Why the CRTC should keep its hands off VoIP

This week, the Canadian Radio-television and Telecommunications Commission has been holding hearings about whether or not it should regulate the industry that’s developing in Voice over Internet Protocol (VoIP).

VoIP is a new technology that can transform a phone conversation into digital packets that are shipped over the Internet and reassembled at their destination. The entry of a large number of VoIP competitors is likely to change completely the telephone and telecommunications industry.

These new players include cable companies such as Rogers, Shaw, Cogeco and Videotron; small telephone companies such as Sprint and Primus; simple resellers of phone services such as Yak; and Internet-based competitors such as AOL or Vonage. Even electric utilities are likely, in the near future, to enter the fray and offer VoIP over their electric cables.

This brings up two questions. The first is, will the CRTC regulate VoIP? Although the CRTC has previously indicated that it does not intend to regulate VoIP, which is a purely digital form of communication (that is, from computer to computer, or computer to telephone), its “preliminary views” are that it should regulate such services when bundled with cable or DSL phone-line offerings.

So, to answer the first question, yes, the CRTC intends to regulate a large chunk of VoIP services. The second question is, if the CRTC regulates VoIP, will it continue to regulate the former regional telephone monopolies such as Bell or Telus more tightly than their competitors?

The CRTC has expressed “preliminary views” that the former monopolies should continue to be regulated more heavily than other participants. The official reason is to foster competition and prevent the former legal monopolies from retaining a dominant market share. However, this approach reflects a poor understanding of the nature of competition and economic efficiency.

The CRTC relies on an old and static theory that measures the number of competitors and their market shares to estimate the level of competition in an industry. It is true that after a few years of “deregulation,” the former telephone monopolies, even if they are obliged to lease their equipment and lines to new competitors, still hold large market shares. The CRTC concludes that there is not enough competition, and that more regulation must be imposed to enhance competition.

But the more realistic perspective sees competition grounded in a dynamic process of technological innovation, whereby companies that are dominant in a narrowly defined market (like ordinary land-based telephones) are in competition with providers from other closely related industries (cellular telephony and, now, cable-TV and Internet firms). In this perspective, what drives competition is freedom of entry into the industry, not regulation.

As professor Donald McFetrige of Carleton University puts it, “It is seldom the case, perhaps never the case, that inhibiting competition increases competition.”

Misled by its theory of competition, the CRTC once protected telephone monopolies against entry when it should not have, thus preventing, or slowing down, change. Today, after an 180-degree turn, it grants privileges to the competitors of its former protégés.

The common error is to favour one firm or one group of competitors against others. VoIP represents a major challenge for the large, established telephone monopolies. One reason is that it will lead to a dramatic reduction in the prices of long-distance communications.

Moreover, while other competitors have already launched their VoIP services, the conventional telephone companies have been a bit slow to enter the VoIP market because of the uncertainty surrounding CRTC regulation. It would indeed be economically inefficient to protect the old telephone companies against the new VoIP competitors. But it would be equally inefficient to protect the new VoIP providers against the traditional telephone companies, as the CRTC now intends to do.

Let them compete, and the market will sort the ones who best offer what consumers want.

The ideal solution would be that the CRTC keeps its hands off VoIP and the Internet completely, which seems to be the orientation taken by its U.S. equivalent, the Federal Communications Commission. But if the CRTC decides to regulate VoIP, there is no reason to discriminate against some competitors.

Valentin Petkantchin is research director of the Montreal Economic Institute.

%d bloggers like this: