ARCHIVED -  Telecom Decision CRTC 95-12

Telecom Decision

Ottawa, 8 June 1995

Telecom Decision CRTC 95-12

CUSTOMER BALLOTING TO SELECT A LONG DISTANCE SERVICE PROVIDER

I BACKGROUND

On 2 March 1994, Unitel Communications Inc. (Unitel) filed an application requesting that the Commission conduct a ballot to allow subscribers to pre-select their preferred long distance service provider. Specifically, Unitel requested that the Commission establish a carrier pre-selection ballot procedure for implementation in the operating territories of AGT Limited (AGT), BC TEL, Bell Canada, The Island Telephone Company Limited, Manitoba Telephone System, Maritime Tel and Tel Limited, The New Brunswick Telephone Company Limited and Newfoundland Telephone Company Limited (collectively, the telephone companies). Unitel proposed, among other things, a two-ballot positive selection process, involving an independent third-party administrator.

In support of its application, Unitel stated that the Commission's expectations and objectives, as expressed in Competition in the Provision of Public Long Distance Voice Telephone Services and Related Resale and Sharing Issues, Telecom Decision CRTC 92-12, 12 June 1992 (Decision 92-12), have not been fully met. In Unitel's view, the introduction of long distance competition and related consumer benefits have been hampered by significant barriers to entry. One barrier cited by Unitel was the inertia present in the long distance market. According to Unitel, the source of this inertia is the information barrier that exists for many subscribers, in terms of their knowledge and understanding of the availability of competitive alternatives. An additional impediment to entry cited by Unitel was the telephone companies' practice of using their control over the provision of local service to give themselves a preference in the carriage of long distance traffic.

On 8 April 1994, the Commission issued Customer Balloting to Select a Long Distance Service Provider, Telecom Public Notice CRTC 94-19, inviting comment on:

(1) whether there should be a balloting process to permit customers to select a long distance service provider;

(2) if a balloting process was to be conducted:

(a) whether Unitel's proposal would be the most appropriate, or whether some other procedure would be preferable;

(b) the estimated cost of Unitel's proposal and the cost of any other proposal that might be put forward; and

(c) whether it would be appropriate to continue contribution discounts for interexchange carriers (IXCs) and resellers; and

(3) if the balloting process was not conducted, whether there were other approaches (such as billing inserts) that would be appropriate for addressing any inertia in the marketplace.

The Commission received comments from: AGT, Government of British Columbia (BCG), Cam-Net Communications Inc. (Cam-Net), Canadian Business Telecommunications Alliance (CBTA), Competitive Telecommunications Association (CTA), Consumers' Association of Canada (CAC), The Director of Investigation and Research, Bureau of Competition Policy (the Director), Fédération Nationale des Associations de Consommateurs du Quebec (FNACQ), fONOROLA Inc. (fONOROLA), Incotel, London Telecom Network (London Telecom), National Anti-Poverty Organization (NAPO), Netlinks Telecom Inc. (Netlinks), Northline Telecommunications Inc. (Northline), Government of Ontario (Ontario), Government of Quebec (Quebec), Government of Saskatchewan (Saskatchewan), Smart Talk Network (STN), Sprint Canada Inc. (Sprint) and Stentor Resource Centre Inc. (Stentor) on behalf of the telephone companies. Eleven individuals also filed comments.

Parties either supporting or not objecting to a balloting process included CAC, Cam-Net, CBTA, CTA, the Director, fONOROLA, NAPO, Netlinks and Sprint. Parties opposing Unitel's application, in whole or in part, included AGT, BCG, FNACQ, Incotel, London Telecom, Northline, Ontario, Quebec, Saskatchewan, Stentor, STN and the eleven individuals who filed comments.

II POSITIONS OF PARTIES

A. The Need For a Balloting Process

Unitel submitted that balloting is necessary in order to overcome the high level of customer inertia in the long distance market. In Unitel's view, the source of inertia is the "information barrier" that exists for many customers. Unitel contended that customers lack understanding on several points, including (1) that long distance service can be provided separately from local telephone service, (2) that a variety of alternative service providers are available, and (3) the process for selecting an alternative service provider. In support of its position, Unitel presented the results of two focus group interviews and two market research surveys performed for it by Decima Research.

According to Unitel, the proposed balloting process would (1) educate consumers about choice in the long distance market through neutral, unbiased third parties, and (2) provide consumers with a simple means of selecting an alternate carrier.

CAC, Cam-Net, CBTA, the Director and Sprint supported Unitel's application for a balloting process as a neutral way of addressing the inertia in the market. fONOROLA supported the balloting process, provided it was targeted at the residential and small business market segments that, in fONOROLA's view, displayed the greatest inertia and lack of knowledge. It proposed that the balloting process not include large business subscribers, because that segment of the market is sufficiently informed.

NAPO, while generally in support of the balloting process, expressed concerns that it was a rather elaborate mechanism for raising customer consciousness about the choices available.

Stentor submitted that inertia is not a very significant factor in the long distance market in Canada, as demonstrated by the fact that competition has developed much more rapidly than originally envisioned by the Commission or by Unitel. Stentor expressed the view that there is a high level of customer awareness and understanding of competitive alternatives in the long distance market. In support of its position, Stentor presented the results of its own market survey research.

AGT stated that there have been significant developments since the present proceeding began. AGT noted that equal access has been implemented, enabling competitors to offer seamless interconnection and eliminate complex dialing arrangements, and that the Commission has required the telephone companies to distribute billing inserts informing consumers of the availability of long distance competitors and the process and consequences of switching to an alternative long distance service provider.

FNACQ, London Telecom, Northline and STN shared the view that it was too early to assess the pro-competitive impact of recent developments affecting the long distance market, and that a ballot was therefore premature. CTA and STN stated that, because of the high level of name recognition of the telephone companies and Unitel, balloting could result in a monopoly or duopoly industry structure and unfairly disadvantage other long distance providers. Incotel stated that customers are already able to obtain the information that they may need to make a choice, without balloting. BCG and Ontario submitted that advertising, not balloting, is a more appropriate means of informing customers.

Quebec and Saskatchewan stated that a balloting process would create confusion for the majority of customers. Saskatchewan was of the view that the bill inserts already distributed were sufficient to educate customers. Saskatchewan also presented evidence intended to demonstrate the large amount of media coverage that long distance competition has received. Quebec stated that the balloting process would amount to a variation of the "rules of the game" established by the Commission for the introduction of competition.

CTA proposed that the Commission conduct a public education program, whether or not a ballot is held. CBTA, the Director and STN supported the proposal for a neutral public education campaign to heighten customer awareness.

B. Unitel's Balloting Proposal and Suggested Alternatives

Unitel proposed a two-ballot selection process closely resembling the approach taken in Australia. Under this proposal, a ballot would be sent to individual line and two-party residential customers, as well as individual line and multi-line business customers, whereby they would select a preferred long distance service provider (telephone company, IXC or reseller). In those areas where customer response to the first ballot was less than 65%, a second ballot would be sent to those customers who did not respond to the first. Those customers who did not respond to either the first or the second ballot would continue to receive long distance service from their current service provider.

Under Unitel's proposal, a ballot administrator would be selected to oversee and manage the entire balloting process. In order for a service provider's name to appear on the ballot for a particular serving area, the service provider would have to be capable of offering equal access ("1+" dialing) at the time of the ballot and to have ordered Feature Group D in the relevant Class 4 and (where applicable) Class 5 areas. Eligible service providers would also have to offer universal termination (i.e., Canada, the United States and overseas).

Unitel also proposed that the Commission conduct a public education campaign to prepare customers for the ballot.

Finally, Unitel proposed that limits on advertising spending be established for the period leading up to the ballot, in order that the financially stronger companies do not influence the outcome. Stentor objected to Unitel's proposal that the Commission impose restrictions on the dollar amount of advertising expenditures that the telephone companies could spend during the ballot period.

CAC, NAPO and Sprint recommended that the balloting proposal be amended in order to minimize costs. They suggested that Unitel eliminate the second ballot and target only residential customers. In response to concerns over the high cost of conducting the ballot, Unitel outlined a streamlined version of its original balloting proposal that would lower costs by eliminating items such as a second ballot, a ballot for business customers, and television and radio advertisements.

Concerns were raised regarding, among other things, the eligibility criteria for service providers to appear on the ballot. Netlinks proposed that switchless resellers also be represented on the ballot, because they offer the same services as facilities-based carriers. London Telecom proposed that information about line-side resellers be included in any information package accompanying the ballot, and that they should be represented on any public education committee.

C. Cost of Unitel's Balloting Proposal

Unitel estimated the cost of conducting its ballot, as proposed in its application, at between $38 million and $42.9 million. Unitel estimated the cost of conducting its streamlined ballot, which would be limited to residential customers, at $25 million.

Stentor submitted that the cost of conducting a ballot would greatly exceed any perceived economy-wide benefits. Stentor estimated the cost of conducting the ballot, as proposed in Unitel's application, and the accompanying public education campaign at between $43 million and $47 million. Stentor noted that individual participants would incur additional costs through their own marketing and advertising campaigns. Stentor added that competitors not listed on the ballot would also have to expand their advertising budgets.

The Director stated that the long-term benefits of increased competition and early regulatory forbearance by the Commission warranted a one-time cost of between $30 million and $50 million. NAPO also found the costs acceptable overall. FNACQ and Saskatchewan were of the view that Unitel's ballot process was unnecessary and costly.

Unitel proposed that the cost of conducting the ballot be shared among the service providers appearing on it on the basis of their realized market shares after tabulation of the final results in each ballot area. This approach was supported by Sprint.

Stentor objected to the cost recovery formula proposed by Unitel, noting that the Stentor companies would bear about 80% of the costs, while any benefits would accrue largely to Unitel in terms of increased market share. Stentor proposed that the costs be assigned to each service provider based on the total number of ballots on which the competitor´s name appeared.

D. Contribution Discounts for IXCs and Resellers

Unitel argued that contribution discounts for IXCs and resellers should be continued after balloting, because the telephone companies would remain dominant in the market. Accordingly, the original rationale for balloting, i.e., market dominance, would warrant that the discounts be continued. CBTA, CTA, and fONOROLA supported the continuation of contribution discounts. The Director stated that, in the short term, balloting was complementary to discounts.

NAPO stated that, if balloting was adopted, the need for discounts should be reviewed.

AGT, BCG and Stentor were in favour of eliminating contribution discounts if balloting took place. AGT further proposed that discounts be discontinued immediately, arguing that they are no longer justifiable with the introduction of equal access.

Stentor stated that balloting would cause a one-time reduction of 5% to 6% in the market shares of the Stentor companies, which would upset the tenuous fiscal balance established by the Commission and necessitate an increase in the entrants' contribution payments through the elimination of discounts (with the exception of discounts relating to line-side access where trunk-side access is not available).

Stentor also stated that, if the Commission undertakes a public education campaign, the schedule for contribution discounts should, at a minimum, be shortened.

E. Default Routing of Calls

Unitel noted that the telephone companies route all long distance traffic originated by a local telephone subscriber over their own long distance networks, except where the subscriber has specifically taken action to ensure otherwise. According to Unitel, in so doing, the telephone companies are granting themselves an undue preference, contrary to subsection 27(2) of the Telecommunications Act (the Act).

Stentor argued that there is no undue preference in the default routing of calls when the alleged preference is the direct result of the telephone companies' compliance with directions from the Commission. Further, any preference that may result from the situation described by Unitel has been addressed by the Commission through a variety of safeguards and other remedies, including contribution discounts and requirements for the telephone companies to (1) implement equal access, (2) provide carrier billing and collection services, (3) disclose the existence of competitors (if, in the provision of access service, they actively promote their own long distance services), and (4) provide reports to carriers, on request, regarding customers who install, move or change access service.

III CONCLUSIONS

Unitel requested that the Commission conduct a ballot in order to overcome two barriers to competition. One of those barriers, in Unitel's view, is inertia in the long distance market. According to Unitel, the source of this inertia is the information barrier that exists for many subscribers in terms of their knowledge and understanding of the availability of competitive alternatives.

The Commission recognizes that competitors in the long distance market may encounter customer inertia. However, the Commission agrees with Stentor that inertia is a feature of many markets, including competitive markets; further, it is primarily the responsibility of new entrants to overcome problems such as customer inertia due to a lack of information. The Commission notes that entrants in telecommunications markets have addressed some of these problems through marketing techniques that make it relatively easy for consumers to switch to another long distance service provider (for example, newspaper and magazine advertisements containing a mail-in tear-out, 1-800 telephone numbers, affinity plans and telemarketing).

The Commission notes that the evidence presented in this proceeding, including quantitative evidence obtained through market surveys supplied by Unitel, indicates that consumer awareness of competitive alternatives in the telecommunications market, as well as of particular competitors such as Unitel, is quite high.

Further, since the present proceeding was initiated and since the surveys were conducted on behalf of Unitel, there have been significant developments that have improved customer awareness by informing consumers as to the availability of competitors, the means of selecting a competing long distance service provider and the consequences of switching service provider. In Equal Access - Marketing Information, Telecom Decision CRTC 94-17, 24 August 1994 (Decision 94-17), the Commission required the telephone companies to send to subscribers a billing insert drafted by the Commission containing information on the existence of long distance competition and the process and consequences of switching to an alternative long distance supplier. As well, the Stentor companies distributed their own billing inserts informing subscribers of equal access and long distance competition.

The Commission agrees with Unitel that balloting may have played an important role in the achievement of a competitive long distance market in Australia. However, the Commission notes that circumstances prevalent in Canada today with respect to competition in telecommunications markets are substantially different from those in Australia when balloting was introduced there in 1992. As noted by Stentor and AGT, competition, including resale, was essentially non-existent in the Australian telecommunications market prior to the introduction of the ballot. In Canada, however, resellers have been active in the long distance voice market since 1990, and a large number are in operation today. Also, equal access ("1+" dialing) will be available to 95% of all access lines in Canada by July 1995, in contrast to Australia´s five-year equal access implementation plan.

Moreover, the very concept of competition in long distance telecommunications services was unfamiliar to Australians. By contrast, Canadians have been exposed to the concept through advertising in the American media since the implementation of long distance competition in the United States in the 1980s.

The Commission considers that what the ballot achieved in Australia in terms of introducing competition has already largely been achieved in Canada, without a ballot. In particular, the market share held by competitors in those areas of Canada where competition exists is, on average, comparable to the market share achieved by the competitor, as a result of the ballot, in major Australian urban centres.

As a second impediment to entry and to competition, Unitel cited the practice of the telephone companies of routing all long distance traffic originated by a local subscriber over their own long distance networks, except where the subscriber has specifically taken action to specify otherwise. Unitel submitted that, in doing so, the telephone companies are granting themselves an undue preference, contrary to subsection 27(2) of the Act.

In Decision 92-12, the Commission recognized that the respondent telephone companies had a market advantage over all competitors in the long distance market, both as a result of their control of the local network and as a result of their historically dominant positions. Accordingly, the Commission considered it appropriate to grant contribution discounts to entrants, phasing out those discounts as competitors captured greater market share.

Further, as noted by Stentor, the Commission also introduced other requirements intended to address the advantages accruing to the telephone companies as a result of, among other things, their position as providers of both local and long distance service.

In light of all of the above, the Commission is not persuaded that the expected benefits of conducting a ballot, in particular the potential reduction in customer inertia, would be realized to a degree that would warrant the associated costs. Accordingly, the Commission denies Unitel's application.

Various parties suggested that the Commission conduct a public education campaign, in the event that it determined not to order a ballot. The Commission finds that the use of billing inserts and the extensive media coverage and advertising of alternate long distance service providers have addressed many of the concerns that would be addressed by a public education campaign. In view of this, the Commission considers that it is not necessary to conduct a public education campaign at this time.

Allan J. Darling
Secretary General