TORONTO (djc) – Canada is sitting on a digital gold mine. Trouble is, we don’t know it. And if history is any guide, we probably won’t until it’s too late.
The gold mine is broadband. Or, more precisely, the happy reception broadband has enjoyed in Canada. The country ranks second only to South Korea in high-speed Internet penetration. Proportionally, twice as many Canadians have broadband than Americans, who are eighth on the list. That’s an advantage, and we’ve had it for almost two years now, but we just haven’t done much with it.
Broadband is what the Internet is supposed to be all about. It may not seem so, at least not in a world ruled by little more than Web browsing, email and instant messaging. These are low-level services. Internet service providers, many industry studies have shown, are barely earning a profit offering them. They want to offer more — much more.
The real stuff — television, video on demand, real-time video conferencing, massive archives of entertainment and information, all supported by multimedia advertising — can be accomplished only with broadband. And not the same broadband that chuffs along at 750 kilobits or one megabit per second; the real vision starts with connections of 1.5 Mbps and goes higher from there.
The current economic slump has cast a pall of forgetfulness on the dreams we once had for the Internet. Visionaries who once stood on every street corner evangelizing the New Technology have been co-opted into trying to identify the gadgets that might reboot the economy. Dreamy engineers, no longer working in a financial climate that promises handsome rewards for unpaid months of labour in their parents’ garages, are now on the payroll of companies that tell them what to think. And companies that fancy themselves as innovators are retreating timidly as their desperate competitors start lashing out with lawsuits to make up for shortfalls in their bottom line.
If there’s one thing we learned since the economy nose-dived in 2001, it’s that a clear vision of the future is much easier to have when the economy is booming. Take away the cash and suddenly the dreamers are ousted and replaced by purse-lipped puritans chanting the single-minded mantra of restraint, cutbacks, layoffs and outsourcing, all dampers on the economy.
The economy was doing just great — well, okay, it was overheating, but it didn’t look so bad from inside the bubble — when America Online (AOL) founder Steve Case engineered the blockbuster merger with Time Warner Inc. His vision was that AOL’s Internet expertise would help push Time Warner’s fabulous content, both current and archived, through its cable interests. At the same time in Canada, the acting Industry Minister John Manley had a different vision: Every corner of the country, particularly Northern and wilderness communities, would be connected by high-speed satellite connections. He called his proposal the National Broadband Initiative.
Both visions were similar in one major respect: Both were based on the concept of a far-reaching broadband network. Sure, each idea was typical of the country that gave birth to it — the American one voluptuously profit-oriented and the Canadian one primly moral in its social consciousness. Both AOL Time Warner and the Canadian government imagined a super-fast communications network that would stitch each country together and create handsome profits.
The visions, however, dissipated with the financial speculators. Technology, its value over-inflated by a greedy investment community, collapsed like a punctured lung in 2001 and it left AOL Time Warner gasping for air; in 2002, the company coughed up a $100-billion (US) loss, the largest in American corporate history. AOL Time Warner found itself carrying an outrageous debt load based on boom-time repayment schedules while running into dwindling investor confidence. North of the border, cable and digital subscriber line (DSL) operators were content to tend to their urban subscriber bases and remained silent as the public, blanching at Mr. Manley’s $6-billion price tag, eviscerated the Broadband Initiative.
The dreams were grand and realistic, but began to appear like fantasies as ruthless corporations started shedding everything that did not fit their “core business.” Soon, “convergence” turned into a dirty word.
But the dream of broadband did not go away. Its subscriber base crept upward in the United States, but it jumped in Canada. The reasons for this difference are very important — more on this later — but as Canadians embraced broadband, the country created a unique opportunity for itself, one we have so far proved remarkably hesitant to take.
At the lowest level, Americans and Canadians share the same limited image of broadband. In the United States, broadband has been seen as unnecessary; dial-up modems are able to deliver everything Americans imagine wanting, if they imagine the Internet to be only email, browsing and instant messaging. They are not convinced that the high cost of broadband (often as much as three to four times what they pay for dial-up access) would deliver sufficiently more quality content to justify its cost.
Canadians dismissed the Broadband Initiative as a political pipe dream at best and at worst, a cheap Liberal Party vote-grubbing ploy that would bring nothing more than copyright piracy, pornography and the pointless consumerism of eBay to economically disadvantaged communities in the North.
But if technology depends on the stock market for its growth, it doesn’t need the New York Stock Exchange or NASDAQ to create dreams. The stock market’s downward spiral had more to do with dashing the expectations of instant wealth among people who were uninterested in technology in the first place than it did with a flawed view of what technology could (or should) do. And the near-death experience of the National Broadband Initiative had more to do with the public’s sinking political romance with Prime Minister Jean Chrétien and his handpicked but doomed successor, John Manley, than it did with what Manley believed broadband could deliver.
The idea of what high-speed Internet could deliver to the subscriber and to the economy as a whole is still an idea that is waiting to be born. Broadband not only offers the ability to sell recycled TV, film and journalism on demand, but also to create new revenue streams and develop new channels of communication in the industrial and social worlds.
New revenue streams are necessary — traditional TV production is becoming too fabulously expensive at a time when its audience is shrinking, fragmented by a growing list of specialty channels. The resulting pressure to keep costs down while increasing ratings has dispirited producers of mainstream entertainment, who have turned to the only programming they can imagine that is cheap to produce and can still attract a mass market: reality television.
The desperation of the television industry is leading to increased pressure on broadband. It is no longer possible to produce profitable TV programming in the traditional model, which is mainly done by selling a few expensive independent productions to the networks; it is also impossible to exploit the small regional markets belonging to individual TV stations. The American TV industry is also chafing at the constraints of a sagging economy, increasingly expensive production budgets and tight controls over what the TV stations can own within a given constrictive geographical boundary as defined by regulators at the U.S. Federal Communications Commission (FCC).
In the largely mercenary American view, which sees its future filled with corporate takeovers, the answer is to create a monolith that not only produces movies, television and journalism, but also controls the wires through which these things can be pushed.
That’s where Case and the Time Warner people came in. They all had the same problems, and saw salvation in a merger.
Traditionally, American society has wavered between worshipping corporate giants like Roman emperors and an almost barbarian lust to dismantle their empires; this conflicted attitude reached its peak in the perception of Microsoft Corp., whose wealthy owners are not admired but vilified. To avoid similar criticism, much of the U.S. industry has been forced to create new euphemisms to describe what they’re doing — notably “synergy,” which is another way of describing a good corporate fit, and “convergence,” which suggests a coherence emerging from various corporate takeovers.
But it all adds up to what was once called “monopoly.”
The granddaddy of converged media conglomerates was Hollywood, where studios at one time owned not only the films and the stars (who were bound by contracts, like major-league ball players), but also the distribution networks and the exhibitors, meaning theatres. This kind of top-to-bottom control was regarded as unacceptable, and in 1948, the U.S. Congress passed a law that forced major studios to divest themselves of one of their industries. The studios chose to shed their interests in the theatres themselves, knowing that if they still controlled production and distribution, then theatre owners would fall into line quickly enough and little would really change.
The Time Warner octopus is even more sophisticated than the old Hollywood system. Even before AOL came on the scene, Time Warner’s empire was based on a complex series of interconnected interests that promote and feed into each other.
Time Warner could, for instance, tear the headlines out of its own journalism (Time, Life) and turn the stories over to its book-publishing interests (Little, Brown and Co., Oxmoor House), which then make them into best-sellers that could in turn be made into movies by their own movie studios (Warner Bros., Castle Rock Films) and shown in their own theatres (Warner owns Cineplex movie theatres in 12 countries) as well as over cable channels (Warner Television, HBO). The movies would be cross-promoted by the company’s celebrity-boosting magazines (People, Entertainment Weekly) and, if the soundtrack was any good, it could be packaged by its own record label (Warner Electra Asylum) and distributed by its own company (WEA Inc.).
With the addition of AOL, which at the time was swimming in cash, Time Warner could push the entire package along cable lines (Road Runner, owned by AOL in partnership with Microsoft Corp.), on major networks and stations (TBS Superstation, Turner Network Television, Cartoon Network), or even use more production companies to create other kinds of films (New Line Cinema, Turner Original Productions). The AOL Time Warner monolith was also crazy about sports, with three teams, all from Atlanta (baseball’s Braves, basketball’s Hawks and hockey’s Thrashers). These teams could be cross-promoted in AOL Time Warner’s own magazines (Sports Illustrated) and their games broadcast over Turner Network Television, which reaches as far as Canadian urban centres.
All this could then be merged with the mighty AOL Internet pipeline, which would use its digital expertise to deliver all of Time Warner’s current content as well as the stuff sitting in its vaults. At the time of the merger, businesspeople tended to regard the Internet as little more than a new medium, similar to cable and broadcast, but one that could also offer interactive features such as television on demand. With it, subscribers could decide to watch a certain episode of The Beverly Hillbillies or The Brady Bunch and see it within minutes; all they needed was an Internet account and a credit-card number.
This prospect was an elixir for media executives, who were spurred on in their efforts by the anti-regulatory sentiment sweeping the States, a sentiment whose wheels had been set in motion by former president Ronald Reagan in the early 1980s. Reagan’s economic outlook, dismissed as “Reaganomics” by those who objected to corporate giants, was based on the libertarian belief that removing government controls would unfetter companies, which could then accomplish greater things. It seemed to be only natural that much of this would be achieved by gobbling up smaller competitors, creating near-monopolistic media companies.
Meanwhile, the Canadian view of the Internet is, not surprisingly, a community service. The Broadband Initiative envisioned bringing such things as health and education to far-flung communities. Doctors could “see” patients over the Internet in real time, monitoring existing patients and diagnosing new cases, recommending treatment or a course of action to a local nurse. Teachers in the South could interact with students thousands of kilometres away, who would do their homework and submit it for correction without having to leave their communities.
The cost of implementing a national Internet is immense, yes, but the benefits of such an idea are much greater, and continue to increase after the initial capital outlay shrinks into an annual operating cost. Currently, when a member of a northern community falls seriously ill or is critically injured and there is no doctor available, the only option is expensive: an emergency airlift to a distant hospital, a process involving two round trips with a team of specialists. The ability to monitor and recommend treatment over a real-time two-way connection would cut down that expense dramatically. In addition, it could offer patients the priceless benefit of being near their families during treatment.
Education is currently one of the most devastating problems northern people face. Children must be educated or the communities will slide into hopelessness, and indeed most outposts have schools for kindergarten to Grade 7. But when northern children leave Grade 7, few prepare to go to high school like their southern cousins. Children play a critical role in northern survival, and their families are naturally reluctant to bid their 14-year-old kids goodbye for at least four years, and so most are never sent away to high school. Even if they do go, the children are at an age when parental guidance is crucial, and they spend those important years many thousands of kilometres away, cut off culturally and physically from the only world they know.
This is a modern variation on the old, reviled system of residential schools for native peoples. With it, the social fabric is rent and the results are all too familiar: dislocation and unhappiness manifested by lethargy, substance abuse and a shocking suicide rate. Educating children beyond grade school in their home communities would not only give them a high school education, but some would probably go on to college. The graduates would then present their communities with the hope that springs from intellectual challenge, and offer the kind of development that could be sustained by an educated community. The resulting cost to the taxpayer has not been quantified, but it does not take a degree in sociology to see that keeping families together would represent tax and healthcare savings much greater than the maintenance costs of a broadband connection.
But in both countries, the dream of broadband became a casualty on the information highway. Using the Internet for multimedia and real-time conferencing would work only if enough people subscribed to high-speed Internet access. The Canadian Broadband Initiative imagined just that; AOL Time Warner, a superpower among media conglomerates, would be powerful enough to change the landscape too.
However, there is one huge difference between the two. Canadians have welcomed broadband in much greater numbers than Americans. In March 2003, Internet marketing consultants at Nielsen/NetRatings found that 64 per cent of Canadian households that were connected to the Internet subscribed to broadband, more than twice the penetration into U.S. homes, where a scant 33.8 per cent enjoyed high-speed access.
That had been the story for some time. In 2000, Canada had a penetration rate of 24 per cent, compared to the U.S. rate of 8.1 per cent; by 2002, it was 49 per cent in Canada and 22.3 per cent in the U.S. In fact, Nielsen/NetRatings estimated that the Americans would have to wait until June 2004 before 50 per cent of its wired homes adopted broadband, a level Canadians surpassed in 2002.
Tellingly, many Americans are still clinging to slow-speed dial-up connections; more than 12 per cent of them still use modems running at 28.8 kilobits per second or 33.6 Kbps.
To understand the reason why is to delve into the technology that delivers the Internet, who owns that technology and how Americans regulate their media. Broadband over cable, for instance, has put much of the Internet into the hands of cable operators. Broadband over DSL has put most of the rest into the hands of telecommunications companies. In Canada, the two have been living in a reasonable state of peace, able to share large swaths of Canada’s urban markets. Thus they have been able to indulge in the classic free-market competitive practice of cutting prices, which spurred broadband after Bell Canada’s Sympatico service entered a price war with the major cable operators (Rogers, Shaw, Vidéotron).
Not so in the United States.
There, federal legislation and FCC regulations limit media and telecom monopolies much more severely. The mechanism that controlled the media was designed almost exclusively to foster competition, and sought to do so by governing such things as cross-ownership between television stations, newspapers and radio stations. The limitations had more to do with geographic regions (the traditional means of control, based on the physical reach of TV and radio signals and the delivery of newspapers). The official motivation behind the regulations was a desire to maintain a diversity of voices informing Americans; a region dominated by one company with too many cross-interests in television, radio and newspapers would present the audience with too few perspectives.
But the policy backfired. Rather than offering a variety of viewpoints, Americans got USA Today and the Fox TV network, hardly shining examples of diversified voices or intelligent social discourse. Moreover, as production costs were going up, television found itself with less revenue and nowhere to expand. And when the telecommunications sector had been split up in the early 1980s, regulators broke AT&T Corp.’s grip on the industry and spun off a number of smaller regional telcos called “Baby Bells.”
The Internet changed all that.
The technology of the Internet put an enormous opportunity before cable and television interests as well as the phone companies. The Internet created a “convergence” for cable operators, who had seen their future as little more than delivering specialty channels to residential customers. And the telcos, which had never offered much more than phone calls, suddenly found themselves able to deliver TV signals. Both quickly began competing for the Internet market, and for other markets made possible by the new technologies, notably cellular and digital telephones.
The sudden expansion of these industries, together with a long series of corporate takeovers, resulted in conglomerates competing not only with Internet service, but phone service and TV service as well; some had other media interests, such as radio and newspapers. And that made broadband subject to the FCC laws governing ownership, which sought primarily to define ownership limits by instituting geographical boundaries, like they had with signal strength and advertiser reach.
The same is happening in Canada: Rogers Communications, the country’s largest cable operator, delivers not only television and the Internet, it also has radio stations (680 News in Toronto), a string of publications (the old Maclean-Hunter empire) and the Rogers AT&T cellular phone system. And Bell Canada, once just a telco, has expanded to own the CTV television network, The Globe and Mail, the Sympatico Internet service and ExpressVu, its satellite-TV service.
But while cable and DSL interests compete for the same regional markets in Canada with reasonable comfort, their American cousins have been doing just the opposite. Limited by regional ownership rules, small operators found it unprofitable to enter markets where a competitor had already staked out a business and signed up a significant number of subscribers. As a result, U.S. customers often find themselves with only one provider offering broadband service, without even a choice between DSL or cable, and the monopolistic nature of that service allows the provider to charge rates that range from 50 per cent higher to twice the Canadian rates.
No wonder Americans are not embracing broadband. And, to complete the circle, no wonder American Internet broadband providers are offering little more than email, browsing and instant messaging. So what’s the point of having broadband?
The fragmentation of the market is, ultimately, what is fuelling the current desire to change the FCC’s ownership rules, which are rapidly becoming obsolete as new technologies change the communications and media landscape. FCC chairman Michael Powell agreed, saying the United States needs “modern rules that take into account the explosion of new media outfits.” The push for change was led by AOL Time Warner Inc., Viacom Inc. (including CBS, Blockbuster, Paramount), Walt Disney Co., News Corp. (including Fox, Fox News, TV Guide, the New York Post) and General Electric’s NBC unit, which collectively control the lion’s share of U.S. media sources. These corporations together have spent $24.6 million (US) in lobbying for the changes. The TV networks have bluntly stated that they are motivated by the arrival of the Internet and other technologies. Newspapers are increasingly developing online presences. And both are beginning to believe that they should own the Internet service providers as well.
But public discourse has instead focused on the issue of diversity among media voices, which resulted in a blow to the proposed FCC changes when, in July, the U.S. Congress shot down the proposed relaxation of the ownership rules of TV stations, and threatened to stop other parts of the FCC’s proposal. A deregulated media industry would see a series of mergers, critics said, in which larger media would gobble up the smaller ones. This may indeed be true, but that’s not the fundamental reason behind deregulation; the priority is to gobble up Internet access providers, who can barely make a living offering bare-bones services, and use them to push multimedia and other bandwidth-hungry goodies at their markets, which can become large enough only with relaxed geographical limitations.
With Congress casting its gimlet eye on the FCC and voting down its more important changes, the future for broadband has not improved much. Expected to reach only 50 per cent of connected U.S. homes by mid-2004, broadband still won’t have the penetration to warrant a rollout of major multimedia and interactive services.
Canada’s relatively higher penetration rate puts the country in a position to blaze a trail of content over high-speed service. It’s happening already, but it’s a painfully slow process.
For example, in a little-publicized announcement at the end of 2002, Bell tested out new technology that allowed only Sympatico subscribers to see certain content. Sympatico taped an Alanis Morissette concert, held in Toronto’s Air Canada Centre, and rebroadcast it a few days later to a limited number of subscribers. The experiment was a wild success, Sympatico reported; more “targeted” events will be planned in the future. The idea here is to offer something customers simply cannot get from the competition.
And in July, Sympatico quietly dropped its bandwidth caps — limits placed on how much subscribers could upload and download each month — when it announced a major deal with the Microsoft Network. Terms of the deal mean Sympatico would give Microsoft the technology and infrastructure for an MSN portal, which would deliver to its subscribers a wealth of multimedia content, which of course requires major bandwidth.
There are other signs that Canadian media companies have kept the faith in convergence too. Three of the top four professional sports teams in Toronto subtly changed hands over the past three years, all falling into the hands of media companies. In 2000, Rogers Communications bought baseball’s Toronto Blue Jays from Interbrew, a Belgian beer maker with no interest in convergence; the Belgians had become reluctant baseball tycoons after buying the Jays’ original owner, Labatt Breweries of Canada, which saw baseball as a way to sell beer. And in early 2003, grocery tycoon Steve Stavros sold his controlling interest in Maple Leaf Sports and Entertainment Ltd., owners of hockey’s Maple Leafs and basketball’s Raptors, to billionaire Ken Thomson, part-owner (with Bell Canada) of Bell Globemedia, including the CTV television network, The Globe and Mail, a bunch of cable-TV channels (including The Sports Network) and a number of Internet interests.
These moves suggest both Rogers and Bell Globemedia see sports as an integral part of their core media businesses. And both suggest these companies will use sports to capitalize on their remarkable broadband access to so many Canadians. In fact, Rogers Communications has already started offering subscribers a package called Super Sports Pak, which offers an enormous number of baseball games, most of them played well outside Rogers’ reach.
The presence of Microsoft on this stage is telling. Like Rogers and Bell Globemedia, the giant of Redmond, Washington has seen the opportunity presented by Canada’s remarkable broadband penetration rate.
But the moves of three companies (two Canadian and one American) do not constitute an industry. A lot of other companies will have to embrace the promise of broadband and start developing content for it.
The opportunity for Canadians to get a step ahead in this game is here. The question now is whether there is also a will to take up the challenge.
Paradise Lost: Convergence Denied
- 1. Broadcast networks may own TV stations that reach 45 per cent of the national audience, up from the previous limit of 35 per cent.
- 2. In most cases, a company may now own both a newspaper and a radio station in the same area.
- 3. Media mergers must still be approved by the FCC and the U.S. Justice Department.
- 4. In large markets, a company could own up to three stations and one newspaper; earlier rules prevented companies from owning broadcast and print organizations in the same market.
- 5. Some consolidation would be allowed in small and mid-size markets, as long as there are six other competitors. The earlier rules stated that companies could own only two stations in one market if they are not large stations, and there are eight other competitors.
What the FCC Proposed
On June 2, the five-member Federal Communications Commission (FCC) introduced a series of measures designed to loosen some of the regulations covering how the media operates, as laid down by the 1996 U.S. Telecommunications Act. In a 3-2 vote split along party lines, the Republican-controlled FCC recommended:
- 1. One company is prevented from owning two of the top four television broadcast networks.
- 2. The number of radio stations a company may own in a single market is still limited. For large markets, the limit is eight.
Rules that remain unchanged:
Bandwidth Hogs
The competitive frenzy between Bell Sympatico’s DSL service and the cable companies demonstrated that it is uneconomical for highly competitive companies to be profitable offering only email, browsing and instant messaging over high-speed connections. Rather than admit this, a senior Rogers Communications executive tried to explain his company’s limitations on service by blaming Rogers’ own customers who, he said, were “misusing” their connections by logging on to peer-to-peer networks such as Kazaa. He called them “bandwidth hogs.”
But users of peer-to-peer (P2P) networks refused to believe the criticism, dismissing it as self-serving. They added up the number of megabytes they downloaded from Kazaa and couldn’t understand why they were being called hogs. To blow a bit cap of 5GB, as Sympatico initially imposed, P2P aficionados calculated they would have to download more than 1,200 songs in a month before reaching their limit.
Not so, said Sandvine Inc., a Toronto-area maker of Internet network equipment and author of a study on how P2P networks operate.
Sandvine calculated that to maintain a P2P connection, there must be constant and extensive traffic between the user’s computer and the network, whether the user is downloading anything or not.
First, the user’s computer must keep sending out “I’m here” signals to the Kazaa network to ensure that other users’ software knows where to look for the songs they want.
Next, the user’s computer must be open to searches of its own shared files — even if there aren’t any. Millions of users log on to Kazaa and all of them are searching for files; every computer is then searched many times, involving a tremendous amount of traffic.
In short, Sandvine said, as much as 60 per cent of Internet traffic is taken up by peer-to-peer activity.
- 1. Laying new fibre to homes is costly and offers no promise of profit. An AT&T study shows that for a new optical cable to be laid in a residential community, 50 per cent of that community would have to subscribe at a price of $112 (US) a month before AT&T could break even. A business case for optical fibre for residential use could work, AT&T concluded, “only in niche markets or monopoly situations.”
- 2. FCC regulations are forcing the large regional Bell companies to share pieces of their networks with competitors. One industry insider expressed it this way: “The most serious problem is, how do you build a business model when, as soon as you’ve developed it, somebody else has the right to come in and take it away.”
- 3. A lack of packaged applications and content, such as applications that deliver e-learning and telemedicine, is keeping people ignorant of what broadband can offer.
- 4. A lingering perception that it is difficult to connect to broadband seems to have put off many potential U.S. subscribers, despite considerable evidence to the contrary.
- 5. There are too many competing technologies. Not only do cable and DSL providers compete for regional markets, other players are trying to move in too, including those selling satellite connections, as well as those promising Internet along hydroelectric power lines, a 20 Mbps technology called PowerWiFi due for rollout soon by a company called Amperion.
- 6. The low number of multi-tenant unit (MTU) buildings (or apartment buildings) in the United States is forcing broadband operators to lay more expensive new cable than is required in Asia. A paper published by the WAN research group says that a high proportion of MTUs, as is found in South Korea, explains the large number of subscribers; more Americans live in suburban houses, a situation that forces cable operators to put more wire into a community. The paper compares the United States with South Korea only, and does not explain how Canada, with its low number of MTU buildings, made it to second place after South Korea.
Why the U.S. Lags in Broadband
The failure to roll out broadband has resulted in a lot of finger-pointing. Industry representatives have tried to explain why. Their complaints:
