Editorial: Bad business models

Why the federal government is wrong to reverse the CRTC's decision on usage-based billing.

Imagine you own a hamburger joint. You bought a chunk of land, built the restaurant and established a clientele. Business is booming. But the government’s worried you’ve cornered too much of the market. So they require you to sell patties in bulk to an upstart competitor at a discounted price. And while you charge on a per burger basis, the government-mandated price allows your competitor to offer an all-you-can-eat buffet supplied and subsidized by you.

Sound fair? Of course not.

Yet that’s the business model backed by the Conservative government in the fight over unlimited Internet access plans. The Canadian Radio-television and Telecommunications Commission (CRTC) ruled last year that Bell could charge the smaller Internet companies that lease space on its network a pay-per-use fee based on how much their clients download. The small companies say this move to usage-based billing will end their ability to offer unlimited Internet plans, up until now their main competitive advantage.

Public outrage and political grandstanding has forced the CRTC to review its decision. But regardless of what the CRTC decides, Industry Minister Tony Clement says the ruling will never stand, saying his government must foster competition in the marketplace.

Increased competition is an admirable goal, but the system preferred by the government is a rotten way to accomplish it. And yes, let’s acknowledge this magazine’s conflict of interest — Rogers owns Canadian Business, and the CRTC ruling was in the best interest of our parent company. But beyond any institutional bias, there is a basic principle worth defending at the centre of this debate: people should pay for what they use. Those who use more should pay more; those who use less should pay less. The principle holds true whether you’re talking about electricity, water, natural gas, hamburgers or the Internet.

Forcing the option of unlimited internet access favours a tiny minority of Internet users. Bell estimates 14% of users account for 83% of web traffic. The vast majority of customers fall well below the caps imposed by the major Internet providers, beyond which extra charges begin.

In the event that unlimited Internet plans persist, the logical response by major providers will be hiking rates for all consumers. Since the rates charged by smaller companies are tethered to the big ones through their leasing deals, their rates will increase as well. As Konrad von Finckenstein, the CRTC chairman, said: ‘The vast majority of Internet users should not be asked to subsidize a small minority of heavy users. For us, it is a question of fundamental fairness.’

There is a second issue of fairness at play. The CRTC requires major Internet companies to allow smaller competitors access to their network at a 15% discount of what they charge commercial clients. In doing so, the regulator has already done plenty to offer a boost to new Internet service providers.

If the government goes beyond these existing incentives for competition, it will impose an inefficient business model and punish the big companies for their success. Telecommunications companies spent billions building their networks. (Between 2008 and 2009, Bell and Telus invested $8.7 billion in upgrades.) They must now offer that infrastructure to other companies at a markdown, so those companies can grow and compete with them.

It is one thing for a competitor to eat your lunch; it’s an entirely separate thing to then be asked to split the bill.

James Cowan is deputy editor of Canadian Business magazine.