Report to the
Governor in Council

Status of Competition in Canadian
Telecommunications Markets

Deployment/Accessibility of
Advanced Telecommunications
Infrastructure and Services

November 2004

See Update

This publication is available electronically:
www.crtc.gc.ca

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Letter

25 November 2004

The Honourable David Emerson, P.C., M.P.
Minister of Industry
235 Queen Street
11th Floor - East Tower
Ottawa, Ontario
K1A 0H5

Dear Minister Emerson:

I have the honour to present to you, in accordance with Order in Council P.C. 2000-1053, the fourth report of the Canadian Radio-television and Telecommunications Commission addressing the Status of Competition in Canadian Telecommunications Markets and the Deployment and Accessibility of Advanced Telecommunications Infrastructure and Services.

Sincerely,

Charles M. Dalfen

Acknowledgements

The Commission wishes to thank all the entities that completed the CRTC Data Collection forms, without which, this report would not have been possible. The Commission would also like to acknowledge the assistance provided by Industry Canada in the analysis of broadband deployment as it related to the rural communities in Canada and to Statistics Canada for the various economic data used throughout the report.

Executive Summary

This is the fourth annual report to the Governor in Council with respect to the status of competition in Canadian telecommunications markets and on the deployment and accessibility of advanced telecommunications infrastructure and services.

Industry Overview

Internet and wireless services continue to be the engines of growth for the Canadian telecommunications industry. The revenues of the remaining services, including local and access, long distance and data and private line, declined in 2003. The industry has evolved, and continues to evolve, to meet the telecommunications needs of Canadians. Competition, as intended, continues to motivate both existing and new service providers to be innovative, agile and cost efficient in meeting the needs of all stakeholders. Canada has not only a very high telephone penetration rate of 98.7 subscribers per 100 households but also has a very high Internet subscription rate of 56 Internet subscribers per 100 households.

In 2003, total Canadian telecommunications revenues were $31.8 billion, an increase of 1.1% over the previous year. Wireline revenues, representing 75% of the industry total, declined from $24.4 billion in 2002 to $23.8 billion in 2003, a decrease of $0.6 billion or 2.4%. Wireless revenues, however, representing 25% of the industry total, displayed strong growth, increasing from $7.1 billion in 2002 to $8.0 billion in 2003, for an increase of $0.9 billion, or 13.3%.

The telecommunications industry's earnings before interest, taxes, depreciation and amortization (EBITDA) declined from $11.6 billion in 2002 to $10.9 billion in 2003, a $0.7 billion or 6% decline. This decline was entirely due to the wireline telephone companies (incumbents), whose EBITDA declined from $8.8 billion to $7.2 billion, a $1.6 billion or 19% decline. At the total industry level, this was partly offset by the wireless EBITDA, which increased from $2.2 billion in 2002 to $3.1 billion in 2003, for an increase of $0.9 billion or 38% and by the wireline competitors EBITDA which increased from $0.60 billion to $0.64 billion, an increase of $0.04 billion or 8%. As a result, the wireline incumbents' share of the industry EBITDA decreased from 76% of the industry to 66% while that of the wireless providers increased from 19% to 28% and the wireline competitors share remained relatively unchanged at 6%.

Capital expenditures declined from $6.3 billion in 2002 to $5.2 billion in 2003, a $1.1 billion or 17% decrease. All providers, both wireline and wireless, reduced capital expenditures in 2003. Wireless providers reduced capital expenditures from $1.6 billion in 2002 to $1.3 billion in 2003, a 23% decrease. Wireline incumbents reduced capital expenditures from $4.0 billion in 2002 to $3.6 billion in 2003, a decrease of $0.4 billion or 11%. Wireline competitors reduced capital expenditures from $0.7 billion in 2002 to $0.4 billion in 2003, a $0.3 billion decrease or 45%. Consolidation activities within the industry reduced capital expenditures for companies expanding outside their traditional operating territory.

The wireline competitors' percentage decline in capital expenditures is approximately 4 times that of the wireline incumbents. This may be attributed, in part, to several large competitors who have either emerged, or are emerging, from bankruptcy protection. These companies face the same constraints as the incumbents in managing capital expenditures. In addition, these companies must now place a greater reliance on internally generated funds than they did prior to entering bankruptcy protection. Although these companies restructured their financial affairs, their focus is to maintain healthy financial ratios and re-establish relationships with the financial community.

Consolidation continues in the industry. Allstream Inc. and the Canadian portion of 360networks Inc. have, or are being, acquired by MTS Communications Inc. (now MTS Allstream Inc.) and Bell Canada respectively, allowing MTS to begin, and Bell Canada to strengthen, out-of-territory operations. Subsequent to its deal to acquire the Canadian portion of 360networks, Bell Canada intends to sell 360networks' eastern Canadian customer base to Call-Net Enterprises Inc. (Call-Net). Call-Net also has the option of acquiring 360networks' eastern assets from Bell Canada. In a separate deal, Bell Canada took full control of Bell West Inc. by acquiring the remaining outstanding shares from MTS (now MTS Allstream). Another company, Microcell Telecommunications Inc., was acquired by Rogers Wireless Inc.

Long Distance

In the long distance market, revenues continued to decline, decreasing from $6.5 billion to $5.9 billion in 2003, a $0.6 billion or 9% decline. The number of long distance minutes, however, increased in 2003 by 1.8% when compared to the previous year. The incumbents' long distance revenues declined 11.6% while the competitors' revenues declined 2.4%. As a result, the competitors' share of long distance retail revenues increased from 28% in 2002 to 30% in 2003.

Local and Access

In the local wireline market, which continued to be the largest segment accounting for over 30% of the industry's telecommunications revenues, local revenues decreased from $10.0 billion in 2002 to $9.7 billion in 2003, a $0.3 billion or 3% decrease while the number of local lines increased from 20.6 million lines to 20.7 million lines, a 0.2% increase.

Overall, local wireline competitors and incumbent out-of-territory operations made progress, as their combined market share of local lines increased from 5.1% in 2002 to 6.3% in 2003. Their combined share of local business lines increased from 10.3% in 2002 to 11.7% in 2003 and their share of residential lines increased from 1.4% in 2002 to 2.0% in 2003. Competition in these markets was primarily confined to the major urban centres, where they generally had between 0.1% and 26.9% of the local business lines and between 1.6% and 17.6% of the local residential lines.

Local wireline competitors paid incumbents $0.52 in 2003 for every local revenue dollar earned for the use of the incumbents' facilities and services in order to serve their local customers. This is a 33% reduction from the previous year. This reduction is mainly attributed to regulatory  action which reduced the rates incumbents charge competitors for some competitor services. The competitors, however, remain heavily dependent on the incumbents' local facilities due, in part, to their limited access to external funding and the high cost of building these facilities to support a market share of approximately 5%.

Internet and Broadband Deployment

The Internet market continued to be one of the fastest growing markets in the industry. Internet revenues increased from $3.3 billion in 2002 to $3.7 billion in 2003, a $0.4 billion or 11% increase. The incumbents had 42% of the retail Internet access revenues in 2003, while the cable companies had 36% and all others had 22%. The four largest Internet service providers accounted for 54% of the retail Internet revenues in 2003.

Broadband deployment continued to progress, with approximately 86% of Canadian households having access to broadband services, of which 42% actually subscribe. Ninety-five percent (95%) of urban households can access broadband service versus 63% of the rural households. In 2003, 56% of Canadian households had an Internet subscription. There were more high-speed Internet households (36%) than there were households with dial-up subscriptions (20%). Public funding to help seed private sector investment in broadband deployment was also available at both the federal and provincial levels based on a variety of funding models.

Wireless

The wireless market continued to display strong growth and continued to be very competitive. Wireless revenues increased from $7.1 billion in 2002 to $8.0 billion in 2003, a $0.9 billion or 13% increase. The wireless share of the telecommunications revenues continued to increase, growing from 23% of total industry revenues in 2002 to 25% in 2003. Four major entities accounted for over 93% of the wireless market, with no entity dominating in terms of either revenues or subscribers. After several years of decline, the average monthly revenues per subscriber increased slightly to $49 from $48 in 2002.

Data and Private Line

In the data and private line market, total revenues in 2003 decreased from $4.55 billion in 2002 to $4.48 billion in 2003, a $0.06 billion or 1.4% decrease. This decline was the result of private line service revenues that declined by 6.3%, offsetting a 4.4% revenue growth displayed by data services.

Aggressive pricing and reduced demand were the major contributors to the decline in private line service revenues. However, the competitors' market share of the data and private line market remained relatively unchanged at approximately 20%. The industry has introduced new data services to meet customer requirements for increased speed, functionality and cost efficiency. Service providers promoted these newer data services such as Ethernet and Internet Protocol based Virtual Private Network which had revenue growth of 34% and 74%, respectively, and which may account for some of the reduced demand for private lines and legacy data services such as X.25.

Consumer Survey

Based on the results of the consumer survey performed by Decima Research Inc. in 2004 on behalf of the Commission, 67% of Canadians believe that they have benefited from the availability of competition compared to 72% in last year's survey. Forty-one percent (41%) of Canadians indicated that they had at some time subscribed to an alternative provider of long distance service. More than half of the households (52%) indicated that they spend more than $75 a month on telecommunications services. Sixty-five percent (65%) of Canadian households believe that their total monthly spending on telecommunications services, consisting of local, long distance, Internet and wireless service, stayed about the same or had decreased over the previous year.

Table of Contents

1.0 Introduction

1.1 Purpose of the Report
1.2 Data Collection and Outline of the Report

2.0 The Role of Market Information

2.1 Overview
2.2 Competition and Monitoring

3.0 Overview of the Telecommunications Industry and Regulation

3.1 Regulatory Oversight of Canadian Telecommunications Markets
3.2 The Commission and Competition
3.3 Overview of the Telecommunications Services Industry
3.4 Penetration Rates
3.5 Market Participants

4.0 Status of Competition

4.1 Financial Review of Markets
4.2 Long Distance
4.3 Local and Access
4.4 Internet Services
4.5 Wireless
4.6 Data and Private Line
4.7 Fibre Backbone
4.8 Pay Telephones

5.0 Broadband Availability and Promising Means for Accelerated Broadband Deployment

5.1 Introduction
5.2 Geographic Broadband Deployment in Urban and Rural Areas
5.3 Promising Means for Accelerated Broadband Deployment
5.4 Federal Government Broadband Programs
5.5 Provincial and Territorial Broadband Deployment Programs
5.6 Progress Under the Existing Initiatives
5.7 Summary

6.0 Users of Telecommunications Services

6.1 Introduction
6.2 Residential Consumers
6.3 Business Customers

Appendix 1 Summary of Canadian Telecommunications Milestones to Competition
Appendix 2 Summary of Canadian Telecommunications Markets Subject to CRTC Forbearance Rulings
Appendix 3 Summary of Certain Recent CRTC Rulings Relevant to Telecommunications Competition
Appendix 4 Major Market Participants
Appendix 5 Glossary of Terms and Acronyms

List of Tables

Table 3.3.1 Telecommunications Services Employment
Table 3.3.2 Total Telecommunications Services Revenues
Table 3.4.1 Canadian Penetration Rates - Wireline Access Lines and Wireless Subscribers
Table 3.5.1 Total Telecommunications Services Revenues by Type of Market Participant

Table 4.1.1 Total Telecommunications Service Revenues
Table 4.1.2 Segmented Telecommunications Service Revenues
Table 4.1.3 Inter-carrier Payments per Revenue Dollar by Wireline Market Sector
Table 4.2.1 Long Distance Market
Table 4.2.2 Long Distance Revenues by Market Segment
Table 4.2.3 Incumbent Telephone Companies' Long Distance Revenue Market Share by Region
Table 4.2.4 Long Distance Business Revenues
Table 4.2.5 Long Distance Business Minutes
Table 4.2.6 Long Distance Residential Revenues
Table 4.2.7 Long Distance Residential Minutes
Table 4.2.8 Wholesale Long Distance Revenues
Table 4.3.1 Total Local and Access Revenues and Lines
Table 4.3.2 Local and Access Revenues by Major Market Segment
Table 4.3.3 Local Lines by Major Market Segment
Table 4.3.4 Incumbent Local Market Share by Province (lines)
Table 4.3.5 Market Share (Local Lines) in Major Centres
Table 4.3.6 Local Business Revenues
Table 4.3.7 Local Business Lines
Table 4.3.8 Local Residential Revenues
Table 4.3.9 Local Residential Lines
Table 4.3.10 Local Wholesale Revenues by Major Component
Table 4.3.11 Local Wholesale Revenues
Table 4.3.12 Local Wholesale Lines
Table 4.4.1 Internet Revenues
Table 4.4.2 Residential and Business Internet Access Service Revenues
Table 4.4.3 Internet Connectivity Service Revenues by Market Participant Group
Table 4.4.4 Internet Access Revenues by Market Participant Group
Table 4.4.5 Residential and Business Internet Access Revenues and Revenue Market Share by Access Technology
Table 4.4.6 Residential Internet Subscribers by Market Participant
Table 4.5.1 Wireless Revenues
Table 4.5.2 Subscriber Share by Province
Table 4.5.3 Average Monthly Churn Rates
Table 4.6.1 Data and Private Line Revenues
Table 4.6.2 Data Service Retail and Wholesale Revenues by Service Category
Table 4.6.3 Market Share by Data Service Category
Table 4.6.4 Private Line Service Retail and Wholesale Revenues by Market Segment
Table 4.6.5 Private Line Service Revenues Short-Haul and Long-Haul Market Share

Table 5.6.1 Summary of Provincial and Territorial Broadband Deployment Initiatives

Table 6.2.1 Service Improvement Program
Table 6.2.2 Monthly Household Telecommunications Expenditures
Table 6.2.3 Wireless Subscriptions
Table 6.2.4 Importance of Keeping Existing Wireless Telephone Number When Changing Suppliers
Table 6.2.5 Comparison of Wireline and Wireless Service
Table 6.2.6 Consumers' Ability to Compare Service Offerings
Table 6.3.1 Business Accounts and Revenues Distribution (2003)

List of Figures

Figure 3.5.1 Distribution of Telecommunications Service Providers

Figure 4.1.1 Wireline and Wireless Annual Revenue Growth Rates (%)
Figure 4.1.2 Segmented Telecommunications Service Revenues
Figure 4.1.3 Distribution of Revenues
Figure 4.1.4 Total Service Revenues by Provider Type
Figure 4.1.5 Average Monthly Revenue per Line/Subscriber
Figure 4.1.6 Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) by Provider Type
Figure 4.1.7 Capital Expenditures by Provider Type
Figure 4.1.8 Capital Expenditures per Revenue Dollar
Figure 4.1.9 Wireline EBITDA v. Wireline Capital Expenditures (CAPEX)
Figure 4.2.1 Long Distance Revenues by Component
Figure 4.2.2 Retail Average Revenue per Minute (ARPM)
Figure 4.3.1 Local Residential Revenues by Major Component
Figure 4.3.2 Competitor Local Retail Lines by Type of Facility
Figure 4.4.1 Residential Internet Subscriptions by Technology (1999)
Figure 4.4.2 Residential Internet Subscriptions by Technology (2003)
Figure 4.5.1 Wireless Revenues, Subscribers and Revenues per Subscriber
Figure 4.5.2 Mobile Subscriber Growth
Figure 4.5.3 Percent of Pre-Paid and Post-Paid Subscribers
Figure 4.5.4 Wireless Revenues by Major Component (excluding Basic Voice)
Figure 4.5.5 Major Wireless Players' Market Share (Mobile Revenues)
Figure 4.5.6 Major Wireless Players' Market Share (Mobile Subscribers)
Figure 4.6.1 Data and Private Line Revenues - Incumbents v. Competitors
Figure 4.6.2 Data Service Revenues - Incumbents v. Competitors
Figure 4.6.3 Data Services - Revenue Distribution by Service Category
Figure 4.6.4 Retail and Wholesale Revenues as a Percentage of Total Data Service Revenues
Figure 4.6.5 Private Line Service Revenue Trends - Incumbents v. Competitors
Figure 4.6.6 Private Line Service Revenue Distribution - Retail v. Wholesale
Figure 4.6.7 Long-Haul Private Line Service - Satellite v. Terrestrial Facilities
Figure 4.6.8 Retail Private Line Revenues - Competitors' Market Share
Figure 4.6.9 Wholesale Private Line Service Revenues - Competitors' Market Share
Figure 4.8.1 Number of Pay Telephones
Figure 4.8.2 Pay Telephone Revenues

Figure 5.2.1 Broadband Availability (Percent of Households)
Figure 5.2.2 Broadband Availability v. Subscriptions
Figure 5.2.3 Broadband Access in OECD Countries Per 100 Inhabitants (2003)
Figure 5.6.1 Communities with and without Broadband Access - Broadband Pilot Program

Figure 6.2.1 Telephone Services Price Changes as Compared to Inflation
Figure 6.3.1 Total Local, Long Distance and Data and Private Line Revenues - Incumbents v. Competitors (2003)
Figure 6.3.2 Local Business Revenues - Incumbents v. Competitors (2003)
Figure 6.3.3 Long Distance Business Revenues - Incumbents v. Competitors (2003)
Figure 6.3.4 Data and Private Line Revenues - Incumbents v. Competitors (2003)

List of Maps

National Mobile Coverage (Digital and Analog Service)
Presence of Mobile Service Providers
Fibre Backbone Routes

1.0 Introduction

1.1 Purpose of the Report

This is the fourth annual report of the Canadian Radio-television and Telecommunications Commission (Commission) on the status of competition in Canadian telecommunications markets and the deployment and accessibility of broadband services and facilities across the country.¹

The report has been prepared in response to the Governor in Council's June 2000 Direction which:

The information gathered as part of its monitoring activities enables the Commission to determine more effectively (a) the state of competition, (b) the effect of competition on services to consumers and business customers, and (c) service providers' compliance with legal and regulatory requirements. This report, therefore, represents a key component of the Commission's ongoing monitoring plan. It also becomes an authoritative source of information on the Canadian telecommunications industry for use by various stakeholders.

In addition to companies that are primarily involved in the provision of telecommunications services, the scope of this report includes broadcast distribution undertakings (e.g., cable companies) that provide telecommunications services such as Internet access or other telecommunications services, either directly or indirectly, through affiliated companies. For the purposes of this report, only telecommunications services and operations are taken into account in the case of cable companies³ as well as other companies whose primary line of business lies outside of telecommunications (e.g., as in the case of utility companies involved in the provision of telecommunications services).

1.2 Data Collection and Outline of the Report

This report is based on the responses to the Commission's data collection exercise based on forms which have been issued annually since 2002 (referenced as CRTC Data Collection), internal analyses, data collected from other sources, including Statistics Canada, Industry Canada, company-specific financial reports and information previously filed with the Commission.

In 2004, the Commission implemented a number of administrative changes to the data collection process in order to better coordinate and streamline the activities that it undertakes to monitor and regulate the Canadian telecommunications industry. These include activities related to telecommunications entity registration lists, international licences, telecommunications fees and the contribution regime.⁴

In 2004, the Commission introduced a secure web-based platform, the Data Collection System or DCS, to collect 2003 data from telecommunications service providers. DCS supports the Canadian Government Online (GOL) initiative to help improve the quality and timeliness of the data collected, and reduce the overall effort required to produce the monitoring report. DCS also provides the respondent telecommunications companies with the means to validate their submitted data and make any required revisions on-line.

This year, the data collection consisted of a two-step process. The first step involved the issuance of an on-line Reporting Entity Profile (REP) form to enable all telecommunications entities to update their information relating to the Commission's registration lists, international licences, telecommunications fees, the contribution regime and the monitoring report. In addition, the REP form reduced the reporting burden on the entities. The data provided in the REP form was used to identify the universe of entities required to participate in the CRTC data collection process and to determine the set of data forms each entity was to complete. The second step was the issuance of detailed data forms which were made accessible to each entity using a secured web site to the DCS.

The 2004 Commission Data Collection forms encompassed a range of company-specific information, including financial data (e.g., income statement, balance sheet and capital expenditures) along with detailed telecommunications information focusing on product and geographic market information. Geographic markets were defined on a national, provincial/territorial, regional, city or, for mapping purposes, postal code basis. Data was primarily collected for 2003.

Most firms providing one or more telecommunications products or services were required to submit their data for 2003, using the telecommunications industry data collection forms. Separate forms were required for each legal entity providing any such services on 31 December 2003. Where a legal entity in existence on 31 December 2003 was formed through a merger of predecessor companies, survey responses were provided on a consolidated basis for all predecessor companies.

In order to reduce the burden of data reporting on small firms (with revenues under $5 million), the reporting requirements and forms were simplified to include only revenues from their market segments.

Certain figures published in prior years' monitoring reports have been restated to be consistent with 2003 figures. These amounts have been identified by means of a number sign (#). Other figures have changed as a result of some companies resubmitting prior years' data. In addition, certain data have been reclassified to better reflect the market segments.

Some of the tables and figures included in the report are derived from the CRTC Data Collection while others are derived using Statistics Canada and Industry Canada information. These data sources are not always consistent, given that the universe surveyed, the definitions used and the level of precision requested may be different. The data source is identified for each table and figure contained in the report. Statistics Canada data is generally only used when the data is not available from the CRTC Data Collection process.

Each reporting entity was assigned a separate company type and sub-type classification, which reflect historical legacies (e.g., incumbent in a specific industry prior to competition) and whether the company owns facilities (e.g., facilities-based or reseller). Where operating entities are part of a larger corporate family (defined as direct or indirect ownership above 50%), the longer historical legacy supersedes other classifications.

The following classifications and sub-classifications have been adopted for the purpose of this report:

i) Incumbent telephone companies

ii) Competitive service providers

The Commission also commissioned Decima Research Inc. to conduct a survey to assess consumer behaviour towards, and perceptions and awareness of, telecommunications services. Objectives of the survey included the measurement of consumers' expenditure and choices in telecommunications services, wireless and Internet usage and views on regulation and the benefits of competition.

This report is divided into the following additional sections and appendices:

• Section 2 discusses the role of market information in monitoring progress and changes within the industry.
• Section 3 provides an overview of the telecommunications industry and regulation, as well as an overall review of service providers in the market.
• Section 4 provides a review of financial information, including revenue, capital expenditures and other operational data for various sectors of the industry. It also examines the status of competition in each of the major market segments, including long distance, local, Internet and broadband, wireless, data and private line, and pay telephone.
• Section 5 reviews broadband availability and promising means for accelerating broadband deployment to rural and remote areas of the country.
• Section 6 provides information on residential consumers and business customers, including the results of the consumer survey commissioned by the Commission.
• Appendix 1 contains a summary of Canadian telecommunications milestones to competition.
• Appendix 2 contains a summary of Canadian telecommunications markets subject to forbearance rulings.
• Appendix 3 provides a summary of certain recent Commission rulings relevant to telecommunications competition.
• Appendix 4 provides a brief description of the major market participants.
• Appendix 5 contains a glossary of terms and acronyms used in this report.

2.0 The Role of Market Information

2.1 Overview

The Commission is largely responsible for the implementation of the Telecommunications Act (the Act) enacted in 1993. Certain objectives of the Act, set out in section 7, are directly or indirectly tied to the notion of competition. For example, subsection 7(f) of the Act explicitly states that an objective is "to foster increased reliance on market forces for the provision of telecommunications services and to ensure that regulation, where required, is efficient and effective."

In providing an overview on the status of competition in the various telecommunications market segments in Canada, this report, as well as the ongoing monitoring of the telecommunications industry, will assist the Commission in its regulation of the industry.

The Commission is part of a growing number of regulatory bodies that prepare regular monitoring reports. The use of monitoring reports has gained favour as a means of tracking ongoing industry developments to determine whether regulatory and legislative objectives are being met. This is particularly true of countries that are placing, or have placed, a greater emphasis on competition in the regulation of telecommunications services.

2.2 Competition and Monitoring

There are various means for measuring competition; however, good quality data is critical if the monitoring process is to be accurate and useful. For the most part, the Commission uses its own data collection mechanisms in order to gather detailed and timely information.

There is no single or simple way of assessing the state of competition in a market. The Commission uses key indicators in monitoring competition. These include (i) various measurements of market size and market share according to criteria such as revenues, number of subscribers, lines and minutes, (ii) number and description of suppliers in the market, (iii) lists of available services, pricing levels and trends, and (iv) corporate financial conditions.

Specific elements of the monitoring exercise may need to change over time to take into account significant market developments, such as new technologies, changes in the market structure or in domestic or international regulations or agreements, or the introduction of new services. Adaptability ensures that monitoring reports continue to be useful tools for regulators, customers and industry players.

3.0 Overview of the Telecommunications Industry and Regulation

3.1 Regulatory Oversight of Canadian Telecommunications Markets

The Commission has a broad range of powers to implement the policy objectives set out in section 7 of the Act, including the powers to ensure that rates are just and reasonable and that Canadian carriers do not discriminate unjustly or accord any undue preference with respect to the provision of telecommunications services.⁵ In addition to regulating the rates, terms and conditions under which telecommunications services are provided, the Commission has the power to forbear from regulating telecommunications services or classes of service where it finds, among other things, that there is sufficient competition to protect the interests of users.⁶

Industry Canada exercises powers relating to the allocation of radio spectrum under the Radiocommunication Act. Among other things, Industry Canada is responsible for developing spectrum allocation, spectrum utilization and service policies covering fixed and mobile terrestrial and non-terrestrial (i.e., satellite) wireless service applications. In this regard, it has the power to issue spectrum licences, either through an application process or a spectrum auction process.⁷ As well, Industry Canada has pursued spectrum licensing strategies that have increased potential entry into the various segments of the wireless market. It may also set the terms and conditions for any such licences as it deems appropriate.

While the Commission is responsible for regulating and for establishing the terms and conditions of competition in the telecommunications industry as a whole, Industry Canada effectively determines the terms and conditions of entry in the wireless segment of the industry. Consequently, there is a shared responsibility for regulating the wireless portion of the telecommunications industry in Canada between the Commission and Industry Canada.

3.2 The Commission and Competition

In exercising its statutory powers both under predecessor legislation and the Act, the Commission has gradually and in an orderly manner opened up monopoly-based markets to competition over the years. The Commission's approach to opening up various market segments to competition is to weigh the potential advantages and disadvantages, and to strike a fair and reasonable balance between the often conflicting interests of all concerned, including incumbents, competitors and customers. The Commission forbears from regulation pursuant to section 34 of the Act, when it considers that a service or class of services is subject to a level of competition sufficient to protect the interests of users of the service.

The Commission continues to strive to render reliable and affordable services of high quality, accessible to both urban and rural area customers, to foster facilities-based competition, to provide incumbents with incentives to increase efficiencies and be more innovative, and to adopt regulatory approaches that impose the minimum regulatory burden possible. The Commission continues to remove obstacles to fair and sustainable competition, including eliminating barriers to access and ensuring regulatory compliance. In addition, the Commission maintains regulatory clarity through clear rules, clear determinations and the establishment of clear lines of communication. However, regulation is only a piece of the puzzle. Economic conditions are also an important part of the mix, as are technology development and the quality of business decision-making.

The Commission has put in place a range of other measures to encourage the development of competition in the remaining regulated sectors of the industry. For instance, the CRTC Interconnection Steering Committee (CISC) process provides a forum for interested parties, with the assistance of Commission staff, to resolve local competition implementation issues of a technological, operational or administrative nature.

Commission staff also mediate service provider disputes, which in many cases avoids the need for formal proceedings. In cases where a Commission determination is required, this informal mediation enables the issues in dispute to be more narrowly defined and provides a means to obtain better information for an ultimate determination.

In 2004, the Commission also initiated an expedited procedure⁸ for resolving competitive issues that are factual in nature and relate to established rules and not to the creation of new ones. This process is an efficient and effective way of dealing with disputes. A number of expedited hearings were held in 2004 and decisions were generally issued within a week. On other occasions, applications were withdrawn because parties were able to resolve their issues with the help of Commission staff.

The Commission encourages parties to explore various options to resolve outstanding competitive issues, including bilateral negotiations, third-party mediation or staff assisted dispute resolution.

A summary of the most significant milestones in opening telecommunications markets to competition is contained in Appendix 1.

Appendix 2 provides a summary of the most significant forbearance rulings since the Commission was granted this power in 1993. While the Commission has forborne and continues to forbear from regulating a growing number of services, at the same time, the Commission continues to regulate telecommunications services. In the case of large incumbents [including Aliant Telecom Inc. (Aliant Telecom), Bell Canada, MTS Communications Inc. (now MTS Allstream Inc.),⁹ Saskatchewan Telecommunications (SaskTel) and TELUS Communications Inc. (TELUS)], these services include residential basic local services, business single and multi-line local services, local options and features, pay telephone, digital network access, local channels and competitor services, among others. Starting in 1998, the regulation of these services (for all of these companies except SaskTel) changed fundamentally, shifting away from an earnings-based to a price level-based form of regulation.¹⁰ The first price regulation regime covered the period 1998 to 2002. In 2002, it was reviewed and modified.¹¹ The new regime, which now also applies to SaskTel, became effective in June 2002 and extends through to 2006.

Non-forborne telecommunications services provided by Société en commandite Télébec (Télébec) and TELUS Communications (Québec) Inc. (TELUS Québec) were made subject to price cap regulation as of August 2002.¹² In addition, non-forborne services provided by small incumbent telephone companies were made subject to a simplified form of price regulation effective in January 2002.¹³

The Commission has also issued a number of recent rulings that further support the development of competition in the Canadian telecommunications industry. The most important recent rulings are summarized in Appendix 3.

3.3 Overview of the Telecommunications Services Industry

The Canadian telecommunications services industry plays a significant role in the Canadian economy as a whole. The industry's share of Canada's real gross domestic product (GDP) value added was 2.3% in 2003.¹⁴ The telecommunications industry ranks 9^th out of the 14 major service producing components of the GDP as listed by Statistics Canada.¹⁵

Capital expenditures for telecommunications service providers also account for a significant portion of the overall capital expenditures in the Canadian economy. Telecommunications industry capital expenditures were 2.2% of total economy-wide capital expenditures in 2003,¹⁶ down from the 2002 level of 3.5%. Capital expenditures for the industry declined in 2003 by 17%.¹⁷ This decline was due to factors such as revised business plans that focus on the company's strengths, company cost cutting and reluctance of investors to provide funding to companies either in, or emerging from, bankruptcy protection, requiring such companies to place a greater reliance on their limited internally generated funds. As well, as companies restructured, assets were disposed of and acquired by the remaining companies, reducing the need to build new facilities.

In 2003, the number of employees in the Canadian telecommunications services industry was approximately 110,800, representing 0.8% of total employees in Canada.¹⁸

According to Statistics Canada, employment in this industry slowly increased from 1999 to 2003, but until 2003, as displayed in Table 3.3., remained below the 1991 level which was just over 108,000.

Table 3.3.1
Telecommunications Services Employment
(Thousands)

Source: Statistics Canada

Telecommunications services revenues for all reporting entities completing the 2004 CRTC Data Collection forms were $31.8 billion in 2003.¹⁹ This represents an annual growth rate of 5.4% over the 1999 level of $25.8 billion. Table 3.3.2 provides a summary of the total telecommunications services revenues for each of the five years.

Table 3.3.2
Total Telecommunications Services Revenues
($ billions)

Source: CRTC Data Collection

3.4 Penetration Rates

Penetration rates provide a useful general indicator of consumer access to telecommunications networks.

For the purposes of this report, penetration rates are measured using access per 100 households. Penetration rate data for Canada, including wireline, wireless and wireline and/or wireless covering the period 1998 to 2002, is summarized below in Table 3.4.1.²⁰

The rate of penetration of wireline and/or wireless has remained relatively constant over the years 1998 to 2002. Wireline penetration has declined over this period to 97.0 access lines per 100 households in 2002, down from a high of 98.1 in 1999. In contrast, wireless penetration doubled over this period, reaching 51.6 subscribers per 100 households in 2002. The penetration rates in Table 3.4.1 indicate that 1.7% of Canadian households have only a wireless service in 2002, up from 0.4% in 1998.

Table 3.4.1
Canadian Penetration Rates
Wireline Access Lines and Wireless Subscribers
(per 100 households)

Source: Statistics Canada

3.5 Market Participants

The Commission maintains registration lists²¹ of service providers that either operate or propose to operate in the Canadian telecommunications industry. There are over 1,100 telecommunications service providers listed on these lists. The service providers on these lists were contacted and issued the REP form as discussed in section 1.2.

For the purposes of this report, these providers are divided into the following categories:

An overview of these categories is provided in Appendix 4.

As displayed in Figure 3.5.1, approximately 50% of the service providers are resellers, representing the single largest group of telecommunications service providers operating, or who propose to operate, in the Canadian telecommunications industry.

Figure 3.5.1
Distribution of Telecommunications Service Providers

Each of the reporting entities that completed the 2004 CRTC Data Collection forms was assigned to one of the above-noted categories. Certain categories of competitive service providers were combined, as separate reporting would have resulted in residual disclosure of confidential information. Also, certain figures and percentage growth calculations may not reconcile due to rounding.

Incumbent carriers' out-of-territory activities are captured within the various sections of the report. In the local and access section, the out-of-territory activities for the year 2003, for the most part, are identified separately from the incumbent and competitor data. Where data did not permit separate identification, the out-of-territory was included as part of the incumbent data. In all other sections, where applicable, the out-of-territory activities are included as part of the incumbent data, due, in large part, to a lack of available data and to the determination that other markets, such as long distance, have been previously defined to be national in scope.

A summary of total telecommunications service revenues in aggregate and by type of market participant for the five year period 1999 to 2003 is provided in Table 3.5.1 below. As Table 3.5.1 demonstrates, the incumbents' share of the industry's total telecommunications service revenues decreased from 81% in 1999 to 75% in 2003.

Table 3.5.1
Total Telecommunications Services Revenues
by Type of Market Participant
($ millions)

Source: CRTC Data Collection

4.0 Status of Competition

4.1 Financial Review of Markets

Highlights

• Telecommunications industry service revenues increased 1.1% in 2003, with wireline revenues decreasing 2.4% and wireless revenues increasing 13.3%.
• Incumbents, including their wireless operations, continue to have the lion's share (75%) of the telecommunications revenues.
• Telecommunications industry capital expenditures decreased 17% from 2002.
• Telecommunications industry earnings before interest, taxes, depreciation and amortization (EBITDA) declined from $11.6 billion in 2002 to $10.9 billion in 2003, a 6% decline.
• Wireless EBITDA increased from 19% of the total industry in 2002 to 28% in 2003.
• Wireline competitors' EBITDA increased from $0.60 billion in 2002 to $0.64 billion in 2003, an 8% increase. The competitors' share of total industry EBITDA remained unchanged at 6%.

Part A - Telecommunications Revenues

Overview - Market Segment Revenues

Telecommunications revenues include revenues from both wireline and wireless service offerings. Wireline service revenues include local and access, long distance, data and private line and Internet service revenues, but exclude revenues from terminal sales and rentals. Wireless service revenues include mobile and paging service revenues as well as the terminal equipment revenues generated within this market segment.

As shown below in Table 4.1.1, wireline revenues decreased 2.4% from $24.4 billion in 2002 to $23.8 billion in 2003.

Table 4.1.1
Total Telecommunications Service Revenues²²
($ billions)

Source: CRTC Data Collection
Note: CAGR refers to Cumulative Annual Growth Rate

This 2.4% decline was offset by wireless growth, which is slowing down but still strong at 13.3%. Wireless revenues increased from $7.1 billion in 2002 to $8.0 billion in 2003.

As shown in Figure 4.1.1, wireline revenue growth, after displaying a strong growth of 11% in 2000 has been declining, to the point where, by 2002, it became negative. In 2003, wireline growth remained relatively unchanged at -2.4%. In contrast, wireless revenue growth has been strong since 2000 at approximately 15%, dipping in 2002 to 10% and then recovering to 13% in 2003. The decline in wireline revenue in Canada mirrors similar declines that have recently been experienced in both the United States²³ and United Kingdom.²⁴

Figure 4.1.1
Wireline and Wireless Annual Revenue Growth Rates (%)

Overall, wireline market revenue experienced a cumulative decline of 2.4% since 2001. All wireline market segments displayed a downward trend in 2003, except for the Internet segment which displayed a strong growth of 11.2%. Declining prices and reduced demand in the private line market resulted in a decrease in data and private line revenues of 1.4%. Long distance revenues declined 9% mostly due to declining prices, and local and access revenues declined by 3.0%.

Table 4.1.2
Segmented Telecommunications Service Revenues
($ billions)

Source: CRTC Data Collection

Figure 4.1.2 below shows the trend in segmented telecommunications service revenues from 2000 to 2003. Despite the declining growth rates in some wireline segments, total wireline services still represent the majority (75%) of telecommunications service revenues.

Figure 4.1.2
Segmented Telecommunications Service Revenues
($ billions)

The Canadian telecommunications market consists of a small number of service providers that have significant degrees of market power. As is illustrated in Figure 4.1.3, approximately 5% of the companies in the telecommunications market generate approximately 70% of the revenues. Figure 4.1.3 also shows that 2% of the companies generate approximately 55% of the revenues. The next 3% generates an additional 15% of the revenues. These companies, in general, offer all types of service. Two thirds of the companies (generally resellers and small ISPs) account for a total of 1% of Canadian telecommunications revenues.

Figure 4.1.3
Distribution of Revenues

 

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