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Report to the Governor in Council

Status of Competition in Canadian Telecommunications Markets

Deployment/Accessibility of Advanced Telecommunications Infrastructure and Services

October 2005

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For additional copies of the report, please contact:

Documentation Centre
Canadian Radio-television and
Telecommunications Commission (CRTC)
Les Terrasses de la Chaudière
Central Building
1 Promenade du Portage
Gatineau, Quebec

Mailing Address:
CRTC
Ottawa, Ontario
Canada
K1A 0N2

Telephone: 1 (819) 997-2429
1 (877) 249-2782 (toll-free)
TDD: 1 (877) 909-2782 (toll-free)

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

This publication can be made available in alternative format upon request.

Ce document est également disponible en français.

Catalogue No. BC92-57/2005E-HTML
ISBN # 0-662-41275-3

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Letter

31 October 2005

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 fifth and final 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

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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.

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Executive Summary

This is the fifth and final 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. These reports have evolved to become a key component of the Commission's monitoring plan and are used by all stakeholders as an authoritative source of information on the Canadian telecommunications industry. In Monitoring the Canadian telecommunications industry, Telecom Public Notice CRTC 2005-15, 18 October 2005, the Commission announced that it would continue with its monitoring activities and the issuance of monitoring reports.

Industry Overview

Over the past five years, there have been extensive changes in the telecommunications industry encompassing the regulatory framework, technological developments, industry consolidation and service and/or market developments. It would have been difficult to imagine five years ago that in 2005 the Commission would be holding a proceeding to, among other things, establish a framework for forbearance from regulation of residential and business local exchange telephone services.

Internet and wireless services continue to be the engines of growth and innovation for the Canadian telecommunications industry. The decline or minimal growth in revenues from local and access, long distance and data and private line services, collectively, is evidence, not necessarily of declining demand for telecommunications services, but rather, an indication of the deployment of more efficient and effective technologies or platforms to deliver the services.

Technology continues to impact the industry, not only by reducing costs, but also by introducing new means of providing telecommunications services which improve the business case of industry participants. In the midst of these developments, Canada continues to have not only a very high telephone penetration rate of 98.8 subscribers per 100 households but also a very high Internet subscription rate of 59 subscribers per 100 households.

Many entities in the telecommunications industry, both incumbents and competitors, have undergone a period of downsizing, restructuring or bankruptcy, and those that have emerged are stronger and more focused. As a result of recent consolidations, by year end 2004, virtually all of the larger incumbent telephone companies had either entered or expanded and solidified their out-of-territory operations by acquiring some of the larger facilities-based competitors.

Cable distribution undertakings have not been idle. These companies are major providers of Internet service. More recently, the larger cable undertakings started to provide local telephone service by utilizing Voice over Internet Protocol (VoIP). Cable distribution undertakings also participated in the consolidation activities in the industry, as one of the larger cable companies acquired a national facilities-based telecommunications service provider.

In the midst of these activities, total telecommunications revenues displayed strong growth in 2004, increasing from $31.8 billion in 2003 to $33.3 billion, a 4.7% increase. Wireline revenues, representing 72% of the total industry revenues, increased in 2004 from $23.8 billion in 2003 to $23.9 billion, a 0.3% increase. Wireless revenues however, representing 28% of the industry total, continued to display strong growth, increasing from $8.0 billion in 2003 to $9.5 billion in 2004 an increase of $1.5 billion or 18%.

The telecommunications industry's earnings before interest, taxes, depreciation and amortization (EBITDA) increased from $10.9 billion to $11.5 billion, a $0.6 billion or 5% increase. The increase was due to the wireless providers, whose EBITDA increased from $3.1 billion to $3.7 billion, a $0.6 billion or 19.4% increase. The wireline EBITDA remained relatively unchanged at $7.8 billion. The incumbents' (including their out-of-territory activities) EBITDA increased from $7.2 billion in 2003 to $7.7 billion in 2004, a $0.5 billion or 7% increase. The competitors (other) EBITDA decreased from $0.6 billion to $0.1 billion, a $0.5 billion or a 83% decrease mostly due to the industry consolidation. As a result, the wireline incumbents' share of the industry EBITDA increased from 66% in 2003 to 67% in 2004, while that of the wireless providers increased from 28% to 32% and the wireline competitors' share decreased from 6% in 2003 to 1% in 2004.

The consolidation activities did not have a dampening effect on capital expenditures. Capital expenditures increased from $5.2 billion in 2003 to $5.7 billion, a $0.5 billion or 9.6% increase. Wireline providers increased their capital expenditures from $3.9 billion in 2003 to $4.7 billion in 2004, a $0.8 billion or 21% increase; by contrast, wireless providers reduced capital expenditures from $1.3 billion in 2003 to $1.1 billion in 2004, a decrease of $0.2 billion or 15%.

Long Distance

In the long distance market, revenues continued to decline, decreasing from $5.9 billion in 2003 to $5.6 billion in 2004, a $0.3 billion or 6.0% decline. The number of long distance minutes, however, increased in 2004 by 6.0% when compared to the previous year. The incumbents' share of long distance revenues remained unchanged in 2004 at 67%.

Local and Access

The local wireline market continued to be the largest segment of the telecommunications market, accounting for 29% of the industry's revenues. Local revenues and the number of lines remained unchanged at approximately $9.7 billion and 20.6 million lines in 2004. Overall, the incumbents' share of local service revenues (excluding contribution) and lines declined from 95% in 2003 to 94% in 2004. Competition in the local and access market was primarily confined to the major centres where competitors had approximately 90% of their lines.

Competitors' share of business local revenues increased from 11% in 2003 to 12% in 2004. In the residential market, their revenue share increased from 2% in 2003 to 3% in 2004. In various larger urban areas, competitors generally had between 0.1% and 23% of local business lines and between 0.1% and 25% of local residential lines.

The competitors remained 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 7%.

Internet and Broadband Deployment

The Internet market continued to have strong growth and continued to be competitive. The Internet market was again one of the fastest growing markets in the industry. Internet revenues increased from $3.7 billion in 2003 to $4.2 billion in 2004, a $0.5 billion or 12.9% increase. The incumbent telephone companies had 43% of the retail Internet access revenues in 2004, while the competitors (cable) companies had 39% and all others had 18%. The four largest Internet service providers accounted for 59% of the retail Internet revenues in 2004.

Broadband deployment continued to progress, with approximately 89% of Canadian households having access to broadband services, of which 48% actually subscribe. Ninety-eight percent of urban households can access broadband service versus 68% of the rural households. In 2004, 59% of Canadian households had an Internet subscription. There were more high-speed Internet households (43%) than there were households with dial-up subscriptions (16%). 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 competitive. Wireless revenues increased from $8.0 billion in 2003 to $9.5 billion in 2004, a $1.5 billion or 17.6% increase. The wireless share of total telecommunications revenues continued to increase, growing from 25% of total industry revenues in 2003 to 29% in 2004. Three major entities accounted for over 90% 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 from $48 in 2002 to $49 in 2003 and $52 in 2004.

Data and Private Line

In the data and private line market, total revenues in 2004 decreased from $4.5 billion in 2003 to $4.4 billion in 2004, a $0.1 billion or 1.6% decrease. This decline was the result of private line service revenues that declined by 9.7%, more than offsetting the 6.9% revenue growth displayed by data services.

The competitors', including the competitive (ILEC out-of-territory) service providers', share of the data and private line market, increased from 26% in 2003 to 27% in 2004. Aggressive pricing and reduced demand continued to be major contributors to the decline in private line service revenues. The industry is continuing to benefit from the growth of the newer data services that 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 18% and 68%, respectively, and which may, in part, 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 in 2005 on behalf of the Commission, more than half of the households (52%) indicated that they spend more than $75 a month on telecommunications services. Sixty-four percent of Canadians believe that they have benefited from the availability of competition. Canadians welcome competition, as 42% indicated that they had at some time subscribed to an alternative provider of long distance service.

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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

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 Progress under Existing Initiatives
5.5 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 Glossary of Terms and Acronyms

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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 Total Long Distance Revenues and Minutes
Table 4.2.2 Long Distance Revenues by Market Segment
Table 4.2.3 Incumbent Telephone Companies' Long Distance Retail Revenue Market Share by Region
Table 4.2.4 Business Long Distance Revenues
Table 4.2.5 Business Long Distance Minutes
Table 4.2.6 Residential Long Distance Revenues
Table 4.2.7 Residential Long Distance 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 Market Segment
Table 4.3.3 Local Lines by Market Segment
Table 4.3.4 Total Retail Revenues and Lines
Table 4.3.5 Incumbent Local Retail Market Share by Province (lines)
Table 4.3.6 Market Share (Local Lines) in Major Centres
Table 4.3.7 Local Residential Revenues
Table 4.3.8 Local Residential Lines
Table 4.3.9 Local Business Revenues
Table 4.3.10 Local Business Lines
Table 4.3.11 Local Wholesale Revenues by Major Component
Table 4.3.12 Local Wholesale Revenues
Table 4.3.13 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 Access Service Revenues by Market Participant Group
Table 4.4.4 Top Four Retail Internet Companies' Revenues
Table 4.4.5 Business Internet Access Revenues by Market Participant
Table 4.4.6 Residential Internet Access Revenues by Market Participant
Table 4.4.7 Residential and Business Internet Access Revenues and Revenue Market Share by Access Technology
Table 4.4.8 Residential Internet Subscribers by Market Participant
Table 4.5.1 Wireless Revenues
Table 4.5.2 Wireless Subscriber Share By Province (2004)
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 Service Category
Table 4.6.5 Private Line Service Revenues - Short-Haul and Long-Haul Market Share

Table 5.3.1 Summary of Provincial Broadband Deployment Initiatives

Table 6.2.1 Service Improvement Program Status
Table 6.2.2 Monthly Household Telecommunications Expenditures (Percent of Households)
Table 6.2.3 Wireless Subscriptions (Percent of Households)
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 6.2.7 Consumers' Ever Subscribing to Alternate Company Long Distance Services
Table 6.3.1 Business Accounts and Revenues Distribution (2004)

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 Total Service Revenues - Wireline v. Wireless
Figure 4.1.3 Segmented Telecommunications Service Revenues
Figure 4.1.4 Average Monthly Revenue per Line/Subscriber
Figure 4.1.5 Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) by Provider Type
Figure 4.1.6 Capital Expenditures by Provider Type
Figure 4.1.7 Capital Expenditure per Revenue Dollar
Figure 4.1.8 Wireline EBITDA v. Wireline Capital Expenditures (CAPEX)
Figure 4.1.9 Competitors (ILEC out-of-territory) Revenues v. The Incumbents Wireline Revenues (2004)
Figure 4.2.1 Long Distance Revenues by Component
Figure 4.2.2 Long Distance Revenue Market Share
Figure 4.2.3 Retail Average Revenue per Minute (ARPM)
Figure 4.2.4 Business Long Distance Revenue Market Share
Figure 4.2.5 Residential Long Distance Revenue Share
Figure 4.2.6 Wholesale Long Distance Revenue Share
Figure 4.3.1 Local Residential Revenues by Component
Figure 4.3.2 Competitor Local Retail Lines by Type of Facility
Figure 4.3.3 Competitor Local Residential and Business Lines - By Type of Facility
Figure 4.4.1 Business Internet Access Revenues Market Share by Market Participant
Figure 4.4.2 Residential Internet Access Revenues Market Share by Market Participant
Figure 4.4.3 Residential Internet Access Technology Mix (2000 v. 2004)
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 & Post-Paid Subscribers
Figure 4.5.4 Wireless Revenues by Major Component (excluding Basic Voice)
Figure 4.5.5 Wireless Players' Market Share
Figure 4.6.1 Data Protocol Services - Revenue Distribution by Service Category
Figure 4.6.2 Total Private Line Service Revenue Distribution - Incumbents v. Competitors
Figure 4.6.3 Long-Haul Private Line Services - Satellite v. Terrestrial Facilities
Figure 4.6.4 Retail Private Line Service Revenues - Competitors' Revenue Share
Figure 4.6.5 Wholesale Private Line Service Revenues - Competitors' Revenue Share

Figure 5.2.1 Broadband Availability (2003 v. 2004)
Figure 5.2.2 Broadband Availability (Urban v. Rural)
Figure 5.2.3 Broadband Availability v. Subscriptions
Figure 5.2.4 Broadband Access in OECD Countries per 100 Inhabitants (December 2004)
Figure 5.4.1 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 Revenue Distribution Incumbents, Competitors (Out-of-Territory) and Competitors (Other) - 2004
Figure 6.3.2 Local Service Revenue Distribution Incumbents, Competitors (Out-of-Territory) and Competitors (Other) - 2004
Figure 6.3.3 Long Distance Service Revenue Distribution Incumbents, Competitors (Out-of-Territory) and Competitors (Other) - 2004
Figure 6.3.4 Data and Private Line Service Revenue Distribution, Incumbents, Competitors (Out-of-Territory) and Competitors (Other) - 2004

List of Maps

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

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1.0 Introduction

1.1 Purpose of the Report

This is the fifth and final annual report of the Canadian Radio-television and Telecommunications Commission (Commission) to the Governor in Council on the status of competition in Canadian telecommunications markets and the deployment and accessibility of broadband services and facilities across the country (GIC Monitoring Report).¹

These reports have evolved to become a key component of the Commission's ongoing monitoring plan and an authoritative source of information on the Canadian telecommunications industry for use by all stakeholders. Although this is the Commission's final report to the Governor in Council on the status of competition in Canadian telecommunications markets and the deployment and accessibility of broadband services and facilities, the Commission will continue with its monitoring activities and will continue to produce reports on competition in telecommunications markets. In Monitoring the Canadian telecommunications industry, Telecom Public Notice CRTC 2005-15, 18 October 2005, the Commission notified the industry that it found the reports useful in meeting its obligations under the Telecommunications Act (the Act) and that it would therefore continue with its monitoring activities and the issuance of monitoring reports.

These reports have 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.

The telecommunications entities covered in this report include not only the companies that are primarily involved in the provision of telecommunications services, but also other companies such as utility companies and 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 forms which have been issued annually since 2001 (referenced as CRTC Data Collection), internal analyses, data collected from other sources, including Statistics Canada, Industry Canada, and 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 activities include information collected for 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, for collection of 2003 data which was in keeping with the Canadian Government Online (GOL) initiative. In addition to the administration changes noted above, DCS helps to improve the quality and timeliness of the data collected, and reduces the overall effort required to produce the monitoring report.

In order to increase security of the data submitted online via DCS, the Commission, in 2005, introduced the Government of Canada epass security package, a unique electronic credential that is now used to communicate securely with on-line Government services. All entities that access DCS have been assigned this security package for submission of data.

In 2005, further changes were introduced to streamline the data collection process. In order to reduce the reporting burden on smaller entities, the Commission stratified the industry into two broad groups (Group 1 and Group 2) for data collection purposes. Group 1 includes entities who (i) have significant telecommunications revenues, (ii) file tariffs or (iii) have international licences. Group 2 includes the remaining entities that generally have few revenues.

The Group 1 entities were required to complete and submit data collection forms that 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 are defined on a national, provincial/territorial, regional, city or, for mapping purposes, postal code basis. Group 2 entities were required to complete and submit a simplified form in which only general information was requested. In all cases, the data submitted was as of 31 December 2004.

Certain figures published in prior years' monitoring reports may be restated to be consistent with data displayed in this report. Other figures may change as a result of some companies resubmitting prior years' data. In addition, certain data may be reclassified to better reflect the market segments or industry developments. These restatements are identified by means of a number sign (#).

Most of the tables and figures included in the report are derived from the CRTC Data Collection System while others are derived using Statistics Canada and Industry Canada information. The data, derived from these sources, are not always consistent with each other, given that the universe surveyed, the definitions used and the level of detail 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 System.

The report also includes the results of a consumer survey conducted by Decima Research Inc. for the Commission to assess consumer behaviour towards, and perceptions and awareness of, various 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.

Each reporting entity was assigned a separate company type and sub-type classification, which reflects 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

Wireless service providers are not identified separately under this classification structure. They are however categorized based on their affiliation with the other service providers. For example, the incumbent telephone companies wireless affiliates are categorized as incumbent and those of cable service providers are categorized as cable service providers.

This report is divided into the following 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 and access, 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 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 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 the administration of the Act and the regulation of the industry.

The Commission is among a number of telecommunications regulatory bodies throughout the world 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 place an emphasis on competition to replace traditional regulation of telecommunications services.

2.2 Competition and Monitoring

Although there are various means for measuring competition, 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 collects information related to Canadian telecommunications markets in order to monitor the status of competition. This includes, among other things, (i) various measurements of market size and market share according to criteria, such as revenues and 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 change over time to take into account new regulatory issues or market developments, such as new technologies, changes in the market structure or in domestic or international regulations or agreements, or the introduction of new or evolving services. Adaptability ensures that monitoring reports continue to be useful tools for all stakeholders, including 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 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.

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

When competitive disputes arise, the Commission encourages parties to explore various options to resolve the dispute, including bilateral negotiations, third-party mediation or staff assisted dispute resolution.

The Commission also conducts expedited procedures⁸ 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. The expedited hearings generally result in decisions being issued within a week. In other cases, no application is necessary, or applications are withdrawn because the parties are able to resolve their issues with the help of Commission staff.

The Commission recognizes the need for timely disposition of tariff applications by companies for new or amended services. Taking into account the interests of incumbents, competitors and consumers, initiatives were taken to streamline and expedite the processing of retail tariff filings⁹ and the processing of applications concerning withdrawal of services for which new technologies are employed and for which there are replacement services.¹⁰

The Commission strives to minimize the regulatory burden on the industry, where appropriate. For example, in 2005, the Commission forbore from regulating approximately 800 additional interexchange private line routes.¹¹

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 certain telecommunications services. In the case of large incumbents [including Aliant Telecom Inc. (Aliant Telecom), Bell Canada, MTS Allstream Inc. (MTS Allstream), Saskatchewan Telecommunications (SaskTel) and TELUS Communications Inc. (TCI)], these services include residential basic local services, business single and multi-line local services, local calling features and options, pay telephone, digital network access, local channels and competitor services. 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.¹² The first price regulation regime covered the period 1998 to 2002. In 2002, it was reviewed and modified.¹³ 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. (TCQ) (now part of TCI) were made subject to price cap regulation as of August 2002.¹⁴ In addition, non-forborne services provided by small incumbent telephone companies were made subject to a simplified form of price regulation effective in January 2002.¹⁵

In 2005, the Commission issued Telecom Public Notice CRTC 2005-2¹⁶ to initiate a proceeding and to invite comments, among other things, on a framework for forbearance from the regulation of residential and business local exchange services.

Steps were also taken to substantially reduce the administrative burden of filing quarterly and annual reports. Quarterly reporting requirements for (i) 911 Manual Access to ALI,¹⁷ (ii) Quality of Service - Network Outages¹⁸ and (iii) Affordability Monitoring¹⁹ were changed to an annual requirement. As discussed above, the Commission also reduced the administrative burden of filing data under the data collection process through the elimination of 20% of the data collection forms and the simplification of another 40% of the forms.

The Commission also reduced the regulatory requirements related to the application and renewal of international licenses by extending the license period from 5 years to 10 years and eliminating various conditions of licence.²⁰

As well, the Commission 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 2.4% in 2004²¹ up from the 2003 level of 2.3%. The telecommunications industry ranked ninth in 2004 out of the 14 major service producing components of the GDP as listed by Statistics Canada.²²

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 2.3% of total economy-wide capital expenditures in 2004,²³ up from the 2003 level of 2.2%. Capital expenditures for the industry increased in 2004 by 9.6%.²⁴ This increase was due, in part, to companies deploying new or advanced technologies to enter new markets. For example, cable companies were preparing to enter the local and access market utilizing Internet Protocol (IP) technology and thereby offering subscribers a broader range of services. Telephone companies were augmenting and/or upgrading their networks to take advantage of IP technology and expanding the Digital Subscriber Line (DSL) footprint to offer their subscribers a broader range of services.

Telecommunications employment, as displayed in Table 3.3.1 increased 2.5% annually from 103.7 thousand employees in 2000 to 114.3 thousand employees in 2004.

Table 3.3.1
Telecommunications Services Employment
(Thousands)

Year	Employees
2000	103.7
2001	104.9
2002	105.1
2003	110.8
2004	114.3

Source: Statistics Canada

In 2004, the number of employees in the Canadian telecommunications services industry represented 0.9% of total employees in Canada.²⁵

Telecommunications services revenues were $33.3 billion in 2004.²⁶ This represents an annual growth rate of 3.6% over the 2000 level of $28.9 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)

Year	Total telecommunications services revenues
2000	28.9
2001	31.4
2002	31.5
2003	31.8
2004	33.3

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 by identifying the percent of households that have access to the network. Penetration rate data for Canada, including wireline, wireless, wireline and/or wireless and wireless only, covering the period 1999 to 2003, is summarized below in Table 3.4.1.²⁷

The penetration rate of wireline and/or wireless has remained relatively constant over the years 1999 to 2003 at approximately 98.8% of households. Wireline penetration has gradually declined over this period from 98.2% to 96.3% of households. In contrast, wireless penetration increased almost 70% over this period, reaching 53.9% of households in 2003. The penetration rates in Table 3.4.1 indicate that 2.5% of Canadian households had only a wireless service in 2003, up five-fold from 0.5% in 1999.

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

Year	Wireline	Wireless	Wireline and/or wireless	Wireless (only)
1999	98.2	31.9	98.7	0.5
2000	97.7	41.8	98.8	1.1
2001	97.4	47.6	98.6	1.2
2002	97.0	51.6	98.7	1.7
2003	96.3	53.9	98.8	2.5

Source: Statistics Canada

3.5 Market Participants

The Commission maintains registration lists²⁸ of service providers that either operate or propose to operate in the Canadian telecommunications industry. There are over 1,000 telecommunications service providers on these lists. These service providers were contacted and issued the Reporting Entity Profile (REP) form to file as part of the data collection process discussed in section 1.2.

As noted in section 1.2, these providers are classified as follows:

As previously discussed in section 1.2 and noted in the classification structure above, wireless companies are classified based on the affiliate relationship of the service providers.

As displayed in Figure 3.5.1, approximately 55% 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. Although the resellers represent 55% of the participants, as a group, they captured approximately 4% of the revenues.

Figure 3.5.1
Distribution of Telecommunications Service Providers

The incumbents, including their out-of-territory and wireless operations, were approximately 3% of the number of participants, capturing approximately 76% of the revenues making them the largest group with respect to revenues. Cable service providers were the third largest group with 8% of the number of participants, capturing 15% of the revenues. As a result, they were the second largest group in terms of telecommunications revenues. Over 95% of the cable providers' revenues was related to Internet and wireless services.

Each of the reporting entities 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.

As discussed in section 4.0, there were a number of major acquisitions in 2004 that impact the assignment of revenues to the above-noted categories. In the case of competitors acquiring other entities, the revenues from the acquired company were reassigned to the same category as the competitor that acquired the company. However, in the case of incumbents, the revenues from the acquired company, generated within the traditional operating territory of the incumbent, were reassigned to the incumbent category and the remaining revenues were assigned to competitor (ILEC out-of-territory).

Incumbent carriers' out-of-territory activities are generally captured within the various sections of the report with the competitors (ILEC out-of territory) group as discussed above. However, in certain cases this was not possible. In these cases, the incumbent carriers' out-of-territory activities were included with the incumbent and are noted as incumbent (incl. ILEC out-of-territory).

A summary of total telecommunications service revenues in aggregate and by type of market participant for the five year period 2000 to 2004 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 increased from 75% in 2003 to 77% in 2004 due to the acquisitions of several facilities-based competitors by the incumbents.

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

			2000	2001	2002	2003	2004
Incumbents Carriers (incl. out-of-territory)
Large			22,622.9	24,541.0	23,560.4	23,483.9	25,410.2
Small			278.4	281.9	319.5	311.9	369.0
Sub-total			22,901.3	24,822.9	23,879.9	23,795.8	25,779.2
Percent of total			79%	79%	76%	75%	77%
Competitors (other)
Facilities-based			3,310.9	3,391.3	3,247.3	3,141.5	1,001.8
Resellers/CPTSPs			625.0	709.2	1,217.6	1,315.2	1,558.6
Cable providers			2,037.7	2,448.4	3,009.2	3,432.9	4,875.8
Utility telcos			5.6	31.2	104.5	132.3	95.5
Sub-total			5,979.2	6,580.1	7,578.6	8,021.9	7,531.8
Percent of total			21%	21%	24%	25%	23%
Total			28,880.5	31,403.0	31,458.5	31,817.7	33,311.0

Source: CRTC Data Collection

4.0 Status of Competition

4.1 Financial Review of Markets

Highlights

• Telecommunications industry service revenues increased 4.7% in 2004, with wireline revenues increasing 0.3% and wireless revenues increasing 17.6%.
• Telecommunications industry capital expenditures increased from $5.2 billion in 2003 to $5.7 billion in 2004, a 9.6% increase.
• Telecommunications industry earnings before interest, taxes, depreciation and amortization (EBITDA) increased from $10.9 billion in 2003 to $11.5 billion in 2004, a 5.5% increase.

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 equipment 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 increased 0.3% from $23.8 billion in 2003 to $23.9 billion in 2004.

Table 4.1.1
Total Telecommunications Service Revenues²⁹
($ billions)

	2000	2001	2002	2003	2004	Growth 2003-2004	CAGR 2000-2004
Wireline	23.3	25.0	24.4	23.8	23.9	0.3%	0.6%
Wireless	5.6	6.4	7.1	8.0	9.5	17.6%	14.1%
Total	28.9	31.4	31.5	31.8	33.3	4.7%	3.6%

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

This 0.3% increase was accompanied by wireless growth, which was still strong at 17.6%. Wireless revenues increased from $8.0 billion in 2003 to $9.5 billion in 2004. Total telecommunications revenues increased from $31.8 billion in 2003 to $33.3 billion in 2004, a $1.5 billion or 4.7% increase.

As shown in Figure 4.1.1 below, wireline revenue after displaying strong growth of 11% in 2000, declined to a negative growth rate of 3% in 2002 and remained negative until 2003. In 2004 the growth rate became a positive 0.3%. 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 and increasing to 17.6% in 2004.

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

Table 4.1.2 below illustrates that the long distance and data and private line revenues displayed a downward revenue trend in 2004 of 6% and 1.6% respectively. The local and access revenues remained relatively unchanged. The Internet segment revenues displayed a growth of 12.9%. Declining prices and reduced demand in the private line market resulted in a decrease in data and private line revenues of $0.1 billion. Long distance revenues declined $0.3 billion mostly due to declining prices. Despite the declining growth rates in some wireline segments, total wireline services still represent the majority (72%) of telecommunications service revenues as displayed in Figure 4.1.2.

Table 4.1.2
Segmented Telecommunications Service Revenues
($ billions)

	2002	2003	2004	Growth 2003-2004	CAGR 2002-2004
Wireline
Long distance	6.5	5.9	5.6	-6.0%	-7.5%
Local and access	10.0	9.7	9.7	0.0%	-1.6%
Data & private line	4.5	4.5	4.4	-1.6%	-1.5%
Internet	3.3	3.7	4.2	12.9%	12.6%
Total wireline	24.4	23.8	23.9	0.2%	-1.0%
Wireless	7.1	8.0	9.5	17.6%	15.5%
Total industry	31.5	31.9	33.3	4.6%	2.9%

Source: CRTC Data Collection

Figure 4.1.2
Total Service Revenues
Wireline v. Wireless
($ billions)

2003

2004

Figure 4.1.3 below compares the segmented telecommunications service revenues of 2000 with 2004. Long distance revenues decreased from 2000 to 2004, while Internet and wireless service providers experienced an increase in annual revenues from 2000 to 2004 of 137% and 70% respectively. Revenues from data and private line services, however peaked in 2001 as displayed in Table 4.6.1 in Section 4.6, and have since declined by 4%. Local and access revenues also peaked in 2001 and then decreased by 11% in 2002 and have since declined by 3%, as displayed in Table 4.3.1 in Section 4.3.

Figure 4.1.3
Segmented Telecommunications Service Revenues
($ billions)

2000	2004

Figure 4.1.4 below shows that the average monthly wireline revenue per line has remained relatively unchanged at $98. Monthly wireless revenue per subscriber has been steadily increasing from $48 in 2002 to $52 in 2004.

Figure 4.1.4
Average Monthly Revenue per Line/Subscriber

The local and access portion of the monthly revenue per line in 2004 for wireline service providers was roughly 41% of the total monthly revenue per line.

Part B - Key Financial Indicators³⁰

The following section provides a broader indication of the state of the Canadian telecommunications industry than can be achieved only through the study of service revenues. In addition to revenue, key indicators such as EBITDA and capital expenditures can also be used to determine the financial state of the Canadian telecommunications industry. Due to the difficulty of determining these financial indicators for the out-of-territory operations of the incumbents, the financial results of the incumbents include their out-of-territory operations.

a) EBITDA

As shown in Figure 4.1.5 below, wireless service providers experienced continued growth in EBITDA in 2004. These providers registered a 19.4% increase in EBITDA from $3.1 billion in 2003 to $3.7 billion in 2004, increasing their share of the industry EBITDA from 28% in 2003 to 32% in 2004. The wireline EBITDA declined slightly in 2004 from $7.83 billion in 2003 to $7.81 billion in 2004, a 0.2% decline.

Wireline competitors' (other) EBITDA was $0.11 billion in 2004, a decrease of 83%. The wireline incumbents' EBITDA, including their out-of-territory operations, increased from $7.2 billion in 2003 to $7.7 billion, a $0.5 billion or 7.0% increase. The EBITDA for the industry as a whole increased from $10.9 billion in 2003 to $11.5 billion in 2004. The wireline competitors' (other) share of the industry EBITDA decreased from 6% in 2003 to 0.9% in 2004, while that of the wireline incumbents, including their out-of-territory operations, increased from 66% in 2003 to 67% in 2004.

Figure 4.1.5
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)
by Provider Type

b) Telecommunications Expenditures

The main costs of provisioning telecommunications services are capital expenditures related to the building of an entity's own facilities or inter-carrier expenses related to acquiring access to the facilities of other entities. The industry's gross plant-in-service in 2004 amounted to $58.7 billion.

Capital expenditures in the Canadian telecommunications industry for the period 2000 to 2004 are displayed below in Figure 4.1.6, by type of provider. Total capital expenditures in the Canadian telecommunications industry were $5.7 billion in 2004, a 9.6% increase from $5.2 billion in 2003.

Wireline capital expenditures increased from $3.9 billion in 2003 to $4.7 billion in 2004, a 20.5% increase, whereas wireless capital expenditures, excluding spectrum, decreased from $1.3 billion in 2003 to $1.1 billion in 2004, a decrease of 15.4%.

Wireline capital expenditures accounted for $4.7 billion or 82% of industry capital expenditures in 2004.

Figure 4.1.6
Capital Expenditures by Provider Type

Capital Intensity

As shown below in Figure 4.1.7, the capital expenditures per revenue dollar for wireless service providers, wireline incumbents, including their out-of-territory operations, and facilities-based wireline competitors have shifted significantly over the past five years. While the wireline incumbents had the lowest capital expenditures per revenue dollar in 2000, in 2004, they had the highest rate at approximately 21%; whereas facilities-based competitors had the highest capital expenditures per revenue dollar of 49% in 2000, they are now among the lowest at 12%.

Wireless providers showed a decrease in their capital expenditures per revenue dollar over the past three years, dropping from 31% in 2001 to 11% in 2004. This decrease resulted from reduced expenditures and increased revenues. Increased coverage through roaming agreements has minimized the need to expand facilities.

Figure 4.1.7
Capital Expenditure per Revenue Dollar

Figure 4.1.8 below, compares EBITDA and capital expenditures for incumbents, including their out-of-territory operations, and facilities-based competitors (other) for the years 2003 and 2004. The data shows that in each year, the incumbents' EBITDA exceeded their capital expenditures, indicating that the incumbents are generally able to rely on internally generated funds to finance their expenditures. This has not generally been the case with the facilities-based competitors. The level of capital expenditures and EBITDA for facilities-based competitors was minimal in 2004. This can be attributed to industry consolidations and to a lesser extent a declining EBITDA in 2004, which limited their ability to finance these expenditures.

Figure 4.1.8
Wireline EBITDA v. Wireline Capital Expenditures (CAPEX)

c) Inter-carrier Payments

Table 4.1.3 below displays inter-carrier payments, excluding settlement, on a per revenue basis for incumbents, including their out-of-territory operations, and competitors (other) in the wireline industry by market sector. In 2004, as in the previous year, the competitors (other) had significantly higher inter-carrier payments per revenue dollar in each sector except for the Internet sector. In the local and access market these payments, as a percent of revenues, increased from 52% to 58% for the competitors (other). The inter-carrier payments per revenue dollar for competitors (other) in the data and private line sector also increased from 36% to 46%. The increase, in competitor inter-carrier payments per revenue dollar for long distance, from 41% to 48% may be attributed to the long distance calling plans that tend to increase with long distance minutes.

Table 4.1.3
Inter-carrier Payments per Revenue Dollar
by Wireline Market Sector³¹

	Local			Long Distance			Data & Private Line			Internet			Total
	2002	2003	2004	2002	2003	2004	2002	2003	2004	2002	2003	2004	2002	2003	2004
Incumbents (incl. out of territory)	n/a	1%	2%	8%	16%	23%	29%	28%	20%	21%	17%	6%	9%	11%	9%
Competitors (other)	78%	52%	58%	30%	41%	48%	44%	36%	46%	12%	17%	7%	34%	25%	17%

Source: CRTC Data Collection
n/a Due to residual disclosure issues, these expenses have been combined with competitors' expenses.

d) Industry Developments

A number of significant shifts in the make-up of the Canadian telecommunications market occurred during 2003 and 2004. For example, the major players have recognised the potential impact that Internet protocol (IP) may have on their operations or networks and on the services offered. As noted above, providers have made expenditures on IP and virtually every major wireline service provider has announced a VoIP initiative directed at business customers, residential customers, or both.

Incumbent Out-of-Territory Operations

In 2004, a number of larger competitors were acquired by regional incumbents as they continued to expand beyond their traditional territories. MTS, through its acquisition of Allstream, suddenly became the third largest service provider in the country and a national player with a presence in eastern Canada. Bell Canada strengthened its position in western Canada through the acquisition of the Canadian operations of 360networks. As part of the deal, Bell Canada sold 360networks' eastern Canadian customer base to Call-Net Enterprises Inc. (Call-Net). Rogers Wireless Inc. (RWI) purchased the shares of Microcell. Bell Canada also assumed 100% ownership of Bell West by purchasing the remaining (40%) shares held by MTS (now MTS Allstream). More recently, in 2005 Call-Net was acquired by Rogers.

Figure 4.1.9 shows that for incumbents with out-of-territory operations in 2004 their revenues from these activities represented approximately 13% of their total wireline revenues.

When compared to the competitor (other), the competitors (ILEC out-of-territory) revenues are approximately 62% of the revenues of the competitor (other).³²

Figure 4.1.9
Competitors (ILEC out-of-territory) Revenues
v.
The Incumbents Wireline Revenues (2004)

e) Service Bundling

Over the past number of years, telecommunications service providers have increasingly relied on the packaging or bundling of various services to maintain or increase their revenues. For example, those providing local service are increasingly bundling long distance service with their local service offering.

Service providers that offer the full spectrum of telecommunications services are well positioned to take full advantage of the benefits of bundling services. Companies that are not full service providers who want to realize the benefits of bundling are required to make agreements with other service providers to complement their service offerings.

Summary

Revenues in the Canadian telecommunications industry increased by approximately 4.7% in 2004. Within the service segments, strong growth in both the Internet access and wireless service revenues of 12.9% and 17.6%, respectively, continued in 2004. The increases in both these service segments were again mostly offset by declines in long distance (6%), and in data and private line (1.6%) revenues. Local and access revenues remained relatively unchanged. Monthly revenue per line for wireline service providers has remained relatively unchanged since 2002 at $98 while monthly wireless revenues per subscriber has been steadily increasing from $48 in 2002 to $52 in 2004.

The wireline share of telecommunications service revenues continued to decrease from 75% in the previous year to 72% in 2004 due to the strong growth of the wireless industry. Wireline incumbents continued to have the largest portion (77%) of total telecommunications revenues.

The industry EBITDA experienced an increase from $10.9 billion in 2003 to $11.5 billion in 2004, a 5.5% increase. The wireline share of the industry EBITDA decreased from 72% in 2003 to 68% in 2004, as wireless increased its EBITDA from $3.1 billion in 2003 to $3.7 billion in 2004.

Total capital expenditures in the Canadian telecommunications industry were $5.7 billion in 2004 a 9.6% increase from 2003. With the expected move to IP technologies and the growth of IP-based networks, companies are anticipating lower operating costs that would improve operating margins. The competitive market may put pressure on the incumbents and competitors to share some of these cost savings with consumers in the form of lower prices.

4.2 Long Distance

Highlights

• Long distance revenues continued to decline, decreasing from $5.9 billion in 2003 to $5.6 billion in 2004, a 6% decline.
• Long distance minutes continued to grow, increasing from 55.8 billion minutes in 2003 to 59.2 billion in 2004, a 6% increase.
• The incumbents' share of long distance revenues remained relatively unchanged at 67%.
• Within the retail market, competitors' share of the long distance revenues in 2004 remained relatively unchanged over the previous year at 31%.

Sector Description

a) Description of Services

The long distance market sector encompasses wireline voice traffic to a location outside the local service calling area. Wireline long distance services are sold in a variety of fashions, ranging from a standard per minute charge to a monthly fixed charge plan provided by a pre-selected Primary Inter-exchange Carrier (PIC), to the use of dial-around services that bypass the PIC'd carrier to use another long distance service provider's services. Long distance traffic was traditionally transmitted via the circuit switched network. In 2004, several service providers were offering voice communication services using IP technologies.

b) Markets and Observations

Table 4.2.1 provides long distance revenues and minutes for the period 2000 to 2004. Revenues include retail revenues from long distance services sold to the residential and business customer, wholesale revenues for long distance traffic sold to other service providers for the purposes of resale, and settlement revenues paid to carriers for the transport of traffic outside a service provider's operating territory. Long distance minutes include both retail and wholesale minutes, but exclude minutes associated with domestic and international settlement revenues.

Table 4.2.1
Total Long Distance Revenues and Minutes

	2000	2001	2002	2003	2004	Growth 2003-2004	CAGR 2000-2004
Revenues ($ millions)	7,126	6,700	6,534	5,944	5,588	-6.0%	-5.9%
Minutes (millions)	50,885	52,977	54,835	55,820	59,175	6.0%	3.8%

Source: CRTC Data Collection

The effects of competition continue to be evident in the number of optional long distance package alternatives available, the number of service providers who offer these and declining prices. Many long distance service providers made progress on IP network transformation in 2004 which may result in improved operating margins for long distance service providers. However, competitive pressure transferred some of these savings to consumers in the form of lower long distance prices, resulting in lower revenues but higher long distance minutes. As well, long distance service is increasingly bundled with local service by the competitive local service providers when promoting local services.

Figure 4.2.1 outlines the long distance revenue components split between retail and wholesale, for the period 2002-2004. Retail revenues constituted 83% of total long distance revenues in 2004, up slightly from 81% in 2003. Usage-based revenues also declined in 2004 by 11%.

Wholesale revenues continued to decrease from 19% of long distance revenues in 2003 to 17% in 2004. Usage-based revenues, which constitute the major portion in 2004, increased to $0.5 million or 57% of wholesale revenues. Settlements continued to decline from $0.6 billion or 51% of wholesale revenues in 2003, to $0.4 billion or 40% of wholesale revenues in 2004.

Figure 4.2.1
Long Distance Revenues by Component

c) Sector Participants

The sector participants primarily include the large incumbent telephone companies, facilities-based carriers providing both local and switched long distance services, and a variety of resellers who either resell long distance service or provide long distance service using facilities typically purchased from either the incumbent or interexchange facilities-based carriers. The large incumbents also provide long distance service outside their traditional territories either directly or through a separate subsidiary. The incumbents' activities within their traditional operating territories are referred to as incumbent, whereas, their out-of territory operations are referred to as competitor (ILEC out-of-territory). The remaining competitors are referred to as competitor (other).

In addition to selecting their PIC for long distance traffic, retail long distance customers also have the option of using alternative carriers, by "dialing around" their PIC carrier. This option is typically provided via either prepaid card or dial-around service providers. In 2004, revenues from these services constituted approximately 7% of retail long distance revenues.

d) Regulatory Framework

Competition in the long distance market began in 1990 with the resale of certain switched long distance services (Decision 90-3).³³ In 1992, the market was further opened to include facilities-based carriers (Decision 92-12).³⁴ In 1998, pursuant to Decision 97-19,³⁵ the Commission forbore from regulating the incumbents' long distance service rates, with the exception of Northwestel, with certain conditions imposed on the incumbents, most notably price ceilings applying to each basic long distance rate schedule.

The Commission has forborne from regulating the long distance market through a series of decisions that addressed various market players and market segments (Decision 94-19,³⁶ Decision 95-19,³⁷ Decision 97-10,³⁸ Decision 97-19, Order 99-1202³⁹).

While the Commission has forborne from regulating the long distance market, it continues to regulate the local and access market, which determines the competitive long distance carrier's cost to interconnect with an ILEC's facilities. The direct connect rates were reviewed in 2002 and again in 2003 resulting in reductions in these rates, which are paid by long distance providers to ILECs for originating and terminating long distance traffic.⁴⁰

Market Segments

Long Distance

Table 4.2.2 presents a summary of long distance revenues by residential, business and wholesale segments for the period 2000 to 2004.

Table 4.2.2
Long Distance Revenues by Market Segment
($ millions)

	2000	2001	2002	2003	2004	Growth 2003-2004	CAGR 2000-2004
Residential	3,211	3,007	3,038	3,013	2,857	-5.2%	-2.9%
Business	2,209	2,081	1,970	1,777	1,790	0.7%	-5.1%
Wholesale	1,706	1,612	1,526	1,154	941	-18.4%	-13.8%
Total	7,126	6,700	6,534	5,944	5,588	-6.0%	-5.9%

Source: CRTC Data Collection

In 2004, long distance revenues declined by 6.0%, to $5.6 billion. The largest decline was experienced within the wholesale market, which includes settlement payments between carriers for transmission and/or termination of another carrier's traffic. Wholesale revenues declined by 18.4%, or $0.2 billion, in part due to carriers continuing to lower settlement and wholesale rates for the transport and termination of long distance traffic. As a percentage of total long distance revenues, wholesale revenues continued a downward trend from 19.4% in 2003 to 16.8% in 2004.

Residential revenues declined from $3.0 billion in 2003 to $2.9 billion in 2004, a $0.1 billion or 5% decline. By contrast, business revenues remained relatively unchanged at $1.8 billion. As a percentage of total long distance revenues, business revenues increased from 29.9% in 2003 to 32.0% in 2004, and residential revenues increased from 50.7% in 2003 to 51.1% in 2004.

The decline in residential revenues can be attributed, in large part, to competitive pricing pressures and bundling of long distance services in packages provided by the carriers. As displayed in Figure 4.2.2, incumbents' share of long distance revenues remained unchanged in 2004.

Figure 4.2.2
Long Distance Revenue Market Share⁴¹

2003	2004

In the residential long distance market, the average revenue per minute (ARPM) decreased for all service providers. However, in the business long distance segment, the incumbents and competitors (other) realized an increase in ARPM. In 2004, business customers enjoyed price advantages over the residential customer, as the major competitive providers continued to target high volume enterprises and large business customers with lower rate structures. The ARPM for residential and business traffic is illustrated in Figure 4.2.3.

Figure 4.2.3
Retail Average Revenue per Minute (ARPM)

The higher ARPM for the incumbents can be attributed, among other things, to the incumbents' customers that have not subscribed to a long distance calling plan.

Table 4.2.3 provides the major incumbent telephone companies' retail market shares for 2003 and 2004, measured in terms of retail business and residential long distance revenues, in their traditional operating territories.⁴²

Table 4.2.3
Incumbent Telephone Companies' Long Distance
Retail Revenue Market Share by Region

Region	Percent
	2003	2004
BC, Alberta	72%	69%
Saskatchewan	82%	84%
Manitoba	76%	84%
Ontario, Quebec	66%	65%
Atlantic	75% #	78%

Source: CRTC Data Collection

Retail Long Distance - Business Market

Tables 4.2.4 and 4.2.5 display the business long distance revenues and minutes, respectively, for 2003 and 2004. Figure 4.2.4 displays the business long distance revenue market share by service provider.

Business long distance revenues in 2004 remained relatively unchanged at $1.8 billion. Related traffic declined by 7% from 22.5 billion minutes to 21.1 billion minutes, with the competitors (incl. ILEC out-of-territory) carrying as much traffic as the incumbents. The minimal increase in business revenues in 2004, with a 7% decline in minutes, is reflective of the increase in the ARPM for both the incumbents and the competitors (other). The impact of the service providers' price structure is reflected in the ARPM which increased by 9% in the business market, from 8 cents per minute in 2003 to 9 cents per minute in 2004.

Table 4.2.4
Business Long Distance Revenues
($ millions)

	2003	2004	Growth 2003-2004
Incumbents	977	1,067	9.2%
Competitors (ILEC out-of-territory)	62	332	435.6%
Competitors (other)	738	390	-47.1%
Total	1,777	1,790	0.7%

Source: CRTC Data Collection

Table 4.2.5
Business Long Distance Minutes
(Millions)

	2003	2004	Growth 2003-2004
Incumbents	11,247	10,585	-5.9%
Competitors (ILEC out-of-territory)	951	5,584	486.9%
Competitors (other)	10,334	4,882	-52.8%
Total	22,532	21,051	-6.6%

Source: CRTC Data Collection

The incumbents' business long distance revenues increased 9.2% in 2004 over 2003, to $1.1 billion. The competitors' business long distance revenues declined 9.8%, from $0.8 billion in 2003 to $0.7 billion in 2004. The large increase for the competitor (ILEC out-of-territory) and decrease for competitor (other) were mainly due to the industry consolidation that took place in 2004 in which Allstream Canada was acquired by MTS (now MTS Allstream) and 360networks was acquired by Bell Canada, as previously discussed in section 4.1 (Financial Review of Markets). With reference to business long distance minutes, the incumbents' minutes declined by 6% to 10.6 billion minutes, while the competitors' minutes declined 7% from 11.3 billion minutes in 2003 to 10.5 billion minutes in 2004. As previously noted, the impact of the service providers' price structure is reflected in the average rate per minute which increased by 16% and 12% for the incumbents and the competitor (other), respectively, and declined by 9% for the competitor (ILEC out-of-territory).

Figure 4.2.4
Business Long Distance Revenue Market Share

2003	2004

As a result of the increase in business long distance revenues by the incumbents in 2004 and the decline in these revenues by the competitors, the competitor market share declined from 45% in 2003 to 41% in 2004.

Retail Long Distance - Residential Market

Residential long distance revenues in 2004 equalled $2.9 billion, down 5.1% from the previous year. Residential long distance minutes were up in 2004, increasing 3% from 22.4 billion minutes to 23 billion minutes in 2004. The increase in residential long distance minutes was primarily due to growth in competitor traffic, partly offset by the incumbents' minutes which declined 6% over the same period.

Tables 4.2.6 and 4.2.7 display residential long distance revenues and minutes, respectively, for the years 2003 and 2004.

Table 4.2.6
Residential Long Distance Revenues
($ millions)

	2003	2004	Growth 2003-2004
Incumbents	2,300	2,135	-7.2%
Competitors (ILEC out-of-territory)	1	2	221.1%
Competitors (other)	712	721	1.3%
Total	3,012	2,857	-5.1%

Source: CRTC Data Collection

Table 4.2.7
Residential Long Distance Minutes
(Millions)

	2003	2004	Growth 2003-2004
Incumbents	16,295	15,383	-5.6%
Competitors (ILEC out-of-territory)	5	26	420.0%
Competitors (other)	6,061	7,592	25.3%
Total	22,361	23,001	2.9%

Source: CRTC Data Collection

The incumbents' residential long distance revenues declined by 7.2% in 2004 over the previous year, to $2.1 billion, while the competitors' revenues remained relatively unchanged at $0.7 billion. With reference to residential long distance minutes, the incumbents declined by 5.6% to 15.4 billion minutes, while the competitors' (other) minutes increased by 25.3%, to 7.6 billion minutes. The out-of-territory competitors carried minimal residential minutes as they were focused on business customers.

While residential minutes increased by 3%, this increase was with the competitors, as customers continued to take advantage of their offerings.

Figure 4.2.5
Residential Long Distance Revenue Share

2003	2004

As a result of the decline in residential long distance revenues by the incumbents and the increase in these revenues by the competitors, the incumbent's revenue market share decreased marginally from 76% in 2003 to 75% in 2004, as displayed in Figure 4.2.5. The competitors (ILEC out-of-territory) had minimal share of the residential long distance market, as these competitors focused on the business long distance market.

Wholesale Long Distance

Wholesale long distance represents services provided by long distance providers to other long distance service providers. These services include connection arrangements between facilities-based carriers to transit and/or terminate traffic on behalf of another provider, excluding originating and terminating traffic on the local network, and the sale of wholesale bulk minutes to resellers of long distance service. In 2004, wholesale long distance revenues accounted for $0.9 billion, down $0.2 billion or 18% from 2003.

Table 4.2.8 displays the wholesale long distance revenues for 2003 and 2004. In 2004, the incumbents' wholesale long distance revenues decreased by $156 million, or 23% and the competitors' long distance revenues declined by $56 million or 12%. The major increase in revenues for the competitors (ILEC out-of-territory) and decrease for the competitors (other) was due to the industry consolidations in 2004.

Table 4.2.8
Wholesale Long Distance Revenues
($ millions)

	2003	2004	Growth 2003-2004
Incumbents	686	530	-22.8%
Competitors (ILEC out-of-territory)	130	270	107.7%
Competitors (other)	337	141	-58.2%
Total	1,154	941	-18.4%

Source: CRTC Data Collection

With respect to settlement, both incumbents and competitors experienced decreases in settlement related revenues, which declined from $1.1 billion in 2002, to $0.4 billion in 2004, a 64%⁴³ decrease. The decreases in settlement revenues can be attributed in part to the continued reductions in settlement rates and reduced reliance on Canadian wholesale providers to complete international calls.

Figure 4.2.6
Wholesale Long Distance Revenue Share

2003	2004

Figure 4.2.6 displays the wholesale revenue market share for 2003 and 2004 by type of provider. The competitors' share of long distance wholesale revenues increased from 40% in 2003 to 44% in 2004.

Summary

Overall, wireline long distance revenues continue to decrease annually, primarily due to pricing pressures caused by competition. Incumbent revenues decreased in the residential market segment in 2004 but increased in the business market segment. Competitors, however, lost revenues in the business market segment but gained revenues in the residential market segment. Incumbents and competitors lost long distance wholesale revenues.

Wireline long distance services are being replaced by alternative communication technologies, such as wireless, e-mail, instant messaging and other voice communications services.

For 2004, the long distance landscape experienced significant changes. The growing use of IP networks to transmit long distance traffic, with their lower cost structure, may have a positive impact on the service providers' long distance cost structure. Industry consolidation has also had an impact on the industry. MTS (now MTS Allstream) acquired Allstream Canada, thereby increasing its market share significantly. As well, Call-Net purchased 360networks' eastern customer base from Bell Canada with the option to acquire the eastern assets as well. The bundling of long distance service with services such as local, Internet, mobile, and video/cable by major players will continue to put downward pressure on long distance rates.

4.3 Local and Access

Highlights

• In 2004, local and access revenues, and lines were essentially unchanged at $9.7 billion and 20.6 million lines, respectively.
• The total number of retail lines was essentially unchanged at 19.8 million lines, of which the competitors held 6.5%, up from 5.2% in 2003.
• The share of retail revenues held by competitors increased by 19.4% to $548 million, or 6.4% of total retail revenues, up from 5.4% in 2003.

Sector Description

a) Description of Services

Local wireline telephone service is the basis for voice telecommunications services for residences and businesses in Canada. Local service has traditionally been characterized as basic phone service utilizing a telephone set that is wired to a LECs' network that, for a basic monthly fee, provides unlimited access to make calls within a free-calling area. Local service also includes other services such as automated call answering services, business Centrex, Integrated Services Digital Network (ISDN) services, and other user services such as inside wiring, installation and repair, teleconferencing and miscellaneous local services.

Local and access revenues also include the sale of local services on a wholesale basis and since the introduction of local competition, has included access services revenues for interconnection with carriers and other service providers, including switching and aggregation, and unbundled network components.

Contribution revenues, which are received by LECs based on the number of residential lines they provide in high-cost serving areas (HCSAs), are also included in local and access revenues. While contribution revenues are included in the overall segment revenues reported in Table 4.3.1, they are excluded from the remaining tables in the local and access section of this report.

Revenues from the sale of wireline terminal equipment, such as telephone handsets and private branch exchange (PBX) switching equipment, are also excluded from the local and access revenues covered in this report.

b) Markets and Observations for 2004

Table 4.3.1 provides total local and access revenues and lines for the period 2000 to 2004.

Table 4.3.1
Total Local and Access Revenues and Lines

	2000	2001	2002	2003	2004	Growth 2003-2004	CAGR 2000-2004
Total local and access revenues ($ millions)	10,345	11,203	10,003	9,699	9,695	0.0%	-1.6 %
Less: contribution revenues ($ millions)	957	1,002	250	247	240	-2.8%	-29.2 %
Local and access service revenues ($ millions)	9,388	10,021	9,724	9,452	9,455	0.0%	0.2 %
Lines (thousands)	20,840	21,126	20,622	20,612	20,610	0.0%	-0.3 %

Source: CRTC Data Collection

Total local and access revenues in Table 4.3.1 include local and access monthly rates and service charges, contribution, and local pay telephone services. Local lines in Table 4.3.1 include residential, business and local pay telephone lines, as well as lines provided on a wholesale basis to affiliated companies and third party providers of telecommunications services. All other tables and figures in this section, unless otherwise noted, exclude revenues from contribution as well as pay telephone revenues and lines.

Between 2003 and 2004, total local and access revenues, and lines remained essentially unchanged at $9.7 billion and 20.6 million lines, respectively.

i) Telephone numbers vs. lines

While the number of retail lines peaked in 2001 (and subsequently commenced a slow decline), the number of in-service central office codes (a proxy for telephone number consumption) continues to increase at an annual rate of approximately 4.5%.⁴⁴ The growth of wireless telephone subscriptions is clearly a major contributor to this divergence as well as any service that requires large quantities of telephone numbers relative to the number of PSTN access lines. Such services may include facsimile mailboxes, unified messaging, third-party switchboard services, and most recently, Internet telephony.

ii) Increasing local competition

While the ability for personal computer users to utilize the Internet for voice communications between personal computers has existed for several years, the use of Internet Protocol for voice communications (VoIP) is increasing on a number of other fronts:

• facilities-based telecommunications service providers are migrating legacy networks to more efficient and cost-effective IP-based backbone networks;
• the commercialization and availability of services, facilitated by the increasing penetration of residential broadband, which allows an Internet user to interconnect with the PSTN, using the standard North American Numbering Plan (Internet telephony); and
• the introduction of residential telephone service by the cable undertakings, utilizing their existing distribution networks (cable telephony).

In 2004 and throughout 2005, numerous industry participants including incumbents, facilities-based competitors, resellers and cable undertakings have introduced retail services that carry voice traffic utilizing VoIP and interconnect with the PSTN. Although local service has been available from participants within each of these service provider categories for some time, the service utilized traditional circuit-switched technology.

Traditional local service includes an access line from the customer to the service provider, connectivity to the PSTN, and a telephone number. VoIP services are capable of reproducing the functionality of traditional local service, offer subscribers numerous call and message-management features, and operate over the Internet or a distinct connection. Internet telephony allows the service provider and the access provider to be independent. As with traditional wireline, cable telephony is "fixed" in nature in that there is a managed access connection between the subscriber and the service provider.

In 2004, VoIP services had essentially no impact on local revenues; however, it is expected that revenues and subscriptions from VoIP services will increase in 2005.

iii) Pay Telephone

After declining for several years, the number of pay telephones in Canada was unchanged in 2004 at approximately 155 thousand lines, almost all of which are provided by the incumbents. In 2004, the incumbents' annual revenues were approximately $1,250 per pay telephone, down from about $1,500 in 2003. Incumbents' pay telephone revenues consist of:

• their own pay telephones when consumers place calls;
• per-call compensation received from inter-exchange carriers (IXCs) when consumers dial toll-free numbers not carried by the incumbent; and
• charges to CPTSPs for the local pay telephone line and for call setup.

As the dominant providers of pay telephone service in Canada, the Commission requires that the incumbents:

• inform the Commission when they intend to de-commission the last pay telephone within a community; and
• report on an annual basis, among other things, the number of pay telephones in their operating territories that accept coins and/or allow incoming calling.

Competitors offering pay telephone service must be registered with the Commission. In 2004, there were more than 200 registered CPTSPs, most of which had fewer than five lines.

c) Sector Participants

The large incumbents operate in most areas of the country. In addition to their original operating territories, some incumbents also operate in other regions either directly or through affiliate operations. Small incumbents operate in limited areas of Ontario, Quebec, and B.C., and include both municipally-owned and public- and privately-held carriers. The small incumbents account for 1.8% of all incumbent-provided retail lines in Canada.

There has been a limited amount of competitor penetration in the local and access segment since the introduction of local competition in 1998. Competitors have typically been facilities-based service providers, who own a portion of their PSTN network facilities, or resellers of PSTN services, such as Centrex, purchased from either the incumbent carriers or other facilities-based competitors. Facilities-based competitors also include telecom operations of cable undertakings who deliver services using their own infrastructure. Some ILECs have also expanded outside of their traditional serving territories, providing competition either directly or through affiliate companies. Within this report, these operations are referred to as competitor (ILEC out-of-territory).

Competitors continue to focus on the residential and business markets in larger urban centres, although penetration in these markets continues to be negligible in a number of locations.

Further consolidation occurred during 2004 with MTS Communications Inc. completing its acquisition of Allstream (forming MTS Allstream) in June; and Bell Canada completing its acquisition of 360networks, including the assets of LondonConnect Inc. and GT Group Telecom Services Corp., in November. In preparing this report, revenues and expenses accrued by the acquired entities up to the completion of the respective transactions, have been classified as incumbent for the portion within the incumbents traditional territory and as competitor (ILEC out-of-territory) for portions outside their traditional territory.

d) Regulatory Framework

Local telephone service in the territories of the large ILECs (excluding the territories of SaskTel, Northwestel, Télébec and TCQ) was opened to facilities-based competition in 1998. Local competition is now permitted in the territories of all large ILECs except that of Northwestel. Local services provided by ILECs to consumers as well as the interconnection services provided by all LECs continue to be regulated by the Commission. Prior to the introduction of local competition, ILECs were subject to a rate-of-return regulatory framework, under which local service prices were set based on a revenue requirement basis using a rate of return approved by the Commission.

With the introduction of competition in local services, price cap regulation replaced rate-of-return regulation. Price cap regulation uses a formula approach to determine the maximum allowable prices for different baskets of services. Price cap regulation is recognized as being more effective than rate-of-return regulation in that ILECs are provided with stronger incentives to minimize costs, operate more efficiently and be more innovative in the provision of services.

e) Regulatory Developments

In Decision CRTC 2004-46,⁴⁵ the Commission modified the regulatory framework for local network interconnection between LECs, which are intended to provide a more efficient and cost-effective means of interconnection. In addition to exchanging traffic on fewer distinct trunk groups, CLECs can now interconnect with an ILEC at fewer locations by utilizing larger local interconnection regions, composed of many exchanges.

In 2004, and continuing in 2005, numerous service providers began offering, or announced their plans related to, VoIP services. In Decision 2005-28,⁴⁶ the Commission set out details of the regulatory regime applicable to the provision of VoIP services including, among other things, the requirement that local VoIP service providers that are not operating as Canadian carriers are to register with the Commission as resellers, and that local VoIP service revenues are contribution-eligible.

Local exchange service is one of the last markets within the telecommunications industry that continues to be regulated. Currently underway is a proceeding, initiated by Public Notice 2005-2,⁴⁷ the intent of which is to establish, among other things, a framework for forbearance from regulation of residential and business local exchange services.

Market Segments

Table 4.3.2 presents a summary of local and access revenues (exclusive of contribution, terminal equipment, and pay telephone revenues) segmented on a residential, business and wholesale basis for the period 2000 to 2004. Table 4.3.3 provides the number of local lines that correspond to these market segments, while Table 4.3.4 provides aggregated residential and business revenues and lines (retail revenues and lines).

Table 4.3.2
Local and Access Revenues by Market Segment
($ millions)

	2000	2001	2002	2003	2004	Growth 2003-2004	CAGR 2000-2004
Residential	4,833	5,060	5,140	5,132	5,099	-0.6%	1.3 %
Business	3,769	3,946	3,544	3,398	3,402	0.1%	-2.5 %
Wholesale	636	740	893	755	822	8.9%	6.6 %
Total	9,238	9,746	9,577	9,285	9,323	0.4%	0.2 %

Source: CRTC Data Collection

Table 4.3.3
Local Lines by Market Segment⁴⁸
(Thousands)

	2000	2001	2002	2003		2004		Growth 2003-2004	CAGR 2000-2004
Residential	12,909	12,920	12,913	12,886		12,891		0.0%	0.0%
Business	7,378	7,561	7,024	6,952	#	6,947	#	-0.1%	-1.5%
Wholesale	381	474	521	611		617	#	1.0%	12.8%
Total	20,668	20,955	20,458	20,450	#	20,455		0.0%	-0.3%

Source: CRTC Data Collection

Table 4.3.4
Total Retail Revenues and Lines

	2000	2001	2002	2003	2004	Growth 2003-2004	CAGR 2000-2004
Revenues ($ millions)	8,602	9,006	8,684	8,530	8,501	-0.3%	-0.3%
Lines (thousands)	20,287	20,481	19,937	19,838	19,838	0.0%	-0.6%

Source: CRTC Data Collection

In 2004, local and access revenues (excluding contribution, terminal equipment and pay telephones) increased by 0.4%. While revenues for the residential segment declined by 0.6%, the business segment revenues were essentially unchanged. The wholesale segment however, experienced revenue growth of 8.9%.

Over the same period, the total number of local lines remained relatively unchanged at just under 20.5 million lines, with the number of retail lines unchanged and the wholesale segment showing a marginal increase in the number of local lines to 0.62 million lines.

a) Local Retail Market

In 2004, retail revenues held by competitors increased by 19.4%⁴⁹ to $548 million, representing 6.4%⁵⁰ of all retail revenue, up from 5.4% in 2003. With retail lines remaining unchanged, the growth of wholesale revenues and lines confirms that more retail lines were provided by competitors. In 2004, retail lines provided by competitors increased by 24.8% to 1.3 million lines, many of which were provisioned using some component of wholesale services. The correlation between the growth of competitor-provided retail lines and wholesale revenue is discussed in part (d) Local Wholesale Market.

Table 4.3.5 shows the share of local retail lines held by the incumbents for each province. The incumbents' out-of-territory local operations are not included in the incumbent market share.

Table 4.3.5
Incumbent Local Retail Market Share by Province (lines)

Province	2003	2004
British Columbia	95.3%	94.0%
Alberta	94.2%	92.4%
Saskatchewan	100.0%	100.0%
Manitoba	98.1%	99.6%
Ontario	93.3%	91.9%
Quebec	96.4%	95.4%
New Brunswick	99.7%	99.8%
Nova Scotia	89.0%	85.1%
Prince Edward Island	93.1%	90.7%
Newfoundland and Labrador	97.0%	97.7%

Source: CRTC Data Collection

Table 4.3.6 provides further detail on retail market share, disaggregated by residential and business segments, measured in terms of the number of local lines, for a list of major Canadian centres.

When compared to the provincial results shown in Table 4.3.5, the higher share of local lines held by competitors within most major centres, demonstrates that competitors continue to target the major centres in Canada. Collectively, 90.2%⁵¹ of competitors' retail lines are located within the 21 major centres shown in Table 4.3.6.

Table 4.3.6
Market Share (Local Lines) in Major Centres⁵²

Province	City	Business Lines			Residential Lines
		2003		2004	2003	2004
British Columbia	Vancouver
	Incumbents	81.5%	#	78.1%	96.9%	95.1%
	Competitors (ILEC out-of-territory)	7.5%	#	17.0%	0.0%	0.0%
	Competitors (other)	11.0%	#	4.9%	3.1%	4.9%
	Victoria
	Incumbents	90.1%	#	90.8%	100.0%	99.5%
	Competitors (ILEC out-of-territory)	1.6%	#	9.1%	0.0%	0.0%
	Competitors (other)	8.3%	#	0.1%	0.0%	0.5%
Alberta	Calgary
	Incumbents	84.1%		77.7%	94.9%	93.0%
	Competitors (ILEC out-of-territory)	6.3%		16.5%	0.0%	0.0%
	Competitors (other)	9.5%		5.8%	5.1%	7.0%
	Edmonton
	Incumbents	79.7%		77.1%	100.0%	99.7%
	Competitors (ILEC out-of-territory)	13.0%		22.5%	0.0%	0.0%
	Competitors (other)	7.3%		0.3%	0.0%	0.3%
Saskatchewan	Saskatoon
	Incumbents	99.9%		99.8%	100.0%	100.0%
	Competitors (ILEC out-of-territory)	0.0%		0.2%	0.0%	0.0%
	Competitors (other)	0.1%		0.0%	0.0%	0.0%
	Regina
	Incumbents	99.9%		99.9%	100.0%	100.0%
	Competitors (ILEC out-of-territory)	0.0%		0.1%	0.0%	0.0%
	Competitors (other)	0.1%		0.0%	0.0%	0.0%
Manitoba	Winnipeg
	Incumbents	92.4%		98.4%	100.0%	100.0%
	Competitors (ILEC out-of-territory)	0.0%		1.5%	0.0%	0.0%
	Competitors (other)	7.6%		0.1%	0.0%	0.0%
Ontario	Toronto
	Incumbents	81.3%		81.0%	94.0%	91.9%
	Competitors (ILEC out-of-territory)	1.9%		11.1%	0.1%	0.1%
	Competitors (other)	16.8%		8.0%	5.9%	8.1%
	Ottawa-Gatineau
	Incumbents	91.3%		90.5%	98.4%	96.6%
	Competitors (ILEC out-of-territory)	0.0%		6.1%	0.0%	0.0%
	Competitors (other)	8.7%		3.4%	1.6%	3.4%
	Hamilton
	Incumbents	85.6%		85.4%	96.8%	94.1%
	Competitors (ILEC out-of-territory)	0.8%		9.4%	0.0%	0.0%
	Competitors (other)	13.6%		5.2%	3.2%	5.9%
	London
	Incumbents	84.8%		83.7%	96.4%	93.6%
	Competitors (ILEC out-of-territory)	0.0%		10.5%	0.0%	0.0%
	Competitors (other)	15.2%		5.8%	3.6%	6.4%

Table 4.3.6
Market Share (Local Lines) in Major Centres (cont'd)

Province	City	Business Lines			Residential Lines
		2003		2004	2003	2004
Ontario (cont'd)	Kitchener
	Incumbents	84.2%		83.6%	96.4%	94.2%
	Competitors (ILEC out-of-territory)	0.0%		0.3%	0.0%	0.0%
	Competitors (other)	15.8%		6.1%	3.6%	5.8%
	St. Catharines-Niagara
	Incumbents	86.1%		87.7%	100.0%	99.9%
	Competitors (ILEC out-of-territory)	0.0%		10.5%	0.0%	0.0%
	Competitors (other)	13.9%		1.8%	0.0%	0.1%
	Windsor
	Incumbents	83.3%		83.4%	100.0%	100.0%
	Competitors (ILEC out-of-territory)	0.0%		13.1%	0.0%	0.0%
	Competitors (other)	16.7%		3.5%	0.0%	0.0%
	Oshawa
	Incumbents	88.6%		89.7%	96.6%	93.9%
	Competitors (ILEC out-of-territory)	0.0%		6.8%	0.0%	0.0%
	Competitors (other)	11.4%		3.5%	3.4%	6.1%
Quebec	Montréal
	Incumbents	87.8%		85.3%	98.3%	95.8%
	Competitors (ILEC out-of-territory)	3.0%		10.9%	0.0%	0.0%
	Competitors (other)	9.3%		3.8%	1.7%	4.2%
	Québec
	Incumbents	83.8%		83.0%	100.0%	99.9%
	Competitors (ILEC out-of-territory)	5.5%		16.3%	0.0%	0.0%
	Competitors (other)	10.7%		0.6%	0.0%	0.1%
New Brunswick	Fredericton
	Incumbents	99.9%		99.9%	100.0%	100.0%
	Competitors (ILEC out-of-territory)	0.0%		0.1%	0.0%	0.0%
	Competitors (other)	0.1%		0.0%	0.0%	0.0%
Nova Scotia	Halifax
	Incumbents	89.2%	#	85.1% #	80.0% #	72.1%
	Competitors (ILEC out-of-territory)	0.0%		3.6% #	0.0%	0.0%
	Competitors (other)	10.8%	#	11.3% #	20.0% #	27.9%
Prince Edward Island	Charlottetown
	Incumbents	91.4%	#	89.2% #	81.8% #	76.0%
	Competitors (ILEC out-of-territory)	0.0%		0.2%	0.0%	0.0%
	Competitors (other)	8.6%	#	10.7% #	18.2% #	24.0%
Newfoundland and Labrador	St. John's
	Incumbents	89.8%	#	86.5% #	100.0%	100.0%
	Competitors (ILEC out-of-territory)	0.0%		0.6%	0.0%	0.0%
	Competitors (other)	10.2%		12.9% #	0.0%	0.0%

b) Local Residential Market

Local residential service is composed of three primary components: basic local service, optional service features, and other non-recurring services such as connection and inside wiring charges. Figure 4.3.1 shows that the distribution of local residential revenues amongst these three components has remained essentially unchanged over the last several years, with basic local service representing 71% of local residential revenues in 2004.

Figure 4.3.1
Local Residential Revenues by Component

Table 4.3.7 and Table 4.3.8 present local residential revenues and lines, respectively, for the period 2000 to 2004.

Table 4.3.7
Local Residential Revenues
($ millions)

	2000	2001	2002	2003	2004	Growth 2003-2004	CAGR 2000-2004
Incumbents	4,817	5,038	5,082	5,035	4,957	-1.5%	0.7%
Competitors (ILEC out-of-territory)	n/a	n/a	n/a	0	0	n/a	n/a
Competitors (other)	16	22	58	97	142	46.4%	72.6%
Total	4,833	5,060	5,140	5,132	5,099	-0.6%	1.3%

Source: CRTC Data Collection
n/a: not available

In 2004, local residential revenues declined by 0.6% to just under $5.1 billion, while over the same period, the number of local residential lines was essentially unchanged at 12.9 million lines.

As shown in Table 4.3.7, local residential revenues held by incumbents decreased by 1.5% to just under $5.0 billion in 2004, while competitors' local residential revenues increased by 46.4% to $142 million. The share of local residential revenues held by competitors grew to 2.8% in 2004, up from 1.9% in 2003.

Table 4.3.8
Local Residential Lines
(Thousands)

	2000	2001	2002	2003	2004	Growth 2003-2004	CAGR 2000-2004
Incumbents	12,864	12,846	12,729	12,627	12,473	-1.2%	-0.8%
Competitors (ILEC out-of-territory)	n/a	n/a	n/a	1	1	n/a	n/a
Competitors (other)	45	74	184	258	418	62.0%	74.6%
Total	13,909	12,920	12,913	12,886	12,891	0.0%	0.0%

Source: CRTC Data Collection
n/a: not available

As shown in Table 4.3.8, the number of local residential lines held by incumbents decreased by 1.2% to just under 12.5 million lines in 2004, while the number of competitors' lines grew by 62% to 0.42 million lines. The share of local residential lines held by competitors increased from 2.0% in 2003 to 3.2% in 2004.

Among the competitors, local residential revenues and lines provided by competitors (ILEC out-of-territory) remained negligible in 2004 as they continued to focus on the business market.

Over the past several years, the number of Canadian households has grown consistently,⁵³ yet the number of residential telephone lines remained almost unchanged in 2004. A number of demographic and technology factors may be contributing to this, including, but not limited to, the growth of wireless subscriptions, the elimination of secondary telephone lines as consumers migrated to broadband Internet, and the growth of retirement communities with shared telephone systems.

c) Local Business Market

Table 4.3.9 and Table 4.3.10 present local business revenues and lines, respectively, for the period 2000 to 2004.

Table 4.3.9
Local Business Revenues
($ millions)

	2000	2001	2002	2003	2004	Growth 2003-2004	CAGR 2000-2004
Incumbents	3,619	3,736	3,258	3,036	2,996	-1.3%	-4.6%
Competitors (ILEC out-of-territory)	n/a	n/a	n/a	92	298	223.9%	n/a
Competitors (other)	150	210	286	270	108	-60.0%	-7.9%
Total	3,769	3,946	3,544	3,398	3,402	0.1%	-2.5%

Source: CRTC Data Collection
n/a: not available

In 2004, local business revenues were essentially unchanged at just over $3.4 billion, while over the same period, the number of local business lines also remained essentially unchanged at 6.9 million lines.

As shown in Table 4.3.9, local business revenues held by the incumbents decreased by 1.3% in 2004 to approximately $3.0 billion, while over the same period, competitors' revenues increased by 12.2% to just over $0.4 billion, or 12% of total business revenues.

Table 4.3.10
Local Business Lines⁵⁴
(Thousands)

	2000	2001	2002	2003		2004		Growth 2003-2004	CAGR 2000-2004
Incumbents	6,806	6,970	6,303	6,185		6,086		-1.6%	-2.8%
Competitors (ILEC out-of-territory)	n/a	n/a	119	169	#	596		252.7%	n/a
Competitors (other)	572	591	602	598		265		-55.7%	-17.5%
Total	7,378	7,561	7,024	6,952	#	6,947	#	-0.1%	-1.5%

Source: CRTC Data Collection
n/a: not available

As shown in Table 4.3.10, local business lines held by the incumbents decreased by 1.6% in 2004 to 6.1 million lines, while the number of competitors' business lines increased by 12.3% to approximately 0.9 million lines, or 12.4% of total business lines.

d) Local Wholesale Market

The wholesale market segment includes carrier access services used by LECs for the purposes of interconnecting their respective networks and connecting to their retail customers. Additionally, a service or facility which is subsequently resold by a service provider to their end-customer is included within the local wholesale segment. The major components of wholesale services include:

• interconnection, including switching and aggregation, transit and bill-and-keep trunk settlement;
• unbundled network components such as loops used by competitors to extend services over "the last mile" to their customers; and
• PSTN access, such as ISDN, Centrex and basic local service used by resellers and other competitors to provide local service in exchanges where they do not have facilities.

Table 4.3.11 provides a breakdown of local wholesale revenues by component, for the period 2000 to 2004. In 2004, local wholesale revenues increased by 8.8% to $822 million, up from $755 million in 2003. Increases in interconnection, unbundled loop and PSTN access revenues largely contributed to the increase of local wholesale revenues.

Table 4.3.11
Local Wholesale Revenues by Major Component
($ millions)

	2000	2001	2002	2003	2004	Growth 2003-2004	CAGR 2000-2004
Interconnection	248	315	354	287	333	16.0%	7.6%
Centrex resale	84	120	163	134	123	-8.2%	10.0%
PSTN access	148	129	146	128	136	6.6%	-2.0%
Unbundled loops	13	31	53	61	84	37.9%	59.5%
Basic local	38	55	84	89	83	-6.9%	21.5%
Other user charges	105	90	93	56	62	11.3%	-12.2%
Total	636	740	893	755	822	8.8%	6.6%

Source: CRTC Data Collection

When a competitor cannot reach a retail customer by utilizing self-provisioned facilities, there are two alternatives it can employ:

• leased facilities, such as unbundled loops or loop-equivalent facilities leased from a facilities-based telecommunications provider, and used to connect the retail customer to the competitor's network. As with owned facilities, dial-tone is provided by the competitor's network; or
• resold services, such as Centrex or its equivalents, leased from a LEC and resold to the end-customer without touching the competitor's network.

In 2004, the growth of retail lines held by the competitors is most likely a contributing factor to the increase of unbundled loop and interconnection revenues. While unbundled loop revenues increased due to growth in the number of competitor-provided local lines, also contributing may be competitors who are migrating existing customers, originally provisioned using resold services, onto their own network. Interconnection revenues increased due to the larger volumes of network traffic exchanged between incumbents and competitors.

Figure 4.3.2 illustrates the proportions of competitor retail lines provisioned utilizing either owned (self-provisioned), or leased facilities or resold services.

Figure 4.3.2
Competitor Local Retail Lines by Type of Facility

Among the competitors, the use of leased facilities continued to be the dominant means of provisioning local retail lines, increasing again in 2004. However, within the individual residential and business segments, the distribution of the types of facilities used in the provisioning of local service is dissimilar.

The dominant means that competitors use to provision local residential service is via unbundled local loops leased from the incumbents. In 2004, revenues realized by the incumbents for the supply of local loops increased by 37.9% to $84 million, driven primarily by the growth of competitor-provided local residential service which, as shown in Table 4.3.8, increased by 160 thousand lines. As shown in Figure 4.3.3, unbundled loops are used for 80% of all competitor-provided residential lines, with self-provisioned lines representing the other 20%.

Figure 4.3.3
Competitor Local Residential and Business Lines
By Type of Facility

Residential	Business

Within the business market, the dominant means that competitors use to provide service is by reselling the lines of a LEC. Almost 45% of the competitors' business lines are provided via resale, with the balance equally split between leased and self-provisioned facilities. Some higher capacity local services, such as ISDN Primary Rate Interface, are used by business customers. For these services, when a competitor is unable to provision by using their own facilities, it may lease digital accesses from a LEC. Revenues realized for digital access services are captured under private line services.

As reported in Table 4.3.12, local wholesale revenues held by the incumbents increased by 15.4% to $712 million in 2004, while competitors' revenues declined by 20.3% to $110 million.

Table 4.3.12
Local Wholesale Revenues
($ millions)

	2000	2001	2002	2003		2004	Growth 2003-2004	CAGR 2000-2004
Incumbents	608	713	836	617	#	712	15.4%	4.0%
Competitors (ILEC out-of-territory)	n/a	n/a	n/a	70	#	93	32.9%	n/a
Competitors (other)	28	27	57	68		17	-75.0%	-11.7%
Total	636	740	893	755		822	8.9%	6.6%

Source: CRTC Data Collection
n/a: not available

Over the same period, as shown in Table 4.3.13, local wholesale lines held by the incumbents increased by 11.3% to 454 thousand lines, while the number of competitors' lines decreased by 19.7% to 163 thousand lines. The incumbents remain the dominant supplier of local wholesale services.

Unlike the retail market, the composition of providers within the wholesale services market was affected by the Bell Canada acquisition of 360networks in that the operations of two affiliated companies GT Group Telecom and LondonConnect were essentially consolidated, thereby eliminating a supplier of wholesale services.

Table 4.3.13
Local Wholesale Lines
(Thousands)

	2000	2001	2002	2003	2004	Growth 2003-2004	CAGR 2000-2004
Incumbents	289	368	376	408	465	14.0%	12.6%
Competitors (ILEC out-of-territory)	n/a	n/a	43	11	129	1072.7%	n/a
Competitors (other)	92	106	102	192	34	-82.3%	-22.0%
Total	381	474	521	611	628	2.8%	13.3%

Source: CRTC Data Collection
n/a: not available

Summary

In 2004, total local and access revenues remained essentially unchanged at $9.7 billion. Similarly, local and access lines were also essentially unchanged at 20.6 million lines. Exclusive of revenues from contribution, wholesale services and the sale of terminal equipment, retail revenues decreased by 0.3% to $8.5 billion, while retail lines were unchanged at 19.8 million lines.

In 2004, local retail revenues held by competitors increased by 19.4% to $548 million, representing 6.4% of all retail revenue, up from 5.4% in 2003. Local retail lines, held by competitors, increased by 19.3% to 1.3 million lines, or 6.5% of all retail lines. This increase contributed to the growth of total wholesale revenues from sales of components competitors use to interconnect with the incumbents, and their customers.

The incumbents continue to hold the vast majority of both residential and business segment revenues and lines. Although the competitors are making line-share gains in certain major urban centres, in other centres competition remains almost non-existent. In 2004, the majority of new retail lines provided by competitors came from the residential segment, almost none of which were provided by the competitors (ILEC out-of-territory), which continue to focus primarily on the business segment.

The dominant means that competitors use to provision local lines differs between the residential and business segments. While unbundled loops or equivalent, leased from a LEC, are used for 80% of competitor-provided residential lines, the dominant method that competitors use to provide service in the business segment is through the resale of business lines, such as Centrex, also provided by a LEC.

In 2004 and throughout 2005, numerous service providers including incumbents, facilities-based competitors, resellers and cable undertakings have introduced retail voice services which interconnect with the PSTN and use Internet Protocol. These VoIP services are capable of reproducing the functionality of traditional telephone service and can provide users with numerous call and message-management features. In 2004, VoIP services had essentially no impact on local revenues; however, it is expected that revenues and subscriptions from VoIP services will increase in 2005.

4.4 Internet Services

Highlights

• Internet revenues increased 12.9% from $3.7 billion in 2003 to $4.2 billion in 2004, making it one of the fastest growing segments of the Canadian telecommunications services industry.
• Retail Internet access revenues reached $3.3 billion in 2004, increasing 10.3% from $3.0 billion in the previous year.
• The number of households with residential Internet access subscriptions reached 7.4 million in 2004, representing 59% of all Canadian households. The number of households with high-speed Internet access reached 5.4 million households or 43% of all Canadian households, up from 36% in the previous year.
• Dial-up subscriptions continued to decrease. The number of dial-up subscriptions declined 20%. As a percent of total subscriptions, dial-up subscriptions declined from 36% of total subscriptions in 2003 to 27% in 2004.

Sector Description

a) Description of Services

Internet-related telecommunications services can be divided into three broad market segments: Internet access, Internet transport and Internet applications.

Internet access is the provision of an IP connection to an end-user which allows the end-user to exchange applications traffic with Internet hosts and other end-users. Internet access service consists of three distinct components:

• a physical access line, such as a twisted-pair or coaxial copper cable, a fibre optic cable, or over-the-air spectrum;
• a low- or higher-speed data link, to move information between the end-user's modem or switch and the Internet service provider's (ISP's) facilities; and
• an IP connection established between a computer or similar device behind the end-user's modem and the ISP's facilities.

Internet access services are provisioned at a variety of speeds. Low-speed, or narrowband access services, operate at speeds of up to 64 kilobits per second (Kbps), and are typically provided over dial-up access lines. High-speed access services, including wideband (up to 1.5 Mbps) and broadband (faster than 1.5 Mbps), are for the most part delivered over digital subscriber lines (DSL), coaxial cable and, particularly to businesses, fibre optic cables. Satellite and terrestrial wireless technologies are also used to provide high-speed access services.

Internet transport service is the provision of Internet connectivity to ISPs. Internet transport capacity is provided over Internet backbone facilities that carry aggregated traffic across domestic and international intercity links between Internet traffic switches or routers. In some cases, peering arrangements between Internet backbone service providers substitute for the outright purchase of Internet transport by one ISP from another. Consequently, separate accounting of all Internet transport services is not available.

Internet applications include a growing number of services which piggyback on the Internet connectivity services. They include e-mail, Web surfing and hosting, and instant messaging, among others. Typically, many of the application services are bundled together with Internet access services. However, ISPs and other telecommunications companies do participate in emerging stand-alone business Internet applications markets which include services such as premium Web hosting, Internet data centres and off-site data storage, security and firewall services, among others.

b) Markets and Observations for 2004

Internet-related telecommunications revenues in Canada were $4.2 billion in 2004, representing an increase of almost 13% over the previous year. As shown in Table 4.4.1, retail Internet access services accounted for the vast majority of these revenues.⁵⁵ The annual growth, however, in retail access revenues has been declining from 54.7% in 2001 to 10.3% in 2004.

Table 4.4.1
Internet Revenues⁵⁶
($ millions)

	2000	2001	2002		2003		2004	Growth 2003-2004	CAGR 2000-2004
Retail Internet access services	1,293	2,000	2,537		3,004	#	3,314	10.3%	26.5%
Internet transport, applications & other	459	660	748		685	#	851	24.2%	16.7%
Total Internet revenues	1,752	2,660	3,285		3,689		4,165	12.9%	24.2%

Source: CRTC Data Collection

c) Sector Participants

There are four principal groups of participants providing retail Internet access and transport services in Canada:

• Incumbent local exchange carriers (incumbents), who own the vast majority of the copper twisted pair access links to homes and businesses. These entities provide Internet access mainly by dial-up, DSL, fibre and/or satellite, although some fixed wireless is utilized in certain places.
• Cable distribution undertakings, who own the coaxial-based television distribution networks serving homes and, to a lesser extent, businesses. These companies mainly provide access by cable modem or by fibre.
• Competitive facilities-based telecommunications service providers, which provide service via dial-up, DSL, fibre and/or satellite. An increasing trend in this group is the presence of ISPs who utilize unlicensed wireless in rural areas.
• Non facilities-based ISPs such as AOL Canada, Cybersurf Inc., Inter.net Canada and Uniserve focus primarily on the provision of Internet access services. These companies tend to utilize the wholesale DSL data services of the incumbents, although there is increasing use of cable Third Party Internet Access (TPIA).

In addition, Telesat Canada (Telesat) offers wholesale satellite services to ISPs in order to serve their end-users. In 2004, Telesat launched the Anik F2 satellite, and in 2005 is providing wholesale satellite services to ISPs for purposes of providing end-user access to the Internet via the Anik F2 satellite. In addition to Internet access services, some facilities-based service providers, including the incumbents, cable distribution undertakings and competitors, also provide Internet transport services.

ISPs are categorized based on the description of participants in section 3. The telephone companies' activities within their traditional territories are categorized as incumbent and their out-of-territory activities are categorized as competitor (ILEC out-of-territory). Although the cable undertakings are incumbents with respect to their cable distribution activities, they are categorized as competitor (cable). The remaining entities are referred to competitor (other).

d) Regulatory Framework

In 1999, in its consideration of how to regulate new media,⁵⁷ the Commission found that while some Internet applications fell under the Broadcasting Act, they did not warrant regulation. While both low-speed and high-speed retail Internet access services have been forborne from regulation under the Act, the Commission regulates the provision of wholesale Internet access services. In the case of the incumbents, the underlying facilities and services required by third-party DSL Internet access service providers are subject to price regulation and generally fall within the Competitor Services basket of services under the current price cap regime. Cable companies have also been required to provide third-party access, known as TPIA, to their underlying facilities.

e) Regulatory Developments in the Past Year

In Decision 2004-34,⁵⁸ the Commission directed Bell Canada, Aliant Telecom Inc., SaskTel and TCI to extend, upon request, DSL Internet service to CLEC business customers thereby allowing these customers to be served by the independent ISPs.

In Decision 2004-37,⁵⁹ the Commission introduced guidelines for the use and testing of cable modems used by ISPs to provide Internet access service over cable networks.

In Decision 2004-69,⁶⁰ the Commission approved tariffs and agreements setting out the rates, terms and conditions for third party Internet access (TPIA) to allow Internet service providers to connect with and serve customers over the cable networks of the major cable companies, namely, Cogeco Cable Canada Inc., Rogers Communications Inc., Shaw Communications Inc., and Vidéotron ltée. The rates were approved on an interim basis pending further consideration of the level of mark-up over costs appropriate for TPIA services and facilities provided by the cable companies.

In Order 2005-62,⁶¹ the Commission gave approval to an application by Bell Canada to provide Gateway Access Service and High Speed Access Service on a wholesale basis as part of its General Tariff. These services provide ISPs with the ability to reach customers utilising Bell Canada's ADSL high speed infrastructure. These services were provided on an interim basis by Bell Canada, and previously, on a non-tariffed basis by BCE Nexxia.

In Order 2005-144,⁶² the Commission granted interim approval to Bell Canada's application to remove the requirement in its General Tariff on Gateway Access Service (GAS) that an end-customer must subscribe to a primary exchange service (PES). This configuration, often termed "naked DSL," permits an ISP to provide high speed Internet service utilising DSL facilities without the need for the end-user to subscribe to local telephone service.

Market Segments

Table 4.4.2 provides a market segment breakdown of revenues for the retail Internet access service market. Since 2002, residential Internet access revenues have accounted for over three quarters of the retail market.

The annual growth rate for residential Internet access revenues has consistently declined since 2001, from a 50% growth rate to 10.7% in 2004. Similarly, the annual growth rate for business Internet access revenues has also consistently declined but at a faster pace, declining from 69% in 2001 to 9.1% in 2004. When compared to the growth rate in 2003, business Internet access revenue growth rate has declined by 13 percentage points, versus about 7 percentage points for residential.

Nevertheless, the average annual growth rate for both segments combined was 27% over the period 2000 to 2004, making the retail Internet access service market one of the fastest growing segments in the telecommunications industry.

Table 4.4.2
Residential and Business Internet Access Service Revenues
($ millions)

	2000	2001	2002	2003		2004	Growth 2003-2004	CAGR 2000-2004
Residential	974.7	1,461.9	1,943.0	2,279.5		2,523.6	10.7%	26.9%
Market Share	75.4%	73.1%	76.6%	75.9%		76.1%
Business	318.5	537.6	593.8	724.5	#	790.4	9.1%	25.5%
Market Share	24.6%	26.9%	23.4%	24.1%		23.9%
Total revenues	1,293.2	1,999.5	2,536.8	3,004.0	#	3,314.0	10.3%	26.5%

Source: CRTC Data Collection

Table 4.4.3 provides a breakdown of retail Internet access revenues by market participant categories. These figures show that the incumbents and the competitor (cable) companies are the dominant players with revenue market shares of 43% and 39%, respectively, in 2004, up from 41% and 37%, respectively in 2003. The decline in the market share of the Competitor (Other), from 21% to 15%, may be attributed to in large part to the acquisitions of Allstream Canada by MTS and 360networks by Bell Canada in 2004. These acquisitions resulted in the reclassification of Allstream Canada's operations outside the operating territory of MTS from competitor (other) to competitor (ILEC out-of-territory) and its operations within the operating territory of MTS as incumbent. In the case of 360networks, its western operations were reclassified from competitor (other) to competitor (ILEC out-of-territory) and its eastern operations remained as competitor (other) as these were acquired by Call-Net Enterprises Inc. (now Rogers Holdings).

Table 4.4.3
Internet Access Service Revenues by Market Participant Group
($ millions)

	2003		2004	Growth 2003-2004
Incumbents	1,218.9	#	1,431.6	17.4%
Market Share	40.6%		43.2%
Competitors (cable)	1,108.2		1,284.6	15.9%
Market Share	36.9%		38.8%
Competitors (ILEC out-of-territory)	35.1		102.1	191.1%
Market Share	1.2%		3.1%
Competitors (other)	641.8	#	495.7	-22.8%
Market Share	21.4%		15.0%
Competitors	1,785.1	#	1,882.4	5.5%
Market Share	59.4%		56.8%
Total	3,004.0	#	3,314.0	10.3%

Source: CRTC Data Collection

As displayed in Table 4.4.4, the four largest Internet access service providers⁶³ continue to not only dominate the market, but to steadily increase their market share of the Internet market, growing from 39% in 2000 to 59% in 2004.

Table 4.4.4
Top Four Retail Internet Companies' Revenues
($ millions)

	2000	2001	2002	2003		2004	Growth 2003-2004	CAGR 2000-2004
Four largest companies	505.7	875.3	1,289.9	1,641.0	#	1,956.4	19.2%	40.2%
Market Share	39.1%	43.8%	50.8%	54.6%		59.0%
Others	787.4	1,124.2	1,246.9	1,363.0	#	1,357.6	-0.4%	14.6%
Market Share	60.9%	56.2%	49.2%	45.4%		41.0%
Total	1,293.1	1,999.5	2,536.8	3,004.0	#	3,314.0	10.3%	26.5%

Source: CRTC Data Collection

As reflected in Table 4.4.5, competitors' (other) market share declined in the business segment of the retail Internet access market, declining from 42% to 31% in 2004. As previously described, this decline was mainly due to the industry consolidation activities in 2004.

The competitors (other) had the biggest share (31%) of the business Internet segment in terms of revenues after the incumbents who had 49%. The competitors (ILEC out-of-territory) and the competitors (cable) had 12% and 8% of these revenues respectively in 2004.

Table 4.4.5
Business Internet Access Revenues by Market Participant
($ millions)

	2003		2004	Growth 2003-2004
Incumbents	326.9	#	389.8	19.2%
Market Share	45.1%		49.3%
Competitors (cable)	58.9		66.1	12.2%
Market Share