Telus, and not all Canadians, because we pay exorbitantly compared to OECD nations.

The earnings per share (EPS) for rogers has increased each year from 2008 to 2012 from $1.59 per share to $3.34 per share. For Telus, in the same period, from $3.52 to $3.76; and Bell, $2.74 to $3.39.

Canada needs a national telecommunications and wireless strategy with innovation as a priority and the CRTC needs to follow on its commitment to ensuring that our communications and enriches all Canadians’ lives. Telus employs 41,100; Rogers, 28,745; and Bell, 55,250. Rogers is the most efficient.

Al Leong

MBA Innovation Strategy and Global Management, University of Toronto
Management of Complex Product Development Projects, M.I.T.

[1] http://www.justice.gov/atr/public/guidelines/hmg-2010.html#5c

[2] http://www.newswire.ca/en/story/1279367/crtc-to-take-closer-look-at-wholesale-roaming-rates-terms-and-conditions-in-canada

[3] http://www.ic.gc.ca/eic/site/ict-tic.nsf/eng/h_it07229.html

[4] http://ca.search.yahoo.com/r/_ylt=A0SO815JuuBSHyEABFDrFAx.;_ylu=X3oDMTE1bTFxbmlzBHNlYwNzcgRwb3MDMQRjb2xvA2dxMQR2dGlkA01TWUNBQzFfNzY-/SIG=12frmb97q/EXP=1390488265/**http%3a//www.ic.gc.ca/eic/site/ict-tic.nsf/eng/h_it07229.html

[5] http://www.bloomberg.com/news/2013-07-02/huawei-woos-carriers-with-research-boost-beyond-me-too-networks.html

[6] http://english.yonhapnews.co.kr/techscience/2013/05/12/17/0601000000AEN20130512000900320F.HTML

[7] http://www.forbes.com/sites/nigamarora/2013/05/14/ten-reasons-why-samsungs-5g-is-mostly-hype/

[8] http://ec.europa.eu/research/press/2013/pdf/ppp/5g_factsheet.pdf

[9] http://www.cbc.ca/news/politics/csis-warns-business-leaders-of-chinese-cyber-spies-1.1249002

[10] http://www.washingtontimes.com/news/2011/oct/11/chinese-telecom-firm-tied-to-spy-ministry/?page=all

[11] http://www.bell.ca/an-open-letter-to-all-canadians

[12] https://www.openmedia.ca/upgradecanada/hitshome/price-gouging/price-gouging-global-context

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