William Catucci, President and CEO, AT and T Canada Long Distance Services
BRINGING THE BENEFITS OF COMPETITION TO CANADIANS
Chairman: Julie Hannaford, President, The Empire Club of Canada
Head Table Guests
Paul Scargall, Partner, Borden & Elliot and a Director, The Empire Club of Canada; George Karidis, Associate Director, Yankee Group of Canada; The Hon. Barbara McDougall, Sharwood and Company; Ann Curran, President, Curran & Associates, Principal, Lewis Companies and a Director, The Empire Club of Canada; The Rev. Linda Nichols, Rector, Holy Trinity Thornhill; and Albert Wahbe, Executive Vice-President, Operations, The Bank of Nova Scotia.
Introduction by Julie Hannaford
It was a Canadian, Marshall McLuhan, who coined the phrase "the medium is the message," thus placing Canada at the vanguard of the most critical debate affecting our culture for the century. The notion that the way in which we communicate dictates the substance of what we communicate is now an accepted fact, and we do well to remember that in many ways, it was a Canadian who shaped that message.
Perhaps the best explanation for Canadian interest in and leadership of communications issues may be found in the beginnings of the telecommunications industry in Canada. While most Canadians are familiar with the CRTC, and with what it does, fewer people are aware of the rationale behind the CRTC's development approximately 90 years ago. The CRTC developed out of a belief that telecommunications services ought to be available to the entire Canadian public at the lowest possible cost. Regardless of location, Canadians were seen as entitled to receive basic telephone service.
But regulation of the Canadian telecommunications industry was thus faced with some significant challenges. First, the delivery of telecommunication services was confronted with the challenge of Canadian geography.
The Canadian Shield, for the telecom industry, was a graphic illustration of the barriers that faced telcos in delivering universal service. Conquering the Canadian Shield to universal service cost money and investment came with a price of its own. And so, that challenge to universal service delivery was resolved in part by the granting of a monopoly.
In its beginnings, Canadians became the recipients of a telephone and telecommunications service which few countries could match. But such universality and guaranteed service delivery came with a price. That price, put in its simplest and most domestic terms, came in the form of the monthly telephone bill delivered to each Canadian household. Essentially, Canadians perhaps characteristically paid their telephone bills without any thought that the bottom line was a matter for negotiation.
Only a very short while ago, all of that began to change.
Today, deregulation is shaking the underpinning of an industry that in Canada was defined and dominated by one entity.
The Empire Club of Canada over its 93-year history, brings to its podium those people who are most likely to affect the way we live and think. At the beginning of each season for The Empire Club of Canada, we determine who ought to address the Club, based upon those events that will most profoundly affect the greatest number of Canadians. There is no question that one of the greatest changes affecting our nation as we move towards the millennium is the change in the way we communicate with each other. It therefore follows that the people who will most profoundly affect our lives and our culture are those leaders in industry and government who shape telecommunications.
It is therefore a privilege for The Empire Club of Canada to hear from the leaders in our telecommunications industry, and to have our series of addresses on telecommunications organised around the question that is currently galvanising Canadian industry today, namely, competition. I am grateful to the speakers in this series of addresses who have agreed to confront the admittedly bald question: "Competition Who Needs It?"
It is also important that our first speaker in this series of addresses brings to the debate a history of leadership and understanding of monopolies in the United States of America.
Bill Catucci is the President and Chief Executive Officer of AT and T Canada Long Distance Services.
Mr. Catucci graduated from Fordham University, and from the New York Law School. He served for four years as an infantry officer in the United States Army, receiving the Army Commendation Medal.
He retired from AT and T U.S. after a 33-year career in which he held assignments in sales, marketing, finance, engineering, law, consumer services, government relations and merger acquisition.
As a leader in industry, he participated in and developed those changes that are part of the telecommunications industry in the United States today. As a leader in his community, he worked with and received awards for community service with the United Way, The Salvation Army, and St. Jude's Rehabilitation Institute. When Mr. Catucci addresses us on the issue of competition and monopolies, he knows of what he speaks, not only because of his extensive career, but because, as he will tell you, he was at one time a fervent believer in monopolies.
The leaders in our telecommunications industries are changing the way we do business, the way we think, the way we live, and the way we understand our world around us. As the first of our speakers in the telecommunications industry, Mr. Catucci is a participant in the making of Canadian history, as well as a leader on how we shall be told our own history.
Please join me in welcoming Mr. Bill Catucci to The Empire Club of Canada today.
Thank you Julie for that very generous introduction. It's one my father would have been proud of and my mother would have believed.
I'm delighted to be addressing this prestigious organisation. I understand that Alexander Graham Bell, the "purported" inventor of the telephone, also spoke to The Empire Club, perhaps to some of you who are here today. I noticed some quizzical looks when I mentioned that Bell was the "purported" inventor of the telephone. You do know, there is a group of people in the U.S. who sought to overturn the Bell patent, claiming that an Italian inventor named Meucci really invented the telephone.
Just like those Americans to try to take credit away from the rightful owners. Yes, I'm an American (and of Italian heritage, by the way), born, raised, educated and spent most of my adult life in New York, before moving to Toronto in January. Although my wife and I are really enjoying Toronto, we're beginning to worry about being overwhelmed by that insidious Canadian culture of yours. We find ourselves changing in very subtle ways. For example:
• The first thing we talk about each morning is the weather;
• We wait for traffic lights to turn green before crossing intersections;
• Instead of watching CNN, we now watch CPAC--we were particularly fascinated with the Westray Mine hearings;
• We call our house in New York our cottage;
• I went to a baseball game at the Dome and didn't boo or throw anything at the players.
In preparing my remarks for this audience, I was reminded of the story about Dr. Samuel Johnson, who returned an essay from one of his students with the following notation: "Your essay contains ideas which are both original and good. Unfortunately, the good ideas are not original and the original ideas are not good." I hope, today, you will find my thoughts both original and good.
This is an exciting time to be in the Canadian telecommunications business. You can't pick up a newspaper or trade magazine without hearing about consolidation, convergence, alliances, new technology or applications, any one of which is touted to revolutionise the way we live, work and play. It's a profound time in our history. Revolutions like the Internet, the growth in applications and the sheer jargon that surrounds this business creates enormous confusion, even among people who consider themselves close observers of the scene.
Today, I'm going to speak about "Competition, who needs it?"
First, as a backdrop, let me provide you with some brief comments about AT and T Canada Long Distance Services and its role in fostering competition in this country. I think it may surprise some of you that AT and T Canada LDS is one of the oldest, new companies in Canada. We came on the scene this September, as the successor to Unitel, a company with a 150-year tradition of serving Canadians.
Today, AT and T Canada LDS owns and operates a coast-to-coast fibre optic and digital radio network, serving Canadians with state-of-the-art technology, high reliability, outstanding customer service, and competitive prices.
Much has happened since January. We've created 300 new jobs in two customer service centres (one in Toronto and one in New Brunswick); formed alliances with leading Canadian high-tech firms, such as iStar. And, we're rolling out new products such as WorldSource, which give Canadian business customers more punch when competing at home and abroad. The single biggest event to take place in this company over the course of the year was the adoption of the AT and T brand name. When we placed the new name on the company in early September, it opened a new chapter in our long history. At the same time, we dramatically elevated the perception of this company in the minds of Canadians.
But brand recognition isn't the only benefit of our relationship with AT and T When we see a customer need that we believe AT and T can help us with, we call on them for assistance. If we need advice on how to improve our network, or a framework for improving customer service, we seek the best advice in the world. And, that frequently comes from AT and T If they have a product or application that is truly dazzling, we'll work with them to bring it to the Canadian market. Then we tailor it to suit the needs of Canadian residential and business customers.
This doesn't mean they tell us what to do. On the contrary, just recently after a thorough review the Canadian government ruled that we were, in fact, a Canadian-controlled company with an independent board of directors--of which eight out of nine members are Canadian. These experienced and knowledgeable individuals have done a marvellous job of moving this company forward in the marketplace. There's no influx of Americans here--out of a leadership team of 70 exceptional individuals, only four, including myself, are Americans.
Our main goal is to improve telecommunications services for Canadians and we're certainly going to enlist AT and T's help when we need it. Does Cal1Net have such a relationship? Of course they do with Sprint U.S. Does Stentor? Sure--they've got a very ambitious relationship with MCI. This MCI connection is even more significant now that they've been bought out by BT There's nothing unusual about what's going on here--as a matter of fact, it's being done in markets all over the world.
Competition: Who Needs It?
What about the Canadian telecommunications market? As today's topic so delicately asks, "Who needs competition?" As a country, as business people, as consumers, we all need competition.
Telecommunications technology is one of the single most powerful enablers of free enterprise--yet, it's ironic that this industry has been shaped by more than a century of monopoly, regulation, and cross subsidy. I don't say that with any sense of derision. Those monopolies were conceived in the public interest and they brought enormous benefits to countries like Canada.
As a former employee of AT and T U.S., I was part of that kind of system. I was a monopolist. I know what monopoly is. If I had been your guest in the late 70s or early 80s, I probably would have told you that the introduction of competition in telecommunications would sound the death knell of western civilisation. And, I would have believed it.
But, I don't drink from the rich cup of monopoly anymore. The world has changed. Global competition is moving us toward what has been called "democratic capitalism," a period in our social and economic development where companies like ours don't dictate customer needs. They respond to customer demand. In a monopoly environment, the question is always: "How do I raise prices?" or "How do I extract more from customers to cover my cost of capital?" or "What services do I want to provide and when?" In our new world, we ask, "How can I serve customers better?" or "How can I attract them and keep them?" or "What services do my customers need?"
Bringing The Benefits Of Competition To Canadians In my view, the single biggest accomplishment of Canada's experience with competition in long distance is that it has brought choice to customers who, for over 100 years, were told when, what type, and at what price, they would get service.
Certainly, Canada's communications monopoly was responsible for some enormous achievements. How else could the second-largest geographical land mass in the world have a 98-per-cent penetration rate for telephones?--higher than almost any other nation in the world.
But, under monopoly did Canada possess a strong record of innovation? No. Although Canadians had the types of services which we take for granted today, cycles for the introduction of new applications and services were three or even five years behind those in the United States.
Under monopoly, did Canadian business and consumers receive the best possible prices? Au contraire! An independent study, conducted in 1990 by the Angus TeleManagement Group, showed that, if a certain very large U.S. multinational company had positioned its headquarters in Canada rather than the U.S., it would have paid almost two and a half times as much for its long-distance service.
Today, that picture is totally different. Customers like yourselves are getting rates that are just as good as those in the U.S. and competition is saving Canadians $800 million each year.
In terms of innovation, competitors are oftentimes the leader. Our company, for example, was first to bring Frame Relay service to Canada and, today, it is arguably the strongest product on the market. And, we expect to offer Frame Relay and ATM inter-networking sooner than any company in Canada.
Competition is bringing both innovation and better prices, things that people specially business people--require to stay competitive. But, it's also attracting investment in people and infrastructure. Since competition began in this market back in June of 1992, capital investment by new entrants is estimated to have been in excess of $1 billion.
So, the question is not whether competition is good or bad for the country because we already know the answer to that.
The real question is: "When does fair and effective competition, the kind of competition that brings the greatest number of benefits to you and to Canada occur?" It's not here yet.
The Stentor group of monopoly local telephone companies will claim that they are now competing directly against companies like Sprint and the vastly more powerful resources of AT and T They'll cry out for more freedom, that the regulator's job is complete and that's it's time to unshackle Bell and its allies and remove any remaining constraints on their business. One would assume by this refrain that companies like Bell and BCTel are doing very badly and that if the CRTC doesn't rush to fill the vacuum, they will be crushed by foreign competitors bent on pillaging this market.
Quite to the contrary. Bell and its Stentor allies certainly aren't doing badly. Over the last 10 years the telcos' returns on equity have been among the highest in Canada. This year, while calling for the immediate elimination of regulation (or what the industry calls forbearance), Bell's profits through September are up 47 per cent and the company is forecasting a 16-per-cent return on equity and profits of almost $1 billion in 1996. BCE's share price has increased from $28 to $62 in 11 months since the federal cabinet overturned the CRTC and gave the Stentor companies a $250 million annual windfall in local service rate increases. BCE market value has increased by over $5 billion since the beginning of this year--from $14.8 billion to $20 billion. In fact, since the beginning of September (when we changed our name, by the way), BCE's stock value has increased by almost $3 billion!
There are many in this audience who would feel some sense of satisfaction if they were getting those kinds of returns on their investments each year. I certainly would.
Not only are they making huge profits, these companies continue to hold the vast bulk of this market. At the end of 1995, the Stentor companies held 81 per cent of the long-distance market share across Canada. Sure, competitors like us are aggressively attempting to grow our business. Each day, we welcome hundreds of new customers to our company. But competition needs to be spread evenly across the country. The market share of new entrants needs to be high enough to reach a critical mass for viability.
The Stentor telcos maintain a great deal of advantages over their competitors. They remain the sole point of contact for each and every telecommunications customer in this country--a privilege conferred on them by virtue of their monopoly on local service. If that isn't enough, the local service monopoly provides a vast safe haven of almost $7 billion a year for Stentor members--that's higher than the revenue of the entire long-distance market put together.
The Stentor companies have more profits in one day than the entire alternative long-distance industry has reported since its inception. And, it's been estimated that even with competition in local service on the horizon, they will hold up to 90-per-cent market share right into the next century.
The fundamental question is obvious: "Is there a compelling reason now for the CRTC to turn away from regulating this market?" We don't believe a proper competitive balance exists in Canada for the CRTC to back away from this market at this stage of its development.
Before forbearance can take place, two key preconditions must be met. The first is in the whole area of subsidies. You see, in the past and right up to the present, high long-distance rates have been used to subsidise local service rates. In today's competitive environment, these types of subsidies are no longer sustainable. The CRTC has recognised this trend and has endorsed a policy of rate rebalancing. Their goal? To remove subsidies and bring prices for local and long-distance service closer to their true costs. Not only will this effort promote effective and vigorous competition in both long-distance and local services, but it will improve economic efficiency and generate further savings for businesses, particularly those in information-intensive sectors. Having said that, we don't believe Canada should turn its back on the social objectives which have been the bedrock of its communications policy for so long. There must be mechanisms in place to ensure that low-income customers can continue to obtain telephone service at affordable rates. The CRTC is currently evaluating ways to accomplish this and our company is actively supporting these initiatives.
Moving to cost-based pricing is clearly an important pre-condition to forbearance. A second pre-condition is the removal of remaining barriers that flow from the Stentor companies' control of the local network. That means providing competitors with non-discriminatory access to those segments of the local network where the telephone companies maintain a de facto monopoly. The Stentor telcos must not be allowed to use their control of the local network to confer competitive advantages on themselves in the long-distance market.
Let me give you one example of the problem: calling cards; more specifically, the ability to use calling cards at pay phones with a magnetic swipe. I'm sure many of you have noticed the Bell ads in airports and other locations proclaiming the fact that their card is the only one that can be swiped at pay phones. I don't know how many of you have had the experience of using a competitor's calling card without that swipe capability. You have to dial up to 30 digits in order to complete a call--quite an inconvenience.
Customers that use calling cards may be reluctant to switch to an alternative supplier for some of their long-distance calling needs, while keeping their Stentor calling card. Not only would they lose the benefit of one-stop shopping, but they may also sacrifice some of the savings they would otherwise have experienced by combining all their calling volumes on a single discount plan. The CRTC has recognised this problem. A few weeks ago it issued a decision which gave competitors the right to a card-swipe capability at Stentor members' payphones. We are very pleased with the decision and look forward to rapid implementation by Bell.
The card-swipe problem has been a significant barrier to long-distance competition--and it is not the only one. We believe that all remaining barriers to the use of the local network must be eliminated in order to foster fair and sustainable competition.
Regulatory initiatives like removing subsidies and knocking down barriers to fair competition will promote economic efficiency and create a solid competitive foundation for the long-distance market.
That will, in turn, ensure that customers receive the full benefits of competition.
If we manage the regulatory transition wisely and pragmatically, you're going to see definite improvements over the next few years:
• Investment in Canada's telecom market (and in Canadians) will increase;
• The level of innovation will increase; and
• The level of quality and customer service will increase.
In short, each and every player in this market will be knocking themselves out to delight customers.
To ensure this happens, we need to prove to the regulatory agencies, the federal and provincial governments, as well as customers like yourselves, that fair, effective and lasting competition isn't a given. It isn't created overnight. We need to proceed very cautiously when we talk about removing the regulatory structure which helps to discipline the activities of a dominant carrier--especially one with such a colourful history of bending the market to its will.
When the time is right, Canada will be ready for the CRTC to move away from regulating this business. When that day arrives, you can be sure that customers--not carriers--will be the true arbiters of competition.
Thank you very much.
The appreciation of the meeting was expressed by Paul Scargall, Partner, Borden & Elliot and a Director, The Empire Club of Canada.