The Building Blocks of a Strong Canadian Telecommunications Industry

Introduction

Competition in the telecommunications industry has arrived in Canada. Last June, the CRTC deregulated Canadian long-distance telephone service and will decide later this year on how much further it is willing to open the market. If today's guest has anything to do with it, there will be a telecommunications free-for-all, with Bell Canada leading the pack.

Mr. Robert Kearney, Bell Canada's President and CEO, hails from Northern Ireland. As a computer expert who has been associated with Bell companies his entire working life, he is firmly committed to allowing what he calls "natural markets" to set prices competitively. We should not let Mr. Kearney's relaxed demeanour fool us. Under his calm exterior lies a man who will be devoting all his energy to advancing his cause with the CRTC.

His ambition is to transform Bell's corporate culture by firmly making customers No. 1. And, to ensure Bell Canada will "be the leader in moving any information, to anyone, anywhere" he is spinning off parts of the utility into autonomous but wholly-owned subsidiaries--strategic business units. These SBUs, as they're known, are freed from hierarchy and can nimbly enter and exit niche markets to conserve costs and exploit opportunities for the parent company. At a time when small is increasingly beautiful, this is the kind of innovation that will ensure Bell's bottom line stays big.

As the climate in telecommunications policy changes, Robert Kearney is forging ahead with his winning attitude. As CEO of a company which has encouraged Canadians for years to "let their fingers do the walking," he is now optimistically inviting customers to vote with their feet as they join in the Bell parade.

Please join me in welcoming our distinguished guest, Robert Kearney.

Robert Kearney

Mr. President, head table guests, ladies and gentlemen. I'm pleased to be here today to speak with you, members and friends of The Empire Club of Canada, about issues that concern us all. I can think of no better forum than The Empire Club to discuss the importance of telecommunications to our country's future.

Throughout this century, Canadians have responded to the challenge of communicating across the distances and terrain of this rugged country. Today we are world leaders in communications.

But we have some critical choices to make if we are to maintain and improve our position of world leadership. It is no exaggeration to say that Canada now has one of the most open telecommunications markets in the world.

The problem is that trying to determine the future for Canada in the global game today is like working with a jigsaw puzzle, without having the picture as a guide. We simply do not have an overall Canadian vision for our industry, yet we need to see the picture if we're going to succeed.

And time is short. It is a feature of today's world in general, and telecommunications in particular, that the pace of change is accelerating. If you are last out of the gate you may never catch up.

I believe the sovereignty of Canadian telecommunications is at stake. Hence the need for urgent action. We must act now, and move briskly and decisively away from a utility regulated perspective toward a natural market in telecommunications. In such a market:

• The customer is firmly in control; not the suppliers, not the regulator.

• Carriers look to the customer when making decisions about price, services and technology, in short, the customer dictates the rate of change.

• All carriers are free to offer the services that customers demand--at competitive prices and within competitive timeframes.

Today Td like to discuss four building blocks that must be in place if we are to achieve a more natural market:

• One, the ability to provide solutions that meet the needs of customers and help them compete in their individual sectors;

• Two, the need for a regulatory viewpoint that recognizes the convergence of technology and the convergence of markets;

• Three, the need to evolve to streamlined, customer-focused regulation in telecommunications; and

• Four, recognition of the need for a strong financial base if we are to succeed against large, well-financed global companies.

Name any major industry today--from banking to automobiles to telecommunications--and you'll find the customer is the driving force in that business.

The customer is certainly the driving force in my business. If I meet my customers' needs, and help them to succeed--I succeed, too. If I fail to give customers what they want, the consequences can be far-reaching.

When customers take their telecommunications business and walk, it often means that jobs and money leave this country. We can no longer count on a "great wall at the frontier." Technology and markets have made the wall obsolete, and large customers with international telecommunications requirements realize that they can be serviced from anywhere in the world.

And the demand for service transcends size.

All customers--large and small are aware that their ability to compete in their given field depends on their ability to move information. It depends on their ability to access a wide array of advanced services, and to conduct business efficiently and economically around the world.

They want the right products, at the right time, at the right price. Anything less and they can't compete effectively. Bell Canada and its Stentor partners are responding with a huge sense of urgency to this imperative.

On the pricing front, we are pursuing the goal of reaching long-distance price parity with the U.S.--a key to success in the months and years ahead for our customers. We understand the urgency of getting there. We understand that we cannot succeed if we put our customers at a competitive disadvantage.

Bell continues to roll out new discount packages, such as the proposed frequent-caller plan for residence customers, our proposed Teleplus Overseas service, or the suite of discount options now available in the business market.

We have moved rapidly to upgrade our network, spending $18 billion in 10 years, including $5 billion in the recession years of 1991 and 1992. Today, we have one of the most modern networks in the world--more modern than most comparable networks in North America. And we continue to enhance our digital technology platform. This allows us to further reduce costs, improve network quality, and offer new services that our customers demand.

We are also becoming more customer-focused, by creating smaller business units that deal directly with the public. And we are instituting a Total Quality approach to service throughout our organization.

On the global front, we have been building alliances that will allow us to improve our competitive position internationally. Through our Stentor partners, and on our own, we have struck up alliances:

• with ENA, the Financial Network Association, an alliance of telecommunications companies from around the world, dedicated to serving the global needs of the financial services industry,

• with MCI, the lean and competitive upstart that keeps winning market share from AT and T;

• with GTE, where we found a modem billing system that will address an urgent need of the business community.

Alliances of this nature are the name of the game in the global arena. Like most telecommunications companies around the world, Bell and its partner companies can't afford to go it alone. At the same time, we cannot cede control of our national telecommunications infrastructure to foreign interests. It is a key part of Canada's economy, and a major building block for our future survival. We must retain it.

By the same token, policy makers and regulators in the industry can no longer operate in the closed systems of the past. Policy and regulation have to keep pace with the changes in technology and the marketplace. There is no room in today's highly competitive world for anything other than a world-class Canadian telecommunications industry--and that means world class in quality, in range of services, and in price.

There is no room for some cosy artificial Canadian market with arbitrary boundaries and artificial prices.

If the first fact of life in today's telecommunications industry is that the customer is boss, the second fact of life is that technology and markets wait for no one. Indeed, in the last 10 years, technology has changed the face of this industry.

As a result, telecommunications can no longer be divided into neat compartments, with long-distance, cable, cellular, satellites and other categories carefully defined and separately regulated. Convergence is the byword in the industry today as technologies overlap, and open up new possibilities for different types of services.

In the U.S. recently, we have seen two of the regional carriers--Southwestern Bell and Bell Atlantic--strike deals to either buy out or ally themselves with cable TV companies.

Here in Canada, of course, telephone companies are not permitted to enter the cable business. I don't see how keeping cable and telephone companies separate will benefit either the cultural objectives of the government, or the international competitiveness of the Canadian economy.

The telephone companies must be allowed to fully compete in all communications markets for the benefit of all Canadians. In fact, I think Canadians would greatly benefit if cable companies had to face competition from telephone companies. Bell Canada should be able to carry anything, independent of technology, for any customer, anywhere.

Other access carriers, like cable companies, should be considered as common carriers. The market should determine who carries what, over which network. The issue for regulators should not be whether to do it, but how and when.

Frontier barriers and technological limits have been eliminated, and failure to recognize what this means could lead to a serious decline of our industry.

This is not some speculative future that I'm talking about. Elsewhere in the world, we have already seen the development of pricing and product options based on this convergence.

We have made our views known on this subject in the CRTC's current review of cable and broadcasting.

We have also worked with our Stentor partners in presenting a comprehensive proposal in the CRTC's review of regulation in the telecommunications industry.

This represents a third component in the move to a natural market: the need for on-going regulation that is streamlined and effective. The core of our proposal in the CRTC review is that prices and earnings for competitive services should be determined by the market. The only regulation that would apply in competitive markets is that which applies under competition law.

As for utility services, we believe rate-of-return regulation is most appropriate today. But, tomorrow, as we evolve to a more rational pricing structure, we recommend a move to incentive-based regulation, such as the price-cap model.

But, this too would be transitional. As market forces take hold in the local market--a development we would welcome--regulation should be reduced even further. All of us have to recognize that timely service and pricing action in response to customer and competitive pressure is an urgent necessity--now.

Unfortunately, there are still too many regulatory delays, ranging from weeks to months. This may be good for AT and T's Unitel, but it only punishes customers by making them cool their heels.

In my view, the interim solution is to make the existing rules of the CRTC work to the customer's advantage, holding up innovation, new services and new products as little as possible. This being said, I recognize that the CRTC is not the only player in the game.

It is also important that the new Telecom legislation, with amendments, be passed before the coming election. I welcome Parliament's second reading of the bill. And I support the government's drive to get an amended bill passed before an election is called.

As well as streamlining regulation, it is also Bell's belief that the pricing structure that exists in our industry must be reviewed. It has long been public policy for long-distance service to cross subsidize local service by about $2 billion annually. In fact, about 17 cents per minute of long-distance revenue goes toward subsidizing local service, while the big U.S. carriers pay only two to three cents a minute to their cross-subsidy--about a seven-fold difference between the two countries.

This is a startling gap. It gives American carriers like AT and T a decided advantage when competing for North American business. And it's not a cost problem--it's a pricing problem.

Based on a recently updated study by Mercer Management Consulting, our costs are among the best in North America.

Bell Canada's $2 billion cross-subsidy from long-distance keeps our local rates low, but it also keeps long-distance rates way above cost and way above U.S. levels.

In a different world our local rates would be regarded as predatory--so artificially low as to eliminate competition and dampen innovation in the local service area. In our submission to the CRTC's regulatory review, we propose a complete reform of the local and long-distance pricing structure.

I personally cannot see that we have any other choice if Canada is to remain competitive.

The fourth element in the development of a natural market is the continuing strength of Bell's financial base. Plainly stated, financial strength is the lynch-pin in being able to compete. Without a strong financial base, we cannot meet the challenges presented by this new era of telecommunications.

Our financial strength is what allows us to continue to improve our network, expand our services, and guarantee high-quality service to customers. This is the basis of the general rate application we filed with the CRTC in early February.

If there was any way that I could have avoided this action, I would have. It is the first general local-rate application from this company in 10 years.

In that time, long-distance prices have fallen, local price increases have been much lower than the rate of inflation--and, even with new taxes, our overall prices for local and long-distance service have actually fallen by one per cent, while inflation grew some 47 per cent. Cable prices in Canada went up 70 per cent during that period.

However, both the slow economy and resale competition have eaten into our profitable long-distance revenues. At the same time, money-losing local service continues to grow.

It costs, on average, some $40 to supply a service for which we get about $10 per month. And, unlike many other businesses, Bell has an obligation to serve-in unprofitable markets, and when economic times are tough.

We need significant capital investment, year in and year out, good times and bad, to meet customer demand, replace and repair our existing plant, and answer customer demands for new products and high-quality service.

That annual investment measures in the billions, even in recessionary times. And it needs to be financed. A fair rate of return is in the interest of our customers, as well as being a key element in maintaining the vitality of the Canadian telecommunications infrastructure.

Early in April, the CRTC denied Bell's request for an interim rate increase. This was a disappointment for us. We saw the interim increase as a practical approach to balance the revenue requirements for this year and next, and allow our customers to adjust to the higher rates.

That being said, we are confident in the merits of our full application, and in our ability to present a compelling case before the CRTC. In the meantime, we have no choice but to ensure our financial integrity. To this end, we have cut our construction program by $190 million in 1993.

We have also deferred about $140 million in capital expenditures associated with the Community Calling Plan we had proposed as part of the general rate application. The plan would now be introduced in 1994, assuming CRTC approval.

Coming on top of the very ambitious productivity target set for 1993, we expect it will not be possible to implement these new cuts without having some customer affecting local service impacts. These impacts are likely to be felt earliest in our ability to provide local service in unserved territory, and in accommodating customer requests for service upgrades.

This is unfortunate, but prudent management demands that we maintain our near-term financial integrity pending the Commission's final decision.

As I said at the outset, it's a fascinating, challenging time to be a participant in Canadian telecommunications.

There are four concluding thoughts I would like to leave with you.

First, Bell is dead serious about being the first choice for our customers. We intend to be fierce competitors.

Second, we believe Canada is still living with rules meant for yesterday's marketplace. It's time to move to a natural market in telecommunications.

Third, greater regulatory freedom is the only way customers will truly benefit from competition.

And fourth, financial integrity is at the centre of it all. Financial integrity makes world leadership possible.

Thank you for your time today.

The appreciation of the meeting was expressed by Sarah Band, Past President, The Empire Club of Canada.