Research Notes

In global race for 5G, Canada’s telecom regulator erects net neutrality road blocks with zero rating restrictions while Dutch court strikes them down, shifting the landscape for investment and innovation

This research note reviews last week’s developments in Canada and Netherlands on net neutrality and zero rating. Canada’s telecom regulator, the Canadian Radio-television and Telecommunications Commission (CTRC), issued a sweeping framework on differential pricing practices.  Meanwhile the Dutch court ruled in the lawsuit of T-Mobile Netherlands against telecom regulator Authority for Consumers and Markets (ACM), affirming that net neutrality cannot be interpreted as ban on price discrimination. Free internet services are now legal in Netherlands.

While Canada has joined India as a country that restricts the freedom of actors to partner in the digital Internet ecosystem, most countries support price flexibility and partnerships.  Nevertheless, net neutrality rules have become a road block to 5G in many countries, and Canada’s framework solidifies the barriers.

What is 5G – advanced networks management with new flexible business models
5G or Fifth Generation wireless systems is the next generation mobile standard following 3G and 4G/LTE.  5G is like “fiber through the air” with unprecedented speeds, spectrum efficiency, no observable latency, energy efficiency, and high data throughput delivered over intelligent networks.  A number of challenges inhibit the rollout of 5G including a decade long downward trend in mobile ARPU globally; competition from competing broadband facilities; barriers to rollout with permitting, construction, and fmunicipal ees; the availability of backhaul; and regulatory risk. While 5G promises the capability to create a new economy through the Internet of Things with billions of devices being connected, the business models of 5G are still developing.

However it is certain the prevailing model of connectivity in which broadband providers sell subscriptions to humans based on speeds and volume is incompatible in a world in which billions of non-human users need discrete amounts of data with guaranteed quality of service.

The future of networks, and the incentive to invest in them, is based on network intelligence. Smart networks are challenged by net neutrality, the concept of “dumb pipe” transmission  treating all traffic equally.  With net neutrality rules, nations effectively tax shareholder value through price and traffic controls and limit the ability of broadband providers to partner and earn revenue in the Internet economy. This reduces the value of investment, the incentive to innovate in next generation 5G networks, and the ability of networks to perform.

The bottom line is clear. Net neutrality regulation poisons 5G investment and innovation in 5G business models.

The latest CRTC decision on net neutrality, a road block for 5G in Canada.
While the CRTC claims to promote neutrality, its regulation is not neutral for a crucial part of Canadian industry which has been an engine of technological development and economic growth. The CRTC cloaks its policy preferences with seemingly abstract terms such as differential pricing and agnostic treatment, but the rules amount to central planning of the Canadian telecom market. Specifically the CRTC establishes a Framework that evaluates the differential pricing of telecom providers with four factors, the most important being “the degree to which the treatment of data is agnostic (i.e. data is treated equally regardless of its source or nature.”  The framework thus introduces a new jargon into telecom regulation, a vocabulary associating regulation with religion. It appears that should Canadian companies dare to differentiate their services, they will submit to a CRTC inquisition  in which their adherence to the tenets of the net neutrality religion will be judged.  Canadian operators have 30 days to challenge the ruling. Videotron indicated its disappointment with the decision.

Strand Consult’s analysis of the CRTC decision in Canada
The Canadian decision is interesting in light of the evolution of the telecommunications industry, which can be traced to the invention of the telegraph in 1844 followed thirty years later with the telephone by Alexander Graham Bell in Brantford, Ontario. Traditional fixed line telephony has evolved into cable, wireless, satellite, and other broadband technologies, with each generation requiring significant risk, innovation, and investment.  Canada was a cradle of telecom innovation and leadership, Blackberry being one of the blockbusters of this century. From 2000 to 2012, Canada was second only to Japan as that nation in the world which private providers invest most per capita in communication networks. Canada also drove internet adoption, leading the OECD for a period. Akamai has reported that Canada’s internet speeds have been on par with South Korea. Indeed these realities have enabled Canadians to be world’s largest group of per capita consumers of video according to Cisco.  

CRTC Chair Jean Pierre Blais, a Canadian Tom Wheeler of sorts, wants to leave his mark before his term ensd in June 2017. Given that he has not been able to create real market success, he focused instead on regulating the industry down the drain. With hubris and narcissism, Blais and a handpicked group of Reddit users (which Pew describes as 7 out of 10 being male, aged 18-29, and self-identifying as “liberal”) claimed to representative of consumers in general, created a non-neutral policy framework, deciding who can produce which services, how telecom services should be produced, and under what parameters they can be sold.

Regulation typically emerges to slow, if not deter, progress. For example it took some 40 years for the idea of the spectrum auction to be proposed until it was finally allowed by regulators. The ITU’s Telecom Regulation Handbook details how ill-informed regulation has produced a poor allocation of spectrum. Imagine if we required the use of typewriters as the world moved to computers or kept to the dog sled when the snowmobile was introduced. It is exactly this kind of “progressive” regulation proffered in the so-called “public interest” which deters 5G in Canada today.     

With its recent decision, Canada has become an outlier among nations with net neutrality rules and joins the ranks of India with a restrictive view of zero rating. India is in the second year of a two year ban on price flexibility, though it has proposed a government-subsidized architecture for free data, recognizing that free services are valuable for the poor and to promote internet adoption.

In the United States, the FCC explicitly chose not to include zero rating in its 2015 net neutrality rules, and in February 2017 the new FCC Chairman declared, ”These free-data plans have proven to be popular among consumers, particularly low-income Americans, and have enhanced competition in the wireless marketplace.  Going forward, the Federal Communications Commission will not focus on denying Americans free data. Instead, we will concentrate on expanding broadband deployment and encouraging innovative service offerings.”

In its proceeding to create the framework, the CTRC rejected evidence and market studies submitted by Canadian operators which demonstrated the value of price flexibility and consumers’ desire for different kind of offerings. Tellingly the framework includes no discussion of the technological impacts of rules to 5G, and its appears that 5G was not considered at all.

In addition to the concerns the framework creates for competition, innovation and investment, the decision likely raises legal questions. Such regulation could be construed as anti-competitive because it deters market entry and places asymmetric obligations on providers, reducing consumer choice. Moreover the CRTC restricting zero rating by the assertion that it amounts to undue influence by marketing strategies and pricing decisions by ISPs is de facto price control, which contravenes the CRTC’s own remit not to regulate broadband prices.

It’s not clear whether such terminology as “agnostic” will be legal within the Canadian communications law. Moreover that the CRTC is legislator, prosecutor, and judge with respect net neutrality rules, a political structure itself which raises concerns about checks and balances in Canadian telecom policy.

The Canadian development reminds us of life before 1989 in which we travelled to communist countries in Eastern Europe and unsurprisingly saw little to no development in telecommunications. A single rotary telephone served  an entire apartment complex, for example. This is the outcome of the command and control economic model in which the government, rather than the free market, determines what goods are to be produced, how, and at which price. While many claim that communism is dead, it is alive and well in Canada’s telecom policy.

The court case from The Netherlands
In the Netherlands last week, the Dutch court struck down the Authority of Consumers and Markets’ attempt to end T-Mobile’s popular Data Free Music and fine the company €330,000. Not only was the ACM’s ruling out of line with the EU net neutrality rules, the Dutch court observed that the Dutch law on net neutrality unequivocally does not prohibit price discrimination. The court cited the “acte clair” doctrine which enables the national court to avoid referring a case to a higher European court because “the correct application of the EU law is so obvious as to leave no scope for any reasonable doubt.”

In point of fact, the European law for open internet access does not include the terms ”net neutrality” or ”zero rating”, and the non-binding BEREC guidelines to interpret the rules allow zero rating. With the Dutch decision, two laws on net neutrality in European countries have been tested in court, with both decisions rejecting claims that zero rating is a violation of net neutrality.  The Dutch and Slovenian court decisions are explicit that net neutrality does not amount to a restriction on price discrimination and therefore restrictions on zero rating on the premise of net neutrality are not lawful.

Søren Abilgaard, CEO of T-Mobile Netherlands, observed that it is not acceptable to ban services in the Netherlands when they are allowed in other parts of Europe. The free movement of services is a tenet of EU competition law. The Danish-born CEO, who earlier led Telia Danmark, came from a country in which operators are allowed the freedom to innovate and invest, unsurprisingly a feature which helps explain why Denmark has produced multiple mobile apps known globally while the Netherlands has produced none, as e third edition of Strand Consults report Understanding Net Neutrality and Stakeholders’ Arguments describes.

In addition to the Dutch court striking down the zero rating ban, the Swedish court has also struck down the Swedish regulator’s ruling against zero rating in Telia’s Fri Surf program. Strand Consult has highlighted the hypocrisy of zero rating prohibitions, making a formal complaint to Swedish and Dutch regulators about the much-loved Tesla car being sold with a simcard that zero rates Spotify.  

Strand Consult expects that the Dutch regulator is relieved by the decision because ACM knows that the Dutch approach is too extreme compared to the EU law.  In the short run, Dutch operators get the opportunity to be more creative for the 5G business case, but it’s doubtful this will be sufficient as the EU’s net neutrality rules are still a deterrent on investment. In addition it is possible that the Dutch Ministry of Economic Affairs will appeal the court decision. The Ministry “pulls the strings” on telecom policy in the Netherlands and led the drive to restrict zero rating, holding the 2014 hearing on zero rating to create the appearance that the practice is problematic by featuring a pre-selected group of interested parties including Netflix and the Dutch net neutrality lobby. The question remains whether ACM can go forward as an independent regulator, whether EU law will be respected in the Netherlands, and whether the Ministry and ACM will continue to command and control telecommunications.

Who will win the 5G race
Canada wants to regulate the telecom industry so it can only sell dumb pipe connectivity.  There is no opportunity for dumb networks in the 5G world, so Canada is effectively shutting down its technological development while the rest of the world is moving forward.

Japan and South Korea, which were among the first in 3G and 4G, wants to lead in 5G. Note that these two countries have not adopted hard net neutrality rules as they value their telecom investments and global leadership too highly.  

The US is making a play to be first in 5G. In his remarks at the Mobile World Congress session titled “Building the 5G Economy”, FCC Chair Ajit Pai asserted, “From my perspective, then, the key to realizing our 5G future is to set rules that will maximize investment in broadband…As we move towards 5G, regulators also must recognize something many people often don’t:  Innovation is not limited to the so-called “edge” of networks…To realize the 5G future, we need smart infrastructure, not dumb pipes.  And we need to make sure our rules recognize this reality.”

As for the Netherlands, at least some of the Dutch pragmatism has emerged after years of religious regulation, but it’s not clear whether operators can outdo the puppet ACM  or the incompetent EU.  

On the other hand, operators have had some success in the courts. As ban on zero rating violate speech, enterprise, and competition laws, it’s likely that net neutrality does too.  Operators should stop playing small ball, and take the full approach to protect their shareholder investments and fight for their freedom to innovate by challenging bad net neutrality regulation in court.

Strand Consult has spent significant time and resources to understand the net neutrality debate in various countries. The valuable knowledge is gathered in Understanding Net Neutrality and Stakeholders’ Arguments. This report will ensures its readers’ preparation to engage in this high stakes debate.

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