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Global Insight
November 20, 2006
By Seth Wallis-Jones
From Lexis Nexis

In a surprise move, the government has over-ruled the Canadian Radio, Television, and Telecommunications Commission and ordered the deregulation of VoIP pricing, allowing incumbents to offer VoIP at any cost.

Global Insight Perspective

Significance: Incumbent operators have been handed a prize that will let them compete with the cable companies on price through VoIP services.

Implications: A price war is likely as players jockey for position and VoIP will play an increasing role in multi-play bundles.

Outlook: Competition among the cable companies, competitive local exchange carriers, and ILECs will increase. A number of smaller players, particularly virtual service providers, will go to the wall.

In the first action over-ruling the Canadian Radio and Telecommunications Commission (CRTC) in a decade and only the 23rd use of the government's powers since 1976, the Canadian government has announced that VoIP services are no longer to be regulated under the CRTC's mandate to regulate VoIP services in the same manner as standard telephony service.

This decision, announced by Minister of Industry Maxime Bernier last week, who stated "specifically, we are telling the CRTC to start deregulating 'access independent' VoIP services". This will therefore not affect facilities-based VoIP services that do not require a broadband connection. This follows high-profile lobbying from the incumbent telcos and subsequent requests from the government for the CRTC to reconsider the ruling that VoIP was to be regulated in the same manner as traditional telephony services.

This move allows the incumbent telcos to offer VoIP services at un-regulated prices, freeing them to offer services at or even below costs. The incumbent operators are on the whole currently operating under a price cap regulated regime which has limited the strategic moves available as they seek to maintain their market share.

This creates a different playing field in which the incumbents can compete on price for voice services and also immediately target lost customers, which was previously prohibited under "win-back" rules, without having to show that they have lost 25% market share in a specific "local forbearance region," at which point they are able to apply for deregulation in that area.

Outlook and Implications

Incumbents will move to VoIP, Prices Will Drop: This decision will encourage the incumbent service providers to move their customer base to VoIP services where they are not shackled by regulation on pricing.

The incumbent local exchange carriers (ILECs) which have so far not found it economic to introduce VoIP services because of the lack of competitive positioning they were able to leverage are now likely to roll out competitively priced VoIP services while the existing VoIP players reduce their prices. In the short term, the increase in competition as incumbents roll out VoIP provision to underserved areas will be positive for consumers in that it will lead to price cuts, although this will also lead to more rapid shrinkage in the number of traditional PSTN access lines.

Small Players Snuffed Out: While this levels the playing field between the cable companies that already have good market power and the incumbents, it will have a severe impact on virtual service providers such as Vonage.

The roster of VoIP companies tracked by MyVoipProvider.Com has recorded a significant number of losses in recent months, with nine short-lived Canadian service providers dropping out of service - Clone Telecom, Lookieloo, Globe Talk, Our Digital Voice, Talafone, Toll Free Telecom, V1010, VoIP, and the AOL service TotalTalk - as they found competition intense and profitability minimal.

This situation will be exacerbated in coming months as the incumbents leverage the power of the bundled service offering, together with the ability to absorb short-term costs and force a larger number of the small players out of the market.

Regulation of VoIP "Service enhancement": This decision is likely to see the request by Vonage to examine the controversial C$10 (US$8.73) levy charged by cable operator Shaw to users of third-party VoIP services placed under the spotlight again (see Canada: 13 March 2006: ).

This is billed as an enhancement that makes up for intermittent shortfalls in bandwidth on public Internet networks, which can negatively impact on VoIP quality of service. It has attracted controversy for a number of reasons, primarily as it is a barrier to competition from virtual service providers entering the market, but it has additionally been criticised as not actually delivering any real enhancement to service. With the level of competition from incumbents increasing, this will likely receive another airing to pacify the virtual VoIP service providers.