Primus Telecommunications Canada Inc.5343 Dundas Street West, Suite 400

Toronto, OntarioM9B 6K5

E. (Ted) ChislettPresident and Chief Operating OfficerEmail: regulatory@primustel.ca

15 September 2005VIA EMAIL

Mr. Allan MacGillivrayExecutive DirectorTelecommunications Policy Review Panel Secretariat280 Albert St.Room 1031Ottawa, OntarioK1A 0C8

Dear Mr. MacGillivray:

Subject: Second Round Submission – Telecommunications Policy Review

Primus Telecommunications Canada Inc. (Primus Canada) hereby submits its second round submission in the Telecommunications Policy Review process pursuant to the directions set out in the Telecommunications Policy Review Panel’s Consultation Paper, dated 6 June 2005.

Once again, Primus Canada would highlight the fact that it is one of the signatories to the submissions filed by the Coalition for Better Competition. This submission is intended to complement the views found in those submissions.

Yours truly,

E. (Ted) Chislett

TELECOMMUNICATIONS POLICY REVIEW PANEL

SECOND ROUND SUBMISSION OF

PRIMUS TELECOMMUNICATIONSCANADA INC.

15 September 2005

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Executive Summary

1. In its consultation paper, the Panel invited parties to comment on the likelihood that

the telecommunications market will evolve into “a form of duopoly (i.e. incumbent local

exchange carriers (ILECs) versus cable companies.”

2. In response, as one might expect, the ILECs and the cable companies suggest that if

the market does evolve in this manner, it may not be such a bad thing. A duopoly, one

cable company argues, would be a definite improvement over a monopoly.

3. What surprised Primus Canada, however, was the attitude of the Canadian Radio-

television and Telecommunications Commission and the Competition Bureau. Both these

government agencies signal that an ILEC/cable company duopoly could be a good thing

for competition in Canada and for end-customers. Primus finds this extremely troubling.

4. Primus Canada believes that those TSPs that compete with the ILECs and cable

companies have a great deal to offer end-customers in Canada and, as they have in the past,

will continue to be the source of innovation for cutting-edge new services in the future.

The introduction of VoIP into the Canadian market is the best example of this. Canadian

consumers were not introduced to VoIP by an ILEC or a cable company. Canadian

consumers were introduced to VoIP by the competitive industry.

5. While a duopoly may be better than a monopoly in some respects, Primus Canada

submits that settling for a duopoly will stifle innovation, seriously harm competition and

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ultimately change Canada’s telecommunications industry from a leader to follower on the

world stage.

6. The Panel’s recommendations to the government must recognize the danger of

settling for a duopoly and highlight the continuing contribution of the competitive industry.

Its recommendations must also make strong recommendations that these competitors

should have both economic and operationally workable access to the ILECs’ and cable

companies’ networks and broader access to capital to fund growth, via the removal of the

foreign ownership restrictions.

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Introduction

7. In its first round comments, Primus Canada focused on three key issues from its

perspective as a national service provider that also happens to be a reseller:

There must be a workable wholesale access regime. This regime must provide

competitors with a workable economic structure and a workable operational

structure (Issues A.3, A.4, A.5, A.6);

Criteria for post forbearance re-regulation must be established. Competitors

need the assurance that when the conditions for forbearance are no longer

present, appropriate steps will be taken by the regulator to guard against the

exercise of market power (Issues B.6, B.8, B.9); and,

The foreign investment restrictions should be removed. Government policy

should focus on market behaviour and the use of telecommunications networks

and not on the source of capital used to fund these networks (Issues E.4, E.5,

E.6, E.7).

8. Nothing Primus Canada has read in other parties’ first round submissions in this

process have altered its position on the importance of each of these areas. Primus Canada

remains convinced that regulatory and legislative action is required to ensure that each of

these issues is addressed so that competition can flourish in Canada.

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9. After having reviewed the submissions of a number of parties, Primus Canada has

chosen to focus its comments in this second round submission on one area of concern

relating to its first point as set out above. More specifically, Primus Canada’s comments

will focus on a number of parties’ attitudes towards the possibility of a duopoly in the

telecommunications market, as found in their responses to Issue A.5. Primus Canada notes

with some concern that two key governmental stakeholders in this discussion signal a

certain contentment with the prospect of a duopoly in the Canadian market. Primus

Canada wishes to be absolutely clear that a duopoly cannot result in market conditions that

are in the best interests of the Canadian public.

An ILEC and Cable Company Duopoly

10. The Panel’s Issue A.5 is set-out as follows:

Is the Canadian competitive environment in telecommunications likely to

evolve into a form of duopoly (i.e. incumbent local exchange carriers

(ILECs) versus cable companies)? If so, what would be the implications for

the telecommunications and ICT markets? What would be the implications

for the regulatory framework? (emphasis added)

11. At the outset, Primus Canada would like clarify the exact nature of its concern. As

discussed in its first round comments, Primus believes that there will always be an

assortment of Telecommunications Service Providers (TSPs) offering service in the retail

telecommunications market. This group of TSPs will be made up of both resellers and

Canadian carriers. The retail situation at the TSP level is not the main source of Primus’

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concern in this submission. Primus’ concern goes deeper into the local network and ends

at the outside walls of most residences in Canada where the network termination points for

two separate and distinct access networks can be found: the copper twisted pair belonging

to the ILECs and the coaxial cable belonging to the cable companies. These two networks

are currently the only ubiquitous access networks capable of reaching the entire residential

market in Canada and will likely remain so for some time despite potential for wireless

access or broadband over power lines to emerge.

12. Primus Canada is very concerned over the implications for competition in the

telecommunications market in the absence of a workable wholesale access regime to both

these ubiquitous access networks.

13. As an aside, Primus Canada would like to take the opportunity to discuss the phrase

“a form of duopoly” as used by the Panel in its consultation paper. As noted above,

Primus Canada does not believe that there will be a duopoly of retail service providers in

Canada that meets the strict economic parameters of the term. Furthermore, Primus

Canada does not believe that there will be a pure duopoly situation in the access network in

all segments of the market.

14. That being said, Primus believes that the Panel’s phrase “a form of duopoly”

describes the situation that currently exists at the network access or “last mile” level in the

ILECs’ and cable company networks. Primus Canada believes that “a form of duopoly”

could also come into existence in the retail market if the appropriate competitive

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safeguards are not put in place. Primus Canada notes that at paragraph 42 and 43 of its

first round comments the United Telecom Council of Canada states:

… UTC Canada does see some signs of a duopoly forming between the ILECs and

the cable companies in at least some segments of the residential and business local

telephone high-speed Internet markets. This is apparent from their ownership of

broad-based incumbent networks and their rapid roll-out of high-speed Internet

access services. They clearly have a large head-start over all other players and their

revenues dwarf the rest of the industry. Great care will therefore have to be taken

to ensure that they do not collude in an express or behavioral manner to either limit

competition between themselves or by third parties.

Having said that, UTC Canada does not see a pure duopoly developing…

(emphasis added)

15. Primus Canada believes that for at least the next ten years, the ILECs and the cable

television companies will be the only noteworthy and widespread providers of last mile

network facilities to the comparatively larger group of TSPs. While there are other

potential technologies that may in time be widely deployed, this will only happen

somewhere down the line in Canada due, in part, to the difficulty competitors experience in

accessing capital (this relates to the foreign ownership issue). Therefore, this “form of

duopoly” will continue to exist at the network access level and it will continue to have a

negative effect on competition if not addressed.

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16. Primus Canada would like to highlight the fact that it finds itself in a regulatory no-

man’s-land with regards to fitting into the Commission’s agenda of facilities-based

competition. Due to the foreign ownership restrictions, Primus Canada is unable to build

its own transmission facilities that would enable it to lessen its reliance on the networks of

other carriers. The foreign ownership restrictions, therefore, require Primus to continually

increase its reliance on the networks of Canadian carriers as it grows, further contributing

to the precarious competitive situation of reliance on leased network facilities in an era

when the Commission’s stated policy is to promote facilities-based competition. It is a

vicious circle into which Primus Canada is legislated to remain.

17. The restriction on owning or operating transmission facilities can also have

significant operational impacts on companies such as Primus Canada. For example,

Primus Canada recently launched a local switched telephony service that relies on not one

underlying carrier, but two. Since Primus Canada cannot co-locate in ILEC central offices

and lease loops to provide POTS, it relies on arrangements with a CLEC that is co-located

in ILEC COs across the country. Primus Canada is the retail point of contact for the end-

customer and handles marketing, sales, provisioning, billing and customer service. Primus

Canada, therefore, takes the customer’s order for local service, relays the order to the

CLEC, which in turn, leases a residential loop from the ILEC.

18. This is an very complex process to administer and a situation in which Primus

Canada finds itself powerless in the face of service problems at the ILEC. The TELUS

strike has resulted in an almost complete cessation of new order installation. Recently,

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internal post-Entourage strike decisions by Bell Canada have resulted in incredibly poor

performance on its part. As a result, Primus Canada customers often become upset and

decide to go back to the ILEC. Therefore, the awful performance of the ILEC’s wholesale

division results in significant new business for the ILEC retail division. This is patently

unfair and seriously impedes Primus Canada’s business growth. Primus Canada is

frustrated by the fact that it has no direct avenue with the ILEC to address this unfair

situation and, because it is a reseller, it is not even entitled to any of the QoS rebates to

partially compensate for this poor performance. Reliance on carriers’ networks to this

extent is not Primus Canada’s first choice. It is, however, Primus Canada’s only choice

and this continues to be a significant obstacle to Primus’ growth.

19. Primus Canada will now turn to some parties’ first round submissions. Those

companies that form the current access duopoly are not greatly concerned by the prospect

of a duopoly. For its part, Rogers actually concedes that such a duopoly exists, and states

that it’s not such a bad thing:

In the residential market, there are generally two wireline facilities

providers, the ILEC and the cable company, into every home at the current

time.

…

The question asks what the implications would be if the market evolved as a

duopoly. Rogers submits that the evidence shows that two firms can

provide the benefits of a competitive market.

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…

The principle objective for Canadians is to ensure that the market does not

evolve into a monopoly in the broader residential communications market

by virtue of the ILECs leveraging their monopoly local telephone power

into other adjacent service markets. A duopoly is to be much desired in

comparison to a monopoly.1

20. For its part, Bell Canada states:

Even if the industry does not evolve into a duopoly of cable and telco

network facilities, it does not necessarily follow that such a structure would

be problematic from a competition standpoint. First, it is likely that, as they

are doing currently, ILECs will continue to build facilities and services out-

of-territory, such that non-cable facilities-based competition will grow.

Second, significant meaningful competition from resellers is possible. As a

result, while telcos and cablecos would own the networks, there is the

likelihood of vigorous competition in retail markets, and even wholesale

markets.

21. These are, quite frankly, the type of self-justifying positions one would expect the

ILECs and cable companies to assume. Primus Canada spent a large portion of its first

round comments highlighting the economic and operational problems with using both the

ILECs and cable companies last mile networks and will not repeat those comments at this

point in time.

1 Rogers’ Submission to the Panel, 15 August 2005, paragraphs 93, 97 and 98.

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22. What became troubling to Primus Canada as it read other submissions, however,

was that the two key arms-length government agencies involved in this debate, the CRTC

and the Competition Bureau, appear to agree that a duopoly at the retail level, consisting of

those companies that operate the duopoly networks at the access level, could actually be a

good thing for consumers. For example, at paragraph 144 of its submission the CRTC

states:

While facilities-based competition in the local wireline market has been

slow to develop, it has been successful in the wireless and long distance

markets, which have been forborne from rate regulation for some years

now. Even in the local wireline market, we may now, eight years after the

decision to open the market, be on the verge of realizing the goal of broad-

based facilities-based local competition. This is the promise of cable

television companies’ entry into the local telephone marketing using either

circuit-switched networks to deliver traditional telephone services, or high-

speed broadband networks to deliver VoIP services, in competition with the

telephone companies. If this promise materializes, Canada may find itself

in the very enviable position of having two competing broadband networks

to a significant number of Canadian homes and businesses, and all of the

competitive services that can run over those networks. (emphasis added)

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23. For its part, the Competition Bureau states the following at paragraphs 24 and 25 of

its submission:

Assuming for the purposes of this question, that the market does

evolve into a form of duopoly between Incumbent Local Exchange Carriers

(ILECs) and cable companies, the implications for the telecommunications

market could be substantial improvements over the monopoly conditions

that have, for so long, dominated this sector.

The Bureau considers that the potential positive outcomes of a

cable/ILEC duopoly include a decreased likelihood for unilateral effects

(i.e., that a firm could profitably raise prices above competitive levels) due

to the degree of rivalry between cable companies and the ILECs.

Aggressive price competition and innovation are other potential benefits that

could be expected since most of the costs of service provision (i.e., network

costs) by either the ILECs or the cable companies are fixed and sunk, the

cost to provision VoIP would be incremental and the service offerings

would be of similar quality. (emphasis added)

24. Primus Canada finds these statements by the CRTC and the Competition Bureau

troubling to say the least. Primus Canada hopes that instead of merely adopting the views

of these two government agencies the Panel will recognize that such an outcome is simply

not in the best interests of Canadian consumers. Primus urges the Panel to make strong

recommendations to the Minister that the rights of all TSPs to access the networks of the

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ILECs and the cable companies must be guaranteed and that access to those networks must

be economically and operationally workable to the extent that all TSPs are able to offer

bundles similar to those offered by the network owners (i.e. a workable wholesale access

regime applicable to both ILEC and cable networks).

25. Primus believes that the most compelling reason to reject blithe assertions that a

comfortable duopoly can work in the interest of Canadian consumers is that a duopoly

situation, in any form and to any degree, will impede competition and therefore impede

innovation in the market. The best and most recent example of the ability of competitors

to innovate is the introduction to the Canadian market of VoIP services.

26. Canadian consumers were not introduced to VoIP by an ILEC or a cable company.

They were introduced to VoIP by reseller TSPs.

27. In January 2004 Primus was the first company in Canada to launch a residential

VoIP product, followed a few months later by Vonage in March 2004, and by YAK in

September 2004. Primus Canada cannot speculate on when the ILECs and the cable

companies would have launched these services in the absence of the competitive pressure

brought to bear by these three companies.

28. Primus Canada submits that an unworkable wholesale and access regime governing

duopoly networks will actually slow the pace of competitor innovations over time and may

actually reduce the numbers of TSPs in the market.

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29. For example, the power of network owners in the absence of a mandate to unbundle

is currently being experienced afresh in the United States2. In a news article titled “DSL:

Deregulated to Death”, journalist Andy Dornan writes:

ISPs and their customers were quick to condemn the FCC’s August

decision that reclassified DSL as an information service rather than a

telecom service. Because RBOCs will no longer have to carry competitor

ISPs’ traffic, it’s almost certain to mean price increases and reduced

choices. However, the decision is merely the final step in the long process

of restoring the RBOCs’ monopoly over the telecom infrastructure.

Back in February 2003, the FCC announced a three-year plan to

loosen restrictions on what RBOCs can charge ISPs for the use of copper

wires. The result is that it’s already impossible for independent DSL

providers to compete on price in most areas. Once the new rules come into

effect in September 2006, the RBOCs will theoretically be able to eliminate

the other ISPs entirely, though most will probably choose not to. They

already regard small ISPs more as resellers than competitors. (emphasis

added)

30. In its first round comments Primus Canada noted the recent consolidation of the

Canadian carrier industry.3 The elimination of 360 Networks/Group Telecom and Call-Net

2 http://news.yahoo.com/s/cmp/20050902/tc_cmp/169400793, dated 1 September 2005.3 YAK makes the same observation in its first round submission at paragraph 17.

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as independent carriers has put more pressure on the remaining competitors and placed

them in a situation where they have no choice but to make greater use of the ILECs’

networks. This aggravates the severe competitive and operational issues mentioned earlier

in these comments.

31. Those TSPs that compete with the ILECs and cable companies across the various

telecommunications markets have a great deal to offer end-customers in Canada and will

continue to be the source of innovative new services in the future (if they survive). To

maintain this momentum, Primus Canada and these other TSPs need economic and

operationally workable access to the networks of both the ILECs and the cable companies.

The Canadian government should not be satisfied with some form of duopoly in retail

market and to avoid this, will have to ensure that access to the de facto access duopoly is

an on-going reality for competitors. Without access to additional capital streams via the

elimination of the foreign ownership restrictions, it will be difficult for Primus Canada or

any other reseller to move in the facilities-based direction so prized by the Commission.

The danger Primus Canada sees is that if government agencies settle for a duopoly at the

access level, competition and the benefits thereof will be significantly reduced and

Canada’s leading role in the world telecommunications market will be reduce to that of a

follower.

Conclusion

32. In conclusion, Primus Canada urges the Panel to reject the those arguments that

duopoly at either the retail or access network level in Canada will be adequate to protect

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the interests of end-customers. The level of competition in the market can only be

sustained or increased via the presence of a significant number of competitors to the ILECs

and the cable companies. Moreover, given the current legislative and regulatory

framework, it is clear that economic and operationally workable access to the networks of

the ILECs and cablecos is a requirement to ensure that the larger group of TSPs is able to

compete effectively in the market. Primus Canada respectfully calls on the Panel to issue

recommendations that promote such access to these networks.

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