Incumbent

Ron Gruia wrote a comment to my May 13th posting about the CRTC ruling, way back when I wrote the actual post. It got trapped in WordPress’ authorization mechanism, for which I apologize Ron. I didn’t even realize that it was there until today!

Ron’s assertion is that price is an element of competition, and the CRTC should not remove this tool from the ILEC arsenal, since the MSO’s have obvious market power and could choose to price predatorily against the ILECs. In a pure commodity market-place, such would be absolutely true. Generalizing, I contend that technology markets move rapidly, but consumers of voice services have only seen the benefit of those advances on one plane — price.

Fans of Clayton Christiansen’s The Innovators Dilemma will recognize the diagram below. It shows the progression of competition from functionality to reliability to convenience to a commodity based competition based solely on price. That’s where we are today. VoIP has the potential to either reset the cycle, and restore innovation as the basis for competition, or take us further down the price curve. The CRTC apparently believes that unless they remove the incumbent’s pricing power, the reset to innovation won’t happen. Their decision forces Canadian ILECs to confront the Innovators Dilemma head-on, because the choice to compete on price alone would be their destruction.

It’s a bold strategy, to be sure, and as Ron and others point out, it’s not a strategy without risk. The risk is that the incumbents can’t respond, and are destroyed in the subsequent price war.

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The CRTC announced its decision on VoIP yesterday. You can read the entire decision here.

According to the CRTC, VoIP is telephone service when it connects to the PSTN, and will be regulated as such. So, VoIP is a tarriffed service in Canada. One would think that the incumbents would be happy, because the CRTC appears to be preserving their market power. However, the incumbents are actually furious because the CRTC has decided that, in many cases, VoIP service when provided by companies other than the CLEC/ILEC cartels, should be advantaged. The incumbents may not use their market power to price below cost, either. And, built into the decision is the explicit recognition that P2P services which don’t connect to the PSTN are not considered telephony (the Canadian equivalent of the now famous "Pulver Order" in the US). (side note: does this mean we won’t get Skype-In in Canada?)

In essence, the CRTC is saying phones are phones, whatever the technology. However, we (the CRTC) want a competitive market, so some new entrants in the market will be exempt from some classes of regulation. I mailed with Jeff Pulver this morning, and he said "in the long run the CRTC may have better policy than the FCC. Scarey"

Service provider revenues, today, are already declining. The graph below (which I grabbed from an IDC report I use in my business plan), shows the decline of revenues, forecasted out to 2008. In every class of service provided, with the exception of access, prices are in free fall.

As an incumbent carrier you’re really stuck between a rock and a hard place. Prices are falling, due to competition, and the CRTC has said that you can’t underprice your VoIP competition to win back the customers you lose. In fact, the CRTC’s win-back rules prohibit you from even talking with the customer you lost until 90 days have passed.

What can you do? Well, for some time I have believed that the only way the incumbents can prevent the revenue slide from competition is to build better products and services for the market. Now that the CRTC has removed pricing as a weapon, perhaps a new age of innovation will start in telecom services. Perhaps we will see some of the promise of VoIP finally realized, rather than VoIP being just about cheap, low quality calling.

For some other views on this decision, check out Jeff Pulver and Jon Arnold.

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