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CRTC Picks Wrong Analogy In Net Telephony Ruling

When the Internet burst onto the public stage in the mid-1990s, legal scholars initially relied on analogies to identify an appropriate legal framework.  Likening the Internet to the “Law of the Sea” or the “Law of Outer Space”, their hope was that an existing body of law would provide a ready-made solution to the Internet’s inevitable legal challenges. The approach failed, however, as the complexity of the Internet, as well as the genuinely novel issues it raised, rendered each successive proposal unsatisfactory.

Last week marked the return of the Internet analogy as the Canadian Radio-television and Telecommunications Commission (CRTC) issued its much-anticipated Voice-over-Internet Protocol or VoIP decision.  In its search for an appropriate regulatory framework, the CRTC was guided by a single analogy – its belief that the provision of local VoIP service is most like traditional local phone service and that similar rules should therefore apply.  Unfortunately, much like the earlier Internet analogies, this one is not a perfect fit.

In a few short years, VoIP has taken the telecommunications world by storm with at least 1,000 Internet service providers already offering it to their customers.  The ability to use a high-speed Internet connection to complete voice telephone calls offers the promise of lower prices, increased features, greater competition, and a viable substitute for traditional local phone service.

The CRTC is clearly anxious to foster local telephony competition and it views VoIP as perhaps the best opportunity yet to break the monopoly over local telephone service currently enjoyed by Bell Canada and Telus, Canada’s incumbent telecommunications providers. 

In order to achieve a robust competitive environment, the CRTC’s approach rests on three pillars.  First, Internet based VoIP providers, such as the enormously popular Skype, should be exempted from the Canadian regulatory framework since these services are not interchangeable with local telephone service.

Second, the CRTC is committed to ensuring that VoIP services that offer local phone alternatives can serve as functional equivalents to traditional local phone service.  The Commission argues that a necessary condition is that VoIP services include many of the same basic protections that typify traditional phone service.  It has therefore mandated that VoIP providers feature 911 emergency service and offer privacy protections equivalent to those found with traditional local service.  In fact, the CRTC even provides for the inclusion of VoIP phone numbers in local phone directories.

The Commission correctly identifies many of the features needed for a level playing field, but this pillar also demonstrates some of the limitations of relying on the traditional local phone service analogy.  For example, the decision grants consumers the right to select an alternate VoIP long distance provider, much like local service.  This makes little sense, however, since consumers choose VoIP providers primarily on the basis of their long distance services, rendering it unlikely that consumers will opt for different local and long distance VoIP providers.

While the long distance requirement is relatively harmless, it is the CRTC’s third pillar that is extremely problematic.  Given the incumbents’ dominance in the traditional local market and their potential ability to gain significant VoIP market share by underpricing the competition, the CRTC believes that fostering a competitive VoIP market requires similar controls.  Last week’s decision therefore subjects the incumbents to price regulation, though it leaves other competitors, including the cable companies, untouched.

This represents a serious misreading of the VoIP market.  Unlike traditional local phone service, VoIP dominance is not dependent upon local phone service control.  Rather, the real danger lies with insufficient competition in the provision of high-speed Internet access, which serves as the pre-requisite to effective VoIP services. 

Although Canada is a world leader in high-speed Internet access, the market is not particularly competitive.  Most consumers are forced to choose between two strikingly similar options — DSL service from their telephone provider or cable broadband from their cable television provider. 

By regulating only one of the two choices, the CRTC has opened the door to cable dominance of the VoIP market while neglecting two preferable policy choices.  First, the Commission could have established price regulation for both phone and cable, thereby creating a level playing field as between the two dominant modes of VoIP delivery and as against third party providers.  Alternatively, it could have dispensed with price regulation altogether, secure in the knowledge that with open access will come widespread competition.

The damage caused by neglecting access is not limited to price, however.  The CRTC declined to establish a prohibition on high-speed Internet access providers that engage in packet preferencing by either blocking or impairing competing VoIP service as requested by third-party VoIP providers.  The CRTC concluded that there was no evidence that packet preferencing represents a real risk.

In recent months, it has become apparent that the opposite is true.  The Federal Communications Commission, the CRTC’s U.S. equivalent, has ordered at least one ISP to cease blocking a third party VoIP service.  Moreover, Clearwire, a wireless broadband provider that has partnered with Bell Canada, has reserved the right to restrict access or terminate customers that use third party VoIP services.

The CRTC set the right goals in its VoIP decision, but unfortunately stuck too closely to a single analogy. The danger is that last week’s decision will itself be analogized to other failed policy initiatives that start with the best of intentions but ultimately misread the market. 

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