Notes for an Address by Sheridan Scott Commissioner of Competition

To the Telecom Summit

Toronto

June 18, 2008

Introduction

Thank you for your introduction, and for this opportunity to join you.

This is my fourth presentation to the Canadian Summit – my third as Commissioner of Competition. Some of you may recall that, at my first presentation as Commissioner back in 2004, I refrained from commenting about certain aspects of telecommunications policy. I had only recently joined the Bureau after a career in the telecom industry and had been recused for a year on most telecom matters.

But I did take advantage of that opportunity to talk about the process of moving from regulated markets to open competition, and I focused principally on how the Competition Bureau and the CRTC could work together to help that happen.

In just the few years that have passed since then, the technology has evolved, the marketplace has evolved, and the public policy environment has evolved. That powerful combination – technological innovation and consumer demand – continues to push the agenda.

An Emerging Debate

And throughout this change, the debate continues on the interplay between markets and regulation.

Over the past few years there have been many voices added to the debate on where the balance between markets and regulation should lie. In March, 2006, for example, the Telecom Policy Review Panel issued its final report. Among the themes: There should be a presumption in favour of the market. And where government intervention is required, it should be specifically targeted to meet clearly defined objectives in the least costly and intrusive way. The Government responded quickly. Just three months later, it tabled a proposed Policy Direction to the CRTC that signaled its desire for market forces to guide CRTC decisions to the maximum extent feasible.

And last year, the Government commissioned a Competition Policy Review Panel, chaired by Red Wilson, to review the Competition Act and the Investment Canada Act. Over the past year, the Panel has received 148 submissions, including several from telecommunications companies. It is scheduled to report to the Industry Minister by the end of this month. I have no doubt it will advance the discussion about the role of competitive markets in building prosperity.

When I look at these trends over the past few years, I could not be more pleased that the Government has made competition policy such a high priority.

The discussion on markets versus regulation will continue in other fora. Recently, for example, the CRTC announced the launch of its review on the issues of the application of the Broadcasting Act to new media. The Commission also began hearing a competitive dispute between Bell Canada and independent internet service providers. The issue involves whether Bell has the right to shape its wholesale traffic to discourage some customers from clogging up bandwidth by downloading and sharing large files.

The developments raise the urgency of a question that public policy has been tip-toeing around for a decade or more, but which we will now have to confront head-on: Should the government regulate the internet?

Ultimate Goals

Neither competition nor open markets are ultimate objectives in their own rights. Rather, they are tools to be used to reach other stated objectives, whether consumer choice, innovation, prosperity, or the other benefits Adam Smith first identified when he realized that individuals pursuing their narrow interests often create widespread social gains.

From the Bureau’s perspective, competition policy leads to a thriving market; competition leads to innovation and productivity and productivity leads to prosperity for Canadians.

However, as I have said on many other occasions, we are not blind advocates for competition.

There are other values that we – as a country, as a culture, as a civilization – pursue in addition to efficiency and wealth that may not be attained through reliance on the market. For example in his recent book, Supercapitalism, Robert Reich emphasizes how the global marketplace has rewarded us handsomely in our capacities as consumers and investors. But as individuals, we also have a role as citizens, and as citizens we might pursue different objectives than we would as consumers or investors. Blind faith in the market may not deliver the results we want as citizens. Hence the need for intervention.

My response to this idea forms the main point I want to make this afternoon: policy makers must be very clear about the precise nature of what an intervention should be designed to address. In other words, what explicit objective is the “citizen” pursuing? And by citizen Reich means actual citizens, not the lobbyists and interest groups purporting to represent the public interest.

The Telecom Review Panel also recommended that intervention should always be based on explicit, stated objectives. And so if the government’s goal is protecting new entrants – or incumbents for that matter - say so, and explain why it is necessary. If the goal is protecting consumers, then be very clear about why having the captains of industry hugging the harbour rather than navigating the high seas benefits the consumer.

When Industry Canada established its third renewed Spectrum Policy Framework for Canada, for example, the Industry Minister announced there would be set asides for the spectrum auction. He was careful to point out that there are indeed public policy objectives he wanted addressed by keeping part of the spectrum guaranteed for other providers. He spelled them out: greater competition, more innovation, better service, more choice.

The reason for intervention should not be so vague as “finding an appropriate balance.” Balance of what? Why cannot that balance be created ultimately by market forces? Often the pursuit of “balance” is little more than the protection of the status quo. Those who enjoy a market advantage will say that we have struck the right balance. They do not want more regulation, but neither do they want deregulation to open the market to new competitors. Is protecting the status quo the best way to increase innovation and prosperity? If you believe that, then state it, and let the debate begin.

The Bureau’s experience in both telecom and broadcasting has taught us a lot about regulation and other forms of public policy intervention. We know that there are benefits, but we also know that there are always costs: administrative complexities, unforeseeable distortions, and, as is increasingly the case, falling behind the speed of technological innovation. These too should be carefully weighed by policy makers.

The temptation is often to use intrusion to balance several different objectives at once. That’s often the recipe for reaching none of the stated objectives, while at the same time calling down the harpies of unintended consequences.

Finally, and again as the Panel suggested, any intervention should be the least intrusive among the possible options. Sometimes that may be a mechanism that influences the price, such as a tax or a subsidy. Sometimes it may require a quantity or concentration restriction, such as a spectrum cap. And sometimes, where there are persistent market power concerns, it may require full economic regulation. But I believe that regulation should always be viewed, not as a first step, but as last resort. Regulation if necessary, but not necessarily regulation. And each intervention in the market should be constantly subject to review to assess whether the objectives remain valid and whether more market friendly solutions exist.

I’ve had the opportunity to watch the impact of regulation from both government and private sector perspectives. From what I’ve seen, neither has a monopoly on all the wisdom and the right answers. However, in this fast-paced global economy, accelerated still further by deregulation and technological change, I would increasingly put my confidence in the market.

Success stories

The experience of telecom policy provides a good example of the benefits. Many of us recall the concerns expressed 15 years ago over deregulating markets that had long been treated as a natural monopoly. But the value of unleashing competition is hard to deny.

Do you remember how much it cost to make an average long distance call in Canada in 1992? Somewhere in the order of about 25 to 30 cents a minute. Since then, the price of just about everything has increased. How many of us would like to fill our gas tanks at 1992 prices? But long distance charges? Just pennies a minute. Free, in some cases.

And there’s so much more for consumers. Not only did prices fall; usage went up. The pie grew bigger. And consumers have their choice of telcos, competitors, VoIP, dial-around services, phone cards, and the list goes on.

What happened? The competitive process worked. To be sure, there were many companies that changed hands or restructured; and many disappeared completely while others emerged newly formed from the ashes. But that simply reflects the fact that competition is dynamic. And this brings me to the Competition Bureau’s role in this marketplace. We protect competition, not competitors. We make sure the competitive process works, and that market forces are sufficient to protect consumers, but we don’t pick winners and losers.

Regulation should be developed on the same principle: it should protect consumers, and the interest of citizens, but not worry about the viability of individual players. The important thing is to trust that the market is usually going to get it right, even if some of the participants may not like the reality. Some will insist that the sky is falling, and the sun will not rise on the morrow. Over the years, we’ve heard predictions about winbacks, targeted pricing, and the death of Canadian broadcasting. But the sky is still above us; the sun continues to rise.

We face some of the same issues now with deregulation of local phone markets. Two years ago, the cable companies claimed that targeted pricing by incumbents would drive them out of local telephony. This hasn’t happened. Instead, we have seen dramatic shifts as consumers switch. Competition in places like Montreal became particularly intense when the cable company offered local service at around $16 a month. Freed from marketing restrictions, the telephone company responded, to the benefit of consumers.

The power of empirical analysis

I think that the case for reliance on the laws of supply and demand will be increasingly easy as we move forward. Indeed, with every success there’s a more compelling argument.

I also believe that we will get better and better at demonstrating and quantifying the benefits of competition. This is due in part to the effect of two other laws you are certainly familiar with: Moore’s Law – the processing capability of computers doubles every 18 months – and what is sometimes called Kryder’s Law – that the storage capacity of computers doubles every two years. As Ian Ayres observes in his book Super Crunching: … We are in a historic moment of horse versus locomotive competition, where intuitive and experiential expertise is losing out time and time again to number crunching.

His research is very disturbing for those of us who pride ourselves as having the brains and experience to make accurate predictions on what will happen in areas of our expertise.

Think you know something about wine tasting, for example? People like Robert Parker certainly do. If you are a law professor, do you think you could make a fairly accurate prediction on how the Supreme Court will find a case? If you are a physician, do you think you would be better than a computer at diagnosing your patient? But in each of these cases, Ayres shows us computerized data mining will yield more accurate results than the expert opinions of those who have been following the issues most closely.

This should be a humbling message for those of us who think we can predict how competition or how regulation will affect the market. And it is a reminder of how we have sophisticated tools to assess the past. We need to make better use of the data available. Before we intervene in the market on the basis of our expert opinions and lifetime of experience, we should not underestimate just how much more powerful and accurate quantitative analysis has become.

Recently, the wholesale framework proceedings generated reams of data for the record. The extensive data set was a rich source for finding answers to central questions such as: are the objectives of the wholesale regime being met? Was wholesale access encouraging investment in new facilities? Were consumers looking at choices based upon wholesale and resale as effective competition? Whether this analysis was conducted is unclear but the potential for evidence based decision-making was clearly present.

In short, before we regulate, it is critical that we ask ourselves tough minded questions about the objective we are pursuing, that we mine relevant data relentlessly and that we design the best means for attaining our goals surgically, with the benefits of competition in mind.

Convergence and new media

We’ve come some way in applying this approach to telecom. But telecom isn’t just telecom anymore. Rather, telecom, like broadcasting, is beginning to converge to a single IP-based platform. And once we are talking about the Internet, the need to design public policy successfully becomes even more challenging.

I don’t need to stand up here and tell you how powerful the Internet is, or how quickly it is becoming the key delivery method for services traditionally received from telephone and cable companies. The Internet is the network of all networks, and access at next-generation speeds will be vital to the continued prosperity of all Canadians, in such areas as education, health, entertainment, communications, and e-commerce. But as the Internet begins to subsume telecom and broadcasting networks, which traditionally have been subject to very different forms of regulation, the question becomes what, if any, regulation is appropriate for the Internet?

This question is best answered with the principles of smart regulation I’ve been talking about today. What is the public policy objective that isn’t currently being met by market forces? Is is investment in next-generation networks? Is it cultural protection? What is the empirical evidence the market isn’t or won’t be meeting that objective? What is the most direct and least intrusive way of achieving that objective? Convergence isn’t a blank cheque for traditional regulation. Convergence should instead be seen as an opportunity to get things right the first time, based on what we’ve already learned.

Most importantly, it’s an opportunity to engage in evidence-based public policy. The CRTC will be making important determinations in this area over the next year, starting with their review of wholesale traffic shaping and continuing with their new media proceeding next year. Certainly feelings run high on both of these topics. But that may be even more reason to rely on cold hard facts and analysis when determining whether to intervene. The Internet has grown dynamically and dramatically over the last ten years, and new services are being introduced almost daily without any regulatory hand. We need to be clear what our objective is, and what the effects of intervention will be, if we choose to change that system now. Any regulatory initiative that may limit consumer access to content or disincent investment in next-generation networks should be considered very carefully.

Conclusion

For Canada, the important thing is to continue our progress towards greater reliance on market forces. We should resist the temptation to undo the progress of the past few years because we are afraid of rapid technological change. That change is the product of a free market, rather than a threat to it. We should enable the market to attract investment, promote innovation, improve productivity, and build prosperity. We should not constrain the market unless it clearly fails to deliver on the goals we want as citizens.

Any decision that the market has failed should be based not on any vested interests or speculative concerns but on the extensive databased analysis – the super number crunching in Ian Ayres words – that technological change is rapidly enabling. I believe this will give us the best answer – as consumers, investors and citizens – about how to address the policy challenges of the Internet.

Thank you for your time and attention.