Monday, February 7, 2011

Don't fear the foreign reaper

You know what they say: when it rains, it pours! Or, in the case of Canada, when it snows, it Snowmaggedons! Hot on the heels of the whole usage-based internet billing fiasco, the Federal Court on Friday dropped a bombshell in ruling that our government goofed when it let Wind Mobile, one of our new cellphone companies, start up back in 2009. It's a huge decision that throws our telecom market into chaos. I've written about the repercussions in an op/ed piece for

In the meantime, it certainly looks like the issue of foreign ownership restrictions is finally going to get some attention. I've seen a good deal of concern from readers over the last little while on foreign ownership, both in stories and blog posts I've written. A lot of people don't believe that opening Canada's telecommunications market to foreign companies would be a good move, based on a number of fears.

There's a few well-established ones, but I think those are easily countered. Chief among them is that we'll sell out our big Canadian companies to foreigners, likely Americans. To that one I say: so what? Bring it on.

When Kohlberg Kravis and Roberts, a U.S. private equity firm, thought about buying Bell Canada a few years ago, someone - I can't remember who - criticized the deal by saying he didn't want decisions about Canadian telecom made in Manhattan board rooms. That's about as dumb an argument as I've ever heard because when it comes to telecom companies, we're talking about the pipes - whether they're wires or wireless - that stuff travels through. It's like complaining about how the decisions regarding the computers we use or the televisions we watch are being made in California and Tokyo board rooms. Ultimately, it doesn't matter who owns the pipes the stuff goes through. All that's important is that we get the stuff, preferably faster and cheaper.

That fear is tied to another, that foreign firms will have no impetus to promote Canadian content, especially if they end up owning our broadcasters as well. That's another dumb one. I won't get into whether we need to falsely promote some notion of Canadian culture, but be that as it may, it's actually a very simple fear to quash. All we need are some very simple and clear rules: foreign firms must devote X% of their revenue to creating Canadian programming and they must include said programming as X% of their daily content. And they can't air it in the middle of the night when no one is watching/listening. Canadian companies currently follow these rules as conditions of having their broadcast licenses renewed, so there's no reason we couldn't apply them to foreign entities as well.

Another fear is that by allowing foreigners to buy Canadian companies, we'll hollow out corporate Canada and see all of the top-level jobs leave the country. Also related to that is the possibility that a foreign owner might decide to pare down the Canadian operation by cutting jobs. Both scenarios are based on the presumption that our companies suck, and always will. Some of them probably do suck right now and could use a good round of fat-cutting, but they don't have to stay that way. If we build good companies that service a vibrant market, the jobs will come rather than leave. If Bell or Telus or whoever could transform itself and start expanding out of Canada we could some day have our very own Vodafone, or a giant multinational behemoth. That would mean many, many more jobs of all levels right here in Canada.

In fantasizing last week about what Canada if we did get rid of our restrictions, some relatively new fears came up. I'm of the belief that AT&T would become a big player in Canada, simply because it already does big business here and it would like to ease its operations and lower its costs. A few readers commented that they didn't necessarily want a company that is known for abusing its U.S. customers to come north. That would hardly solve our problems.

In the first case, unfortunately things don't work this way. If we open up the market, we can't really pick and choose who gets to come in - the market decides that. If we decide we want to take steps to solve the oppressive situation we're in right now, this is a risk that has to be taken.

But the real point is, it's actually not much of a risk. If, for example, AT&T were to buy Bell Canada, there probably wouldn't be any real change in the level of customer oppression. However, if AT&T were to buy a smaller company - I suggested MTS Allstream - it would immediately be put into the role of challenger to the likes of Bell, which is the reverse of its situation in the United States, where it is the incumbent.

In the end, market position determines market behaviour. Put another way, the level at which a company behaves like a bastard is directly proportionate to how much of the market it controls. Challenger companies have much more reason to be friendly to their customers than market leaders do.

This isn't just theoretical - I had a front-row ticket to this phenomenon a few years ago in New Zealand. There, Telecom New Zealand was the big, evil phone company. TelstraClear, a smaller company owned by Australia's Telstra, was the challenger. For years, TelstraClear fought Telecom to get better access to its network, and the company also built some of its own cable infrastructure in the capital city of Wellington. For the most part, internet speeds and prices were better in Wellington than they were in most other parts of the country. TelstraClear was generally considered a better company to get services from.

On the other side of the Tasman Sea, it was the exact opposite. Telecom fought against Telstra for better access rules and generally positioned itself as a consumer champion through its AAPT subsidiary. The irony was not lost on anyone - the two companies were bitter enemies, but whether they were bastards or not depended on which country you were talking about.

Such is bound to be the case in Canada. There will likely be foreign takeovers of incumbents, but there will also be acquisitions of smaller players or startups of new companies. As long as there are new, hungry challengers, they will be friendlier to consumers in their services and prices, regardless of their relative doucheyness back home.

ALMOST FORGOT: In writing this post up last night, I forgot to include perhaps the best example of this dual douchey-ness. Few would doubt that Wind Mobile has positioned itself as a champion of the Canadian consumer. The whole concept is in the company's very DNA. But let's not forget that the company behind Wind, Egypt's Orascom, is also the only cellphone provider in North Korea. Doing business with Kim Jong Il scores some serious points on the bastard scale. More proof that behaviour in one country doesn't necessarily equate to the same behaviour in another.

Friday, February 4, 2011

Slappin' da UBB bass

It was another crazy week in Canadian internet-land, what with the ongoing saga of usage-based billing. I'm pretty worn out on the whole situation. I hope I haven't alienated any non-Canadian readers, or even Canadians who couldn't give a crap about this stuff, so I'll say only a few final words on the subject before we move on to some fun stuff.

The long and the short of it is that the government held a hearing yesterday where it called onto the carpet the top brass from the CRTC. The regulatory folks were told to go back and reverse their decision, or the government will do it for them. I'm not entirely sure what the point of that is - if it's going to reversed, just do so already. This seems like some unnecessary and possibly cruel parent-to-child scolding.

In any event, the reversal of the CRTC's decision is nearly a done deal and there is very good evidence the government understands that UBB is only a small symptom of the underlying issue, which is that we have a competition problem in telecommunications. Hope that something will be done about it can thus continue to spring eternal.

The one thing that bugs me about the whole situation is how some idealogues are branding the government's interest in this matter as "populist," like that's a four-letter word or something. What they call "populist" I call "democracy" - with close to half a million people signing an online petition so far, it's good to see our system work the way it's supposed to, i.e. politicians responding to something the public is clearly angry about. It's nice to occasionally be reminded that people run this country, not big business.

Anyhow, I'm sure no one wants to go into the weekend on a dour note. While our internet situation may blow, there is at least one thing about Canada that rules: Rush!

One of my favourite movies is , starring Jason Segel and Paul Rudd. It's a "bromance" in that Rudd's friendless character, Peter Klaven, goes looking for someone to be best man at his upcoming wedding. He eventually meets Segel's character, Sidney Fife, and the two become fast friends. At the centre of that friendship is a shared love for Canada's own "holy triumverate."

If you haven't seen the movie, check it out. The boys from the band are in the movie, playing a concert that Klaven and Fife go to. In full media crossover fashion, Rush produced a backstage video with the duo that plays at the end of shows in their current Time Machine tour. The video has now worked its way online. It's funny stuff:

Thursday, February 3, 2011

What an open telecom market might look like

A couple of weeks ago, I wrote comparing Sweden's penchant for internet success with Canada's, er, not success, and I mentioned how all of the Nordic countries had got it right in laying the groundwork for innovation-based economies. The region has put together the correct combination of government investment, open-access rules that let smaller competitors access the networks of incumbents and an open attitude toward foreign investment. The result is they lead the world in many broadband measures and they're hitting above their weight in producing online success stories.

Someone recently suggested this broadband issue is my favourite "whipping boy," which is only partially true. My favourite whipping boy has, in fact, always been Canada's foreign ownership rules, which prevent non-Canadian companies from any real ownership of telecommunications providers in this country. I've believed for a while that our rules are archaic - that they're out of whack with almost all other developed countries, which generally have an open-door policy for such ownership.

If you look at almost every other such country, you'll see a veritable United Nations of telecom providers. Even tiny New Zealand, where I spent an amazing year and a half, has three major telecom companies, two of which are foreign-owned: Telecom NZ (local), Vodafone (British) and TelstraClear (Australian).

I've argued the benefits of liberalizing our rules many times and it all basically comes down to one fact: if you want to enjoy the benefits of a truly open market, you need to remove any barriers for new players to enter it.

I don't want to rehash the topic again, but a reader did add a good comment to that Sweden post. "Bwalzer" said he's about the ownership rules and he's looking for more info. His question, as it relates to the Nordic countries, is that he's not sure if liberalizing foreign ownership alone can accomplish the goal of having a more competitive market. "Is it possible that open access is a prerequisite to the good effects of a more open market?" he asked.

I was going to write a quick response, but that then morphed into this post. To succinctly answer the question: no, I don't think open access is a prerequisite, but it definitely helps in a big way.

If you have open-access rules - that is, smaller internet providers who don't own networks but can use the ones owned by bigger companies for a fee - then you create the possibility for ISPs to start up from scratch. From there, you have to put yourself into the mindset of a person who actually starts a small ISP: what's in it for them?

Some ISPs start up to service an area that is being neglected by the big guys. Some start up to provide some sort of alternative service that people aren't getting from the big guys. Whatever the case, none of them start up without at least the modest goal of having a sustainable, profitable business. In the best-case scenario, they should have ambitions of success and, ultimately, riches. That's the whole point of capitalism, after all: if success and money aren't at least your outside goals as an entrepreneur, you probably shouldn't be in business.

From there, there are at least two roads to riches for those entrepreneurs: either their small company grows and grows and becomes successful nationally, then internationally. Although it's not an ISP, Waterloo, Ont.-based BlackBerry maker Research In Motion is a good example of this route. The other way is to get to a good enough size that you are bought by a bigger player, who is sometimes a foreigner looking to get into the market. This is exactly what happened in the Nordic countries, New Zealand and pretty well everywhere else that doesn't have foreign ownership restrictions. Going this route is far from a bad thing for entrepreneurs: they can cash in for all their years of hard work and probably land a cushy, well-paying job with the acquirer on top of it. Or they can take their money and start up a new company, or if it were me, retire to Hawaii.

In Canada, this acquisition route isn't an option because the only potential buyers are also the entrepreneur's direct local competitors. Rather than buy them out, our big telecom companies can try to drive them out of business, which is what's happening.

So what about the company looking to enter a new market through acquisition? What's in it for them to buy a small ISP? Well, it saves them from having to start from scratch. It's obviously way better to pick up an established business with an existing customer base and build from there, which gets to the crux of our reader's question.

Starting from the ground up, though, is not impossible, especially where there is opportunity. That's exactly what's happening with our new mobile providers. There has been a lot of debate over whether Wind Mobile is Canadian-owned or whether it's just a front for Egypt's Orascom, but it's an argument we wouldn't be having if we didn't have our onerous ownership restrictions. Foreign companies would likely have flocked to our 2008 spectrum auction, whether it was Orascom without its Canadian connection in Globalive, or Vodafone or AT&T or whoever.

That got me thinking about what would happen if our government actually did lift those ownership restrictions, which is where we can get into some fun speculation. Firstly, a couple disclaimers. I haven't looked at the balance sheets of the various companies involved in the predictions I'm about to make, so I can't say with any certainty if any of this would make financial sense. I'm looking at the future from a purely logical and strategic perspective.

Also, the government is supposedly mulling over different options for easing foreign ownership restrictions. Two of the most likely possibilities are that it drops the restrictions entirely, or that it allows limited foreign ownership for a period of time before throwing the gates wide open. That option would make it possible for foreign companies to enter Canada fresh or to buy existing small players, but they couldn't start out by buying our big companies, such as Bell Canada.

My predictions are based on the first option, where the restrictions are lifted completely, but they could also apply to the second choice. With no further ado, let's get to it:

  • Bell and Telus merge: It's a no-brainer and people have been speculating about it for ages. Telus did even attempt it briefly a few years back, but gave up because it was worried there would be competition concerns. At the time, I thought they should be allowed to merge because they didn't really compete anyway - their territories don't really overlap and their "competing" wireless services are basically identical. Now, they even share a wireless network, so why not let them merge? By uniting, the duo would form one large national player to take on the multinationals that would inevitably invade. They do overlap somewhat on business services, but one or the other selling off its business would be a relatively easy condition of the merger.
  • Rogers and Shaw merge: This is another tie-up that has long been speculated about, but it has never happened because the cable companies are different beasts than the phone giants. Both Rogers and Shaw are products of strong-willed entrepreneurs who built their companies into the heavyweights they are today. The idea of selling out or merging was anathema to the founders and their families. But things change, especially when the barbarians are at the gate. If the ownership rules were dropped, the cable situation would rapidly turn into a case of who would blink first - would Rogers or Shaw be the first to sell out to a U.S. cable company such as Comcast? Both would be deathly afraid of the other doing it first because then they'd either have to find their own buyer or go up against an American behemoth alone. Therefore, it makes almost as much sense for them to unite into a national force as it does for the phone companies. The two have no overlapping cable services, although Shaw does have satellite TV on Rogers' turf. But just like Bell and Telus on wireless, it's hardly competitive. Rogers has wireless in Shaw's territory and Shaw is planning to launch its own service, but I have to believe the Western company would be pretty happy if it could be saved that hassle and expense through a merger. Where things would likely get messy is in broadcast, with Rogers owning various City stations and Shaw owning Global. One or the other would probably have to be sold off. Oh, you could probably add EastLink out in the Maritimes to this merger too.
  • Orascom takes full control of Wind: This one's a no-brainer. Maybe Orascom then sells Wind to another multinational cellular company, like Vodafone, Telefonica or T-Mobile.
  • AT&T buys MTS Allstream: Allstream used to be owned by AT&T before Manitoba Telecom Services bought it in 2004. AT&T has made noises to Ottawa in the past about loosening foreign ownership rules so that it could better serve its many business customers here, most of whom are multinational companies. AT&T would love to be able to own all of its own infrastructure, rather than leasing from the likes of Bell et al. Allstream would be a logical and probably affordable choice.
  • AT&T buys Teksavvy: If AT&T also wanted to get involved with selling residential internet access, it could go with the time-honoured tradition of a new market entrant buying a local independent company. Teksavvy is pretty much the best-established indie ISP, so there you have it. AT&T is not the only potential buyer, though. Teksavvy could be tied to a deal that acquires one of Canada's new wireless companies as an acquirer looks to add service bundling capability. A good example is Vodafone New Zealand, which bought small ISP iHug a few years back. Just about everywhere else in the world, Vodafone is a pure mobile company but in New Zealand, it added wired internet in order to compete against the bundles of the incumbent Telecom. It's an interesting approach that could work here.
  • Mobilicity cashes in big: Mobilicity, the other new wireless carrier with operations in the top cities, would be a prime takeover target, given that Wind is already in a long-term relationship, so to speak. If AT&T really wanted to go for it all, Mobilicity would be another arrow in the quiver. Otherwise, any of the big multinationals would probably be happy to get a foot into Canada through the company. That's probably what the founders have been thinking since the beginning.
  • Quebecor goes it alone: Quebec's Videotron is another successful cable company and it appears to be doing well with its newly launched wireless service. Parent Quebecor pretty much controls the province's telecom and broadcasting, so unless a company from France wants to take a run, that's one fiefdom likely to remain untouched.
  • What about Public Mobile? No one really knows how the other new wireless company is doing since it hasn't been forthcoming with numbers, but many people aren't giving it much of a chance. If Public could survive long enough for the foreign restrictions to come down, it could conceivably attract a buyer.
So, to boil it down, in my dream world of Canadian Telecom 2.0, there would be two major television service players (a combined Bell & Telus versus a merged Rogers & Shaw), three major ISPs (B&T, R&S, AT&T) and four major wireless companies (B&T, R&S, AT&T and Wind). That may not seem like a huge step up from what we've got now, but there would be several subtle but important improvements.

Unlike many of the new companies we have now, all of the players would be well financed and on solid ground. Having AT&T, or some other big multinational, would also be a big plus because of the buying power it would bring. AT&T, for example, has more than 90 million wireless customers in the U.S., versus the 7 million or so at each of our big providers. Getting a phone from the company would inevitably be cheaper - kiss those god-awful three-year contracts goodbye - which means the others would have to step up their games. A third, hungrier ISP would also be very welcome. Lastly, there would also be the continued threat of new entry, which is something we just don't have right now.

The last and most important change is that this would finally deregulate the market, which would move away from what I call the - a mutant hybrid of regulation that is having clearly horrible results where the government has to step in and overrule the CRTC every few months. Who knows: deregulation may not be the way to go and perhaps telecommunications is a business that simply needs to be heavily regulated. We'll never know unless we fully go one way or the other.

Wednesday, February 2, 2011

Canada's telecom situation reaches boiling point

I don't know about you, but I've been positively blown away by the level of anger - and therefore media coverage - over this whole usage-based internet billing schmoz we've been having here in Canada. The activists over at had, as of this writing (Tuesday afternoon), a quarter of a million signatures on their petition. That's enough to motivate the two major opposition parties into condemning usage-based billing, but also enough to spur action from the government.

Both Prime Minister Stephen Harper and Industry Minister Tony Clement came out swinging against our major internet service providers and regulator yesterday, indicating they will soon reverse the CRTC's ruling, possibly even today.

A number of folks have wondered why all this outrage is happening now - after all, the CRTC approved UBB last year, with only the formalities of pricing happening last week. The overwhelming majority of Canadians - I've seen estimates as high as 96% - get their service from big ISPs such as Bell and Rogers, who have had small and ever-shrinking caps for years. The CRTC's ruling really only affects the small guys, who are now shrinking their caps to come into line with the big boys. So why all the anger if very few people are going to be affected?

I'd posit it's because after years of building, the anger against our telecom companies has finally hit the boiling point. It's also because we finally have a real, legal and legitimate service - Netflix, namely - that crystallizes the problem for the average Canadian. In-the-know techies have been aware of our crappy internet situation for years, but it's largely been invisible to the mainstream because they haven't had a good example of the issue.

To Netflix's credit, the company has excellent brand recognition in Canada, so when the average person realizes they're going to have to pay three times to use the service - once for internet access, twice for Netflix access and thrice for bandwidth - they start to realize there's a problem. They start to figure out that their tiny monthly usage isn't going to cut it with the internet of the future.

What we have here in Canada, finally, is a mainstream awakening to the real power of the internet. It's not just about getting email and surfing the web as the ISPs would like people to believe, it's about delivering new services in new ways. That includes bandwidth-intensive services such as Netflix.

I'd like to pause here for a second and take a blatant swipe at the people who wonder why we need bigger caps - the "Ooh, look at me, I only use two gigabytes a month" crowd - and/or people who have criticized heavy downloaders as "bandwidth hogs." A few years ago, there was really only one way for the average Joe to be a "hog," or someone who chewed through hundreds of gigabytes a month, and that was through heavy peer-to-peer file sharing, generally of the illegal type. This sort of file-sharing of movies and TV shows sprung up because people wanted digital delivery of such content and they didn't want to pay an arm and a leg for it. And guess what? That early consumer demand means we now have legitimate services arriving to deliver exactly this sort of thing. Yesterday's Napster is today's iTunes and yesterday's BitTorrent is today's Netflix. Thus, there's another term for "bandwidth hog," and it's "early adopter." So before you condemn the hogs, stop and ponder the fact that one day, you'll be one too.

But back to the government. Exactly what will it do with UBB? Well, it can and likely will reverse or negate the CRTC's decision somehow, which ultimately will do very little good. Like I said - 4% of internet subscribers will be pleased, and perhaps that 4% will grow slightly thanks to the exposure companies such as Teksavvy have gotten from this whole affair. But so what? The situation is still crappy. What about the bigger picture?

Can the government force big ISPs to give customers bigger usage limits? Yeah, and I can shoot lasers from my eyes and teleport short distances by folding through a shadow dimension inhabited by leprechauns.

The UBB mess is actually a great opportunity for the government to lift foreign ownership restrictions. With the public's hate-on for Bell, Rogers et al at an unprecedented level, there's never been a better time to sell people on the possibility of those companies getting wiped from the map. Think about it: if you hate Bell or Rogers, how sad would you be to see them bought by AT&T or Comcast? I suspect many people would cheer such a notion.

The other, less-drastic and probably more palatable option the government is mulling is a gradual reduction in foreign ownership restrictions. Rather than throwing the gates wide open, foreign acquisitions would be limited to smaller players for the first few years, then opened wide to cover all Canadian companies. It's a very sensible choice and my odds-on favourite. Given that the Liberals and NDP have committed themselves to the fact that something must be done on UBB and telecom in general, this is a great opportunity. The sell to the public is also an easy one: here come foreign companies to compete with Bell et al.

I've actually been thinking about what the telecom landscape would look like should this happen and was in the process of writing up my predictions before all of this happened. I'll post them tomorrow.

In the meantime, there's another pesky big-picture issue that needs to be dealt with: the CRTC. Most people are under the false assumption that the regulator is supposed to protect the interests of the Canadian public. Uh uh. The CRTC believes its main job is to enforce the Telecommunications Act to the letter of the law. Even though those two things are supposed to go together, any judge or lawyer can tell you the two philosophies often clash because the law is open to interpretation.

Consequently, the government is increasingly having to step in and clean up the CRTC's mess. If it reverses the UBB decision, that'll be two major episodes in just over a year. The first, of course, was the CRTC refusing to let Wind Mobile start up in 2009 because the company didn't meet those Canadian ownership requirements. The government, not so much a stickler for the letter of the law and more concerned with making the public happy, overturned the decision. Now, hundreds of thousands of wireless customers are telling our big wireless carriers to shove it and taking up service with better priced new entrants, including Wind.

Some people have argued for the complete destruction of the CRTC, but that's probably a bad idea - things would inevitably be even worse if there were no one overseeing things. But there is clearly a problem. The regulator is repeatedly accused of being too cozy with the telecom companies it referees, a criticism stemming from the fact that some commissioners used to work for those same firms. The counter-argument is, firstly, that the CRTC is merely carrying out the "hands-off" orders it received from the government in 2006, and secondly that it needs telecom expertise on staff to intelligently carry out its mandate.

All of those arguments have merit, but if the government is going to move against UBB and the crappy internet situation in any meaningful way, it needs to initiate a review of the CRTC. The government needs to examine how the regulator is structured, what its mandate is and how it is carried out, not to mention its own policy direction.

If Ottawa isn't willing to lift foreign ownership rules, it needs to put ideology aside and think long and hard on whether a light-handed regulatory approach is wise. Otherwise, there are going to be plenty more CRTC decisions to overturn.

Tuesday, February 1, 2011

Another internet report, another mediocre showing

I came across some really cool info from Google yesterday that I just had to share, as it's likely to throw some more fuel on the fire that is the whole internet situation in Canada. A while back, Google launched something called Measurement Lab to help people keep tabs on their internet service providers. It's basically a bunch of tools that test things like download and upload speeds. Every once in a while, Google releases the results - and they're always illuminating.

The latest batch compares download and upload throughput speeds across 47 countries. It's similar data to what Netflix released last week, which gauges how well internet connections perform in different countries. How does Canada rate? I'm sure the answer surprises no one: not so hot.

Of the 47 countries for which there's data, Canada ranks 18th with download throughput averages of 4.41 megabits per second - or firmly middle of the pack. For uploads, we're near the bottom of the list with .4 megabits per second, or 31st place. The U.S. is considerably better in both measures, ranking 10th in downloads and fourth in uploads. Who leads the pack? If you've been reading this blog for the last couple of weeks, you shouldn't be shocked: Sweden is the download leader (and third in uploads), while uploads is led by tiny Romania.

Canada doesn't look any better when some of the more developing countries are pared out of the comparison. Of the 29 member countries of the Organization for Economic Co-operation and Development, Canada ranks 16th in downloads and 23rd in uploads. Again, we're middle and bottom of the pack, respectively. The U.S. is 10th and second, in comparison.

I don't need to get into what this means because it's old hat by now. We suck, our innovation and competitiveness is being jeopardized by mediocre internet access, our service providers are greedy jackals, the regulator is inept, the lobbyists dispute the methodology, the government ignores it all, yadda yadda yadda, you know the drill...

Monday, January 31, 2011

Porn leaving hotel rooms, is Hollywood next?

With all the hubbub over usage-based internet billing last week, I almost lost another major story - as it pertains to my book, anyway - in the shuffle. The Marriott hotel chain has announced that, because of declining revenue, it is pulling porn from its in-room pay-per-view offerings.

The media picked up on a couple of interesting angles to this story. Many connected the move with the likelihood that Mitt Romney is once again going to run for U.S. president. Romney recently resigned from the hotel chain's board to prepare for his run. He took heat, especially from Mormons, in the previous election for not pushing Marriott to get rid of the in-room porn, so some are saying both of these moves will remove that particular albatross.

The more interesting angle, I think, is what the Daily Mail calls "the iPad effect" or what I call "BYOP," or bring your own porn. Hotel chains are thinking twice about offering adult content in rooms because people are bringing their own, either pre-loaded on their iPads or smartphones, or they're accessing it online in the room through those devices. In both situations, the hotel is getting cut out of the equation, so ultimately it's a good PR move to get rid of the content.

We've been hearing for the past couple of years how the porn industry has been hurting because of free online content and piracy - you can read all about it in my recent feature - but we're only just now getting a little more illumination on what has been a dirty little secret. Porn piracy doesn't hurt just the porn business - it hurts mainstream businesses too, with hotel chains and cable companies at the top of the list. Anyone who used to make money from the old porn system is seeing that situation evaporate quickly.

Amazingly, you can tie this back to usage-based internet billing. I wouldn't feel too badly for those cable companies, especially Canadian ones, because if they're losing money from a decline in pay-per-view porn, they stand to recoup it from internet usage. Despite what seems to be conventional wisdom, porn is still a major part of the internet and those free sites - the likes of YouPorn and RedTube - are among the highest trafficked out there (both are within the top 150 in Alexa rankings). The more people watch those sites, the more they go over their monthly caps and the more revenue the internet companies get.

That notwithstanding, many people also forget that ISPs have been the biggest beneficiaries of porn's move to the internet. As detailed in Sex, Bombs and Burgers, better access to adult content (as well as file-sharing) has been a major reason for why people upgraded their dial-up internet connections to high-speed. They are a huge part of the dirty little secret.

But to get back to the hotel issue, the iPad effect also extends to mainstream movies. Once again, porn is in the vanguard - if hotels are moving to drop it because people are bringing their own, how long until they drop pay-per-view movies entirely? After all, if you can bring Debbie Does Dallas Part XXIX loaded on your laptop, surely you can also bring Inception, Toy Story 3 or the complete latest season of Dexter. Put another way, why would you watch television on the TV in your room when you can fire up Netflix or Hulu instead? Indeed, one analyst figures pay-per-view revenue overall has shrunk about 39 per cent since 2000.

The hotel chains have been trying to keep this pay-per-view business viable by adding larger flat-screen TVs to rooms and by moving the release windows of movies up. Many of the hotels I've been in recently have had movies on offer that are still in theatres.

They're sort of trying to replicate the whole movie-going experience in the room, albeit on a smaller scale. I'm not so sure that's a good strategy, though, because the price of the lesser experience is roughly the same as the full one. If you're going to pay $15 to see a movie, who wants to watch it on a small screen in their room?

Given that, it seems the overall death of in-room pay-per-view is inevitable.

Friday, January 28, 2011

Netflix: a tale of two countries

Wow, what an interesting week in internet land, especially for Canadians. The buzz all week has been usage-based billing, or metered internet usage. On Tuesday, the regulator handed down on the issue, which will ultimately make it very difficult if not impossible for any ISP to offer unlimited internet usage.

People are pissed. As of this writing (Thursday afternoon), more than 70,000 had signed the Stop The Meter online petition. One fellow, Jean-Francois Mezei - who runs a small computer consultancy in Quebec called Vaxination Informatique - has taken it upon himself to file an appeal with the federal government to have the whole thing struck down. It's a good read; some of it is very technical, but otherwise he covers the innate problems with the whole situation.

At the centre of this storm, believe it or not, is movie and TV show streaming service Netflix. The company announced its latest financial results on Wednesday and, in a refreshing moment of candour (for an executive), CEO Reed Hastings laid out what's going on with the company's recent expansion into Canada, land of the capped internet. He said our restrictive usage caps are a "potentially a significant negative for Netflix," and he criticized the high rates big ISPs are charging when users go over their limits. “Hopefully we can work with the different consumer groups and providers and get a better costing structure... more in the one-penny range or (plans) bundled in with a much higher cap.”

Netflix followed up Hastings' comments yesterday by releasing some illuminating charts. The graphs show how well Netflix performs on different ISP connections, both in the U.S. and Canada. The charts show Netflix performing better in general in Canada than in the U.S., which prompted some people to suggest our networks are better.

Whoa, wait a second there Nelly. That's a mighty big conclusion to be jumping to. There are a couple of things to keep in mind before we can make that leap in logic (not that it's necessarily not true).

The biggest issue is Netflix's performance-versus-usage threshold. There is a very strong logical argument for why U.S. ISPs don't want Netflix to perform well - perhaps more so than their Canadian counterparts. The typical American internet user has hundreds of gigabytes of monthly usage, if not unlimited, to play with. So if ISPs can't discourage internet users from watching Netflix that way, well why not try and make the experience negative in some other way? I'm not saying U.S. ISPs are interfering with or degrading Netflix quality, but it would be foolish of them to go out of their way and devote special resources to making it an optimal experience.

In Canada, it's a very different story. In many ways, ISPs perversely want internet users to have a great experience on Netflix so that they use it more. That gets them up over that monthly usage cap, which results in more revenue. Why not optimize the experience? It makes all sorts of sense. As long as Netflix is still a virtual remainder bin of content devoid of any good new releases or television shows, for the big ISPs it's a case of, "What me worry?"

Let's not forget, also, that we have net neutrality rules in Canada whereas the U.S. is still trying to get them sorted. The Netflix charts are a great thing for Canadian ISPs to point at and say, "Look how well we're provisioning a potential competitor! How dare you suggest we're anti-competitive!?!"

It's really amazing how online video is unfolding, or not unfolding, in Canada. When illegal torrent file-sharing emerged as the big threat to our TV providers a few years ago, they moved en masse to slow it down and cripple it with internet management measures that are still in effect. Now, as the legal options are emerging, they're moving to slow them down and cripple them with different measures: usage limits.

One way or another, they're successfully stemming the tide with the blessing of our regulator and the silent complicity of our government. Is it any wonder Blockbuster Video is doing okay in Canada despite going bust in the United States? Hey Industry Minister Tony Clement: nice "digital economy" you've got going there.
Older Posts Home