Telecommunications Service in Canada: An Industry Overview

Section 3:  Traditional Communications Services

3.0 Traditional Communications Services

The following provides a detailed description of the market segments within the communications service industries, focussing on wireline local services, domestic and international long distance, and broadcast distribution services. In addition, it examines the major participants in the wireline and broadcast distribution market segments and historical revenue trends for the sectors as a whole.

3.1 Wireline Local Services

The wireline local service segment of the telecommunications market is largely made up of revenues generated from providing households and businesses with access to the Public Switched Telephone Network (PSTN). (Footnote 1) Most of the wireline local service market is controlled by the ILECs (Incumbent Local Exchange Carriers) listed in Figure 3.1-1, in Appendix B, Table B-2, and on the CRTC Web site at http://www.crtc.gc.ca/ENG/public/Iplists/independent.htm.

Figure 3.1-1

Local Exchange Carriers

Aliant Communications provides local wireline services in the Maritime provinces and Newfoundland. Bell Canada provides these services in both Ontario and Quebec. TELUS provides local services in British Columbia, Alberta and parts of Quebec. Northwestel provides these services in the Northwest Territories, Nunavut, the Yukon Territory and parts of northern British Columbia.

Since 2000, increased efforts have been made by TELUS to enter into BCE's traditional wireline operating area through several acquisitions. With the purchases of Metromedia Fiber Network Services, QuébecTel, the Quebec assets of Axxent, as well as Williams Communications and PSINet's Canadian operations and facilities, TELUS has rapidly strengthened its position in eastern Canada. Likewise, Bell Canada has captured business customers in traditional TELUS operating territory in Western Canada through its ownership in Bell West, a Competitive Local Exchange Carrier (CLEC) providing fibre-based data and Internet Protocol (IP) services, as well as local and long distance voice services to businesses. Bell Canada augmented its presence in the west when Bell West announced in October 2002 the expansion of telecommunications services to businesses in 10 additional communities in Alberta and British Columbia. More recently, Bell West, in partnership with the Government of Alberta, completed its investment in a high-capacity connection between Calgary and Edmonton in October 2003, Calgary and Medicine Hat in February 2004, and Edmonton and Grand Prairie in May 2004, for Alberta SuperNet.

There are also 41 registered independent telephone companies that provide local and long-distance telephone services to specific rural communities. There are currently 15 independent companies in Quebec, 25 in Ontario, and one in Prince Rupert, British Colombia (See the CRTC Web site). While most of these independent telephone companies were initially established as municipally-owned utilities, some of them are now privately owned or operated as customer cooperatives.

Competition in local telephone service was approved in 1997. In order to provide facilities-based services in the local telephone service market, companies other than the ILECs must register with the CRTC as Competitive Local Exchange Carriers on a local exchange basis. (Footnote 2) In 1998, there were an estimated 30 registered CLECs; at the end of 2003, there were 15 companies registered with the CRTC as CLECs, and an additional 15 companies who had registered their intention to become CLECs, in approximately 164 local exchanges. (Footnote 3) Of these exchanges, many are still in the planning stage, in that competition has not yet been implemented or an actual implementation date has not yet been set. To date, competition exists primarily in urban cores serving high-traffic business customers and high-density urban residential developments (Appendix B, Tables B-3 and B-4).

One of the first CLECs to rollout local service was MetroNet Communications Group Inc., which has become part of what is now Allstream Inc. (formerly AT&T Canada). It began providing local service in Calgary, Montréal, Toronto and Vancouver in December 1997. As of December 2003, Allstream's local telephone operations had expanded into 16 local exchanges in the markets of Bell Canada, TELUS and Aliant. Since this early entrant, other CLECs have started to provide local telephone service. For example, EastLink Telephone competes in 36 local exchanges in Atlantic Canada and Call-Net Enterprises Inc. operates as a CLEC in 24 exchanges in urban centres across the country. In addition to these telecommunications wireline entrants, wireless providers (i.e. Microcell) have registered as CLECs, primarily to be eligible for number portability and the portable contribution (Table 3.1-1 and Appendix B, Table B-3).

Competing in the local services market as a CLEC has been financially difficult, which has led a number of the larger CLECs to recently undergo restructuring. Call-Net Enterprises underwent a recapitalization which was completed in April 2002 when the company's debt holders exchanged $2.6 billion of Call-Net's debt for 80  percent equity in the company. GT Group Telecom found itself in a similar situation in June 2002, as it entered into bankruptcy protection in order to restructure its business operations and capital structure. Group Telecom completed its restructuring and emerged from bankruptcy protection in early 2003, after being acquired by 360networks during the restructuring process. In April 2003, AT&T Canada completed its financial restructuring when $4.5 billion in publically held debt was exchanged for approximately $233 million in cash and 100  percent of the company's equity; two months later, AT&T Canada re-branded itself as Allstream Inc. The financial troubles for the CLECs have also forced many of the smaller companies to cease operations altogether. In recent years, some of the CLECs that have exited the industry include: Cannect Communications; C1 Communication Inc.; Axxent Corp; Norigen Communications; and Gateway Telephone.

In addition, there have recently been several significant acquisitions involving CLECs. As previously mentioned, 360networks announced its acquisition of GT Group Telecom, for approximately $250 million in cash, in February 2003. Subsequently in May 2004, the Canadian assets of 360networks, including GT Group Telecom, were acquired by Bell Canada for $275 million. In a related deal, Call-Net entered into an agreement with Bell Canada to acquire certain assets of 360networks including significant portions of its business customer base and network facilities in Ontario, Quebec and Atlantic Canada. In exchange, Bell will be paid approximately 70 per cent of the total retail revenue and provide technical and operational support services for a two-year transitional period. Finally, MTS announced the acquisition of Allstream for $1.7 billion in March 2004.

Voice over Internet Protocol

Canadian communications services suppliers have recently begun offering local and long distance services using Voice over Internet Protocol (VoIP) as a means for transmitting telephone calls. VoIP operates over a broadband Internet or private network, which may be accessed through a phone line, cable, hydro line, or wireless connection, by transforming the voice into packets of data that are compressed and transmitted across the network. Internet Protocol technology allows for a more efficient, lower-cost means of transmitting all types of electronic communication, including voice, data and video, on a single, converged network, replacing the older circuit-switched technology upon which the traditional telephone network was built. This technology enables traditional telecommunications service providers, cable providers, and Internet Service Providers (ISPs) to now offer one another's core services, which was until now economically unfeasible due to the high costs of replicating the networks. As a result, the distinctions between telcos, cablecos, and ISPs are becoming increasingly blurred.

New entrants have sought to capitalize on the growth opportunity of VoIP. Vonage Holdings launched local and long distance phone service using VoIP in April 2004, in partnership with 360networks. AOL Canada, another recent entrant into the Canadian voice communications market, announced in January 2004 its plan to offer commercial VoIP services over the high-speed Internet connection of any carrier by mid-year 2004.

A number of established Canadian telecommunications service providers have entered the local voice market through the use of VoIP technology. Early in 2004, Primus Communications, a long distance reseller, started offering local phone service to residential and business customers in Canada while another reseller, Yak Communications, began offering VoIP local service in the fall of 2004. Several Canadian CLECs have also introduced VoIP local telephone services as an efficient means of expanding their operations. Call-Net Enterprises launched VoIP service for residential consumers in July 2004. Likewise, Navigata Communications, a CLEC owned by SaskTel, introduced IP telephone service in eight cities in British Columbia and Alberta in 2004 with the intention of further expanding the service.

Cable companies have also registered to provide local service via Internet Protocol in specific regions of the country. Shaw Communications, a cable and satellite television company, is expecting to break into the Internet telephony market in early 2005. Similarly, in February 2004, Rogers Communications announced that it is expecting to provide full-service local telephone services over its cable network by mid-2005. After delays in launching its IP telephone service, Cogeco Cable Inc. wrote off its investment in the project during 2001, citing as the cause an unforeseen level of effort required for successful implementation. It has recently announced a new testing period to launch its IP telephony service in 2005. Vidéotron Ltée has also begun reviews of the VoIP opportunity, planning to launch residential service in Quebec in mid-2005. Currently, EastLink Telephone (Footnote 4) is the only Canadian cable company to offer telephone services over a traditional telephone network and does not use VoIP technology.

3.1.2 Local Wireline Revenues

Figure 3.1-2 displays wireline local service revenues between 1993 and 2003. (Footnote 5) Starting from 1997, there was a slight upward trend in wireline local service revenues which peaked in 2001, and have declined other the last two years. In 2003, revenue was down slightly at $6.8 billion, compared to $6.9 billion in the prior year.

Figure 3.1-2

The $6.8 billion in wireline local service revenues in 2003 were almost entirely attributable to the ILECs. The three largest ILECs (i.e. Bell, TELUS and Aliant) accounted for 90  percent of the local wireline revenue. The remaining approximately 10  percent was divided between the other ILECs (7.6  percent) and the CLECs (2.7  percent) (Figure 3.1-3). The local market shares were quite stable over the course of 2003, as only the CLECs witnessed an insignificant decline in their share of local revenues of less than one  percent.

Figure 3.1-3

3.1.3 Wireline Access Types

Wireline access lines consist mainly of individual telephone lines, party lines, Integrated Service Digital Network (ISDN), Centrex, official lines and public pay phones. At the end of 2003, residential wireline access lines accounted for 63.4  percent, or 12.7 million, of the total 20 million wireline access lines. Wireline access by businesses accounted for the remaining 36.6 percent, or 7.3 million lines (Table 3.1-2, Appendix C, Table C-1).

By the end of 2003, individual business lines represented only 38  percent of the total business access lines. The remaining 62  percent was made up of Centrex (34  percent), ISDN (11  percent), public phones (2.2  percent), official lines (5.8  percent) and other (9.4  percent) (Table 3.1-2).

Wireline Access Lines

The number of access lines for both the residential and business segments peaked in 2001, with 12.9 million and 7.7 million lines respectively; by year-end 2003, the numbers decreased to 12.7 million residential and 7.3 million business lines. In total, wireline access lines equalled 20 million in 2003, an increase of 16  percent since 1994, but a 1.3  percent decrease from the end of 2002 (Figure 3.1-4, Appendix C, Table C-1).

Figure 3.1-4

Of the 12.7 million residential access lines at the end of 2003, 12.4 million were individual lines, a decrease of 0.75  percent when compared to the end of 2002. The number of residential party lines and residential ISDN lines also decreased by 12  percent and 25  percent respectively during this period. The substitution of wireline services for wireless technology and the migration from dial-up to high-speed Internet access, thereby reducing the demand for second telephone lines, have contributed to the slight decline in individual residential access lines.

Business access lines faced a similar decline in 2003; compared to the end of 2002, the total number of business access lines decreased by 2.0  percent. Over this period, there was a drop in all but one business wireline segment (i.e. official lines), with significant declines in individual lines (2.3  percent), party lines (13  percent), ISDN (1.6  percent), public phones (3.6  percent), and Centrex (2.9  percent).

Over the previous six years, the Incumbent Local Exchange Carriers (ILECs) continued to retain most of the local access market. Bell Canada had 58 percent (11.6 million) of the total number of residential and business access lines at year-end 2003. TELUS secured 24  percent (4.9 million) of the wireline access lines while Aliant had 7.5  percent (1.5 million). The remaining ILECs, which include Manitoba Telecom Services and SaskTel, had 6.6 percent (1.3 million) of the total. Since the introduction of local competition in 1997, the CLECs share of the local access lines has been meagre, growing to 4.2 percent (0.85 million) by the end of 2003 (Figure 3.1-5).

Figure 3.1-5

Footnotes

1. A Public Switched Telephone Network (PSTN) individual access line, as defined by Statistics Canada, is a subscriber line arranged to serve one main telephone. This includes PBX (private branch exchange) lines for businesses that have corresponding dedicated ports in the telephone exchange equipment.

2. The framework for local competition was set up in the CRTC's Telecom Decision CRTC 97-8, Local Competition, May 1, 1997. See http://www.crtc.gc.ca/archive/ENG/Decisions/1997/DT97-8.HTM.

3.Competitive Local Exchange Carriers with financial difficulty in the last three years include Allstream (formerly AT&T Canada), Call-Net Enterprises, GT Group Telecom, Gateway Telephone, Axxent, Norigen, Cannect, C1 Communication Inc. (i.e. C1.com), Westcomm Inc., ESP Media, Elink Communications, and Riptide Communications. See the CRTC Web site for current information on CLECs at:
http://www.crtc.gc.ca/eng/public/8180-8.htm.

4. For information on EastLink's operating markets see Appendix B, Table B-3.

5. The drop in local service revenues between 1996 and 1997 was due to a redesign of the Statistics Canada survey resulting in more detailed responses as to what constitutes wireline local service revenues.

6. Voice grade equivalents (VGE) have been used increasingly to reflect the different carrying capacities of different access paths. For example, a single ISDN line, can carry the same amount of voice traffic as 23 individual voice lines.