Leaping Forward-wireless Broadband And A National Digital Strategy Final

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LEAPING FORWARD – WIRELESS BROADBAND AND A NATIONAL DIGITAL STRATEGY November 30, 2009

The Authors The Authors are Michael Hennessy Senior Vice-President, Regulatory and Government Affairs and Ted Woodhead Vice-President, Telecom Policy and Regulatory Affairs, TELUS Communications Company. They have prepared LEAPING FORWARD – WIRELESS BROADBAND AND A NATIONAL DIGITAL STRATEGY for discussion around Canada’s digital future at nextMEDIA Toronto, November 30 . December 1, 2009 at The Design Exchange, Toronto. Michael Hennessy has been involved in the communications industry in Canada for 25 years, originally with the Canadian Radio-television and Telecommunications Commission, then Bell Mobility and prior to joining TELUS as President of Canadian Cable Television Association. He has also been a member of the Board of the Canadian Television Fund and is currently Chair of the Banff World Television Festival. Ted Woodhead has been involved in the communications industry in Canada for 17 years. Prior to joining TELUS in 2004, he was Director of Regulatory Affairs with Rogers Wireless and prior to that was Director of Convergence Policy and Infrastructure Access with the Canadian Radio-television and Telecommunications Commission. He is a member of the Law Society of Upper Canada and was called to the Bar in 1989.

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Table of contents 1.

Introduction ......................................................................................................................................... 4

2. The leap forward we took and how we are doing our part in advocating for a national digital strategy ......................................................................................................................................................... 4 3.

Networks enhance social, cultural and economic welfare .................................................................. 5

4.

Mobile wireless broadband can help drive this future! ....................................................................... 7

5.

Canada needs a national digital strategy ............................................................................................. 9

6.

Principles for a national digital strategy .............................................................................................. 9

7.

Broadband investment never stops ................................................................................................... 12

8.

Spectrum capacity will be the next big barrier to growth ................................................................. 13

9.

Coda ................................................................................................................................................... 16

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1.

Introduction This paper is intended to provoke discussion about how to promote Canada’s digital future through investment and innovation across all media platforms. The opinions expressed however, seek not simply to “ensure” a place in that future for wireless carriers, but to offer proposals for a national digital strategy that would recognize the interrelationships and linkages between all parts of the broadband ecosystem. Our comments use as a starting point, the importance of the broadband networks as building blocks to support a digital media ecosystem. In particular, this paper uses the recent launch of national 3G+ mobile broadband networks by TELUS and Bell (a case study if you will) to illustrate the opportunities that these networks present and how these networks can, if properly leveraged and supported, meet broader social, cultural and economic policy goals. These are the networks that will span Canada from coast to coast and interconnect Canada with the world. These are the networks that Canadian application developers and content creators will leverage and use to bring their products and services not only to Canadians but also to the world. And these are networks that will truly enable open consumer choice and increased innovation at the edge of the network.

2.

The leap forward we took and how we are doing our part in advocating for a national digital strategy TELUS and its over 35,000 team members are proud and excited about our brand new “3G+” wireless network, which was launched nationwide last month. Over a billion dollars of investment has resulted in perhaps the largest and we think one of the most advanced wireless broadband networks in the world. TELUS’ national 3G+ network is nothing short of revolutionary in terms of its reach and its openness. When the network was activated on November 5th, in one stroke Canada was propelled to global leadership in wireless telecommunications and a substantial percentage of the “digital divide” in broadband access was closed with wireless connectivity. When TELUS was planning this next-generation wireless network – which provides Internet access that is as good as or better than the speed of many of the wired Internet connections in Canadian homes – we didn’t stop at large urban centres. We made the capital investment necessary to push this world-class network deep into rural and remote parts of this enormous country. So much so that 93 percent of the population and perhaps 40% of the locations in B.C. and Alberta that Industry Canada recently identified as unserved now have access to 4

wireless broadband service. That’s 2,100 designated locations and hundreds of communities. And all built without a dollar of government money. Even more compelling our network sent a strong signal to the market that the idea of walled-gardens as the model for wireless is passé. From the iPhone to the “Droid”, our wireless business will be driven from the edge of the network according to consumer demands and fuelled by the hundreds of thousands of applications now driving innovation, creativity and choice. What is perhaps most remarkable was that this investment, in conjunction with a dual network infrastructure build by Bell, was accomplished with private money in the midst of a generational recession. There is a very important lesson here to consider as Canada struggles to address broadband challenges going forward. With a deficit heading towards $60 billion, there is no way the government will be able to spend to build the network platforms we need to drive an innovation agenda. If we don’t rely on and encourage private sector investment the next generation of broadband networks will not be built. Step 1 will be stimulating private sector investment in broadband, wireless and wireline networks in any national digital strategy. Step 2 is even more important and that is really understanding all along the media value chain that technology has placed the consumer in charge, Step 3 is recognizing that while there are no sustainable protections defined by political borders for media businesses, broadband networked nations are gateways to prosperity in a borderless media market. Where there is challenge, there is also opportunity.

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Networks enhance social, cultural and economic welfare It always starts with a vision In the 1850’s, Sir Francis Hincks had a vision of a railroad linking all of British North America. His vision, shared with others, culminated in the expansion of rail networks across Canada, moving him to exclaim “railways are my politics”. Between 1850 and 1860 rail lines expanded from 22 miles to 2,000 in both Ontario and Quebec. This was the result of a grand vision – a vision not without controversy – that hastened Canada’s industrialization through the development of home markets and the opportunities that foreign markets provided for Canadian goods and services, once we could quickly and efficiently deliver them. Just as our 19th century economy relied and prospered on the steel ties that bound a nation, it gave way to 20th century and complementary networks made of asphalt and copper. These networks once constructed enabled the “whole” 5

economy. They were not an end, in and of themselves. Rather they enabled economic, social and cultural benefits as well. That is what made them the defining elements of their time. These developments defined the “old world” economy but there are lessons to be learned for the “new world” economy as well. The availability of near ubiquitous wireline networks have made basic communications, broadband access to the Internet and the delivery of entertainment and information a reality - a common staple -for the vast majority of Canadians. Where those networks do not reach, Canada’s leadership role in satellite and wireless have striven to fill the gaps and, in some respects, are poised to be the game changers for the Canadian digital dream. That said, while yesterday’s investments provided a foundation for these next generation builds, we are only as good as the future billions of dollars in risk capital all our enterprises will need to invest in networks, applications and software development and the enablement of content available on any platform and on demand. It is our fundamental premise that continued investment in and availability of advanced broadband infrastructure, particularly on a competitive basis, will be a critical component of Canada’s economic, social and cultural welfare in the 21st century. Building for this future will require billions of dollars of capital from private firms. In terms of funding large scale visions, governments are frankly incapable of financing the ongoing capital requirements of these next generation networks because of fiscal conditions. In a Web2.0 or 3.0, or whatever Web dot you like, people are the markets and private enterprise the bankers. This is as it should be, because private enterprise can more efficiently and effectively raise the capital and deploy it to make this next iteration of the digital future a reality. That is not ideology, it is economics. Investment in advanced broadband infrastructures will rely on continued private sector investment. However, even as we now see the rollout of multiple advanced wireless networks across Canada this year and next, continued investment in fibre networks will still be required to meeting exploding demands for bandwidth.

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4.

Mobile wireless broadband can help drive this future! As noted above, TELUS’ launch of its competitive 3G+ High Speed Packet Access (“HSPA”) network earlier this month brought the prospect of the broad availability of always on, nearly ubiquitous mobile broadband to reality. Canada now has 3 national advanced HSPA networks and more networks are planned to launch in early 2010. That is an enormous addition to our advanced broadband pool, and a very deep pool it will be. New 3G + and later, LTE networks, will move from being considered a mere complement to fixed broadband and the Internet overall, to an integral component that will catalyze increased investment and innovation. This trend would be consistent with the strategy embraced by TELUS beginning in 2000 to invest in the future importance of mobile wireless and data.

TELUS strategic focus on data and wireless

Wireline LD 23%

Wireline Local 49%

$9.7B

Revenue

$6.0B

Wireless 40%

Wireline

Wireless 18%

LD

7%

28% Wireline Local 23%

Data 10%

20001 1 12

Wireless Data 8%

70%

Wireline Data 22% 20091

months ending June 30, 2000 and June 30, 2009, respectively

The telephone monopoly is rapidly becoming part of history

TELUS' national HSPA network is capable of delivering theoretical peak data download speeds of 21Mbits/s this year and peak speeds are expected to double that in the next year. Unlike some providers, TELUS and Bell made the capital investments necessary to push our two world-class 3G+ networks deep into rural and remote parts of Canada. To put this into context, TELUS reached 40% of the areas covered under the Broadband Canada: Connecting Rural Canadians program with the flip of a switch. 2100 locations and hundreds of communities in British Columbia, Alberta and eastern Quebec that previously had no access to broadband Internet are now able to access the Internet at speeds that are as 7

good as the speed of the typical wired Internet connection in urban Canadian homes. In all, over 93% of Canadians are within the coverage area of these new wireless broadband networks. This is a step change in meeting the policy goal of bridging the digital divide and it was achieved without a dollar of government money.

TELUS vs Rogers - HSPA west coverage

* Based on Rogers’ Sept. 14, 2009 public announcement of HSPA+ coverage within the cities indicated (using associated census metropolitan areas). ** Based on coverage maps made publicly available by Rogers on Oct. 23, 2009. Coverage areas are approximate as of October 2009. Actual coverage and network service can vary and are subject to change

It is not a boast to state that these are impressive achievements bringing next generation broadband to previously unlikely places like Masset, Bella Coola and Quesnel, British Columbia. There is little dispute that the growth of the use of information and communications technologies (“ICTs”) has irrevocably altered our society and the global economy in the post-war era. Broadband will irrevocably alter our economies as well and in digital media broadly defined. But the appetite for bandwidth seems insatiable and the changes wrought to traditional industries are as dramatic as the opportunities are for the new. The question is then, “Are we going to seize and leverage these opportunities?”

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5.

Canada needs a national digital strategy What is needed is the Government’s attention on the importance and need for policies that allow all Canadians the opportunity to exploit this broadband future today. Now that we have built and continue to build out the underlying broadband infrastructure, leveraging the capabilities of those networks and the development of a broadband economy should form part of a larger industrial strategy. That industrial strategy for Canada would include: • • •

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incentives for continued investment policies that promote consumer access and choice; and ensuring that application providers, software developers and content creators across the value chain can reach markets.

Principles for a national digital strategy Given the above context, we argue that it is time, in fact past time, to seriously move on developing a national digital strategy that will not only ensure ubiquitous access by Canadians to broadband, but also develop the necessary frameworks and mechanisms by which targeted investments can be made to propel Canada’s digital economy forward. To that end, we submit 10 principles that we believe should guide the discussion and debate. 1. Canada needs to trust the market to build our broadband future •

Government cannot afford to build the next generation broadband infrastructure for the future, it has to trust the market to do that

•

Consumer demand is sovereign and rejects regulated models for consumption including many of the limits that currently operate in the traditional broadcast space

•

Carriers will build platforms because competition demands it. That TELUS just built a world class wireless network without asking for stimulus dollars is proof positive of that fact

2. Government can find smart ways to support a digital media strategy without large expenditures funded by taxpayer dollars •

The government could direct billions of new dollars of investment into a digital strategy if it redirected the next spectrum auction revenues for that purpose 9

•

The principle behind stimulus is to invest not only in stimulating platform deployment but to promote creation from software to stories along the media value chain

•

Stimulus from auction revenues, where required, needs to be considered in a more focused and targeted way: accelerated capital cost allowances for builders; education and training grants; investment in new business vs. subsidy to support failing media models.

3. Spectrum auctions should be fair and open to ensure to ensure that the $2 billion dollar overpayments in the last AWS auction are not repeated again •

Flawed auction design led to massive overpayments of $2 billion that could otherwise have been spent by bidders on building networks

•

Not a dollar of the total $4.2 billion auction proceeds went into stimulating digital media or digital economy initiatives but got lost forever in the federal government’s treasury

•

$4.2 billion would have closed the digital divide for a decade

•

In the TELUS case, $400 million of private capital was diverted (nearly twice as much as was dedicated by the Government to broadband stimulus)

•

TELUS’ overpayments of $400 million, delayed or permanently reduced the opportunity to build next generation fibre networks in Western Canada for the near future

4. Canada and the world are our markets; we cannot be inward looking •

The Internet is a gateway to world markets and young Canadian entrepreneurs often only need venture capital to create new business opportunities

•

Wireless applications will be one of the biggest opportunities and applications will know no borders

•

We need to reassess whether foreign ownership rules and cultural protections are still appropriate or if these undermine innovation and increase the cost of capital

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•

Canadian innovation can succeed at home and on the world stage if properly incubated and nurtured

5. Digital content is not limited to narratives/stories but is also software and applications that enable the creation, distribution and sharing of content online •

Even where broadly available, many Canadians don’t adopt ICTs and do not benefit from the opportunities broadband presents

•

Digital literacy, education, training and skills development are critical elements in building a broadband society

6. Governments are ill equipped to shape new media or to sustain markets that don’t exist, but government can stimulate investment and innovation •

Technology and consumer demand are now the principal factors in reshaping markets

•

Media products are discretionary and demand ultimately dictates success not social engineering

•

The Internet allows success in long tail and niche markets more so than protected broadcast markets

•

Focusing on propping up failing firms in traditional media comes at the expense of those with the more viable business strategies

7. Canadians must have the opportunities to access, communicate, interact, create and transact over open broadband networks •

Open networks maximize innovation and investment opportunities

•

Innovation is increasingly driven from the edge of networks and demand gravitates to edge applications

•

Investment in application development is critical to both economic and cultural opportunities

•

Consumers are agnostic to the networks that deliver the applications or content – but they want both world class networks and the applications and content they can deliver – whenever and wherever they want them

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•

Walled-gardens are anachronistic in an Internet space but managed networks using IP-based technologies still have a place for some consumers and businesses that need to exploit their intellectual property

8. Copyright is not an absolute; it must be balanced against fair use •

Copyright legislation may be a necessary framework for guidance, but it cannot prevent piracy

•

Balanced copyright can legitimize fair use and the right to create managed opportunities to exploit and monetize content in tandem with open network environments

9. Intellectual property is the currency of an information economy just as much as access to broadband is a prerequisite to participation •

Economic growth or economic dependency will be directly correlated with our ability to develop, protect, exploit and profit from intellectual property

•

There will always remain opportunities for creators and distributors to profit in the mass media space from managed on-demand IPbased services on multiple platforms in order to monetize production

•

Monetization of content is critical to ensuring a supply of high value content.

10. The consumer and public are already shaping markets and we need to follow their direction to succeed

7.

Broadband investment never stops

The transformation from a voice-centric traditional telephone company to a full service communications enterprise offering wireline, wireless, satellite, IPTV and other services in all market segments is neither a costless nor risk free exercise. In fact, it has been very costly and risky for TELUS’ shareholders. The investment of billions of dollars of capital, e.g. more than $2B in 2009 alone, has given TELUS the distinction of being the highest capital intensity telecom operator in North America. These investments have been made without government assistance or contribution but with private capital and will provide distribution channels and network platforms on which application and 12

content providers can create and innovate for years to come. Policy makers should acknowledge and encourage these investments made in the midst of a global economic crisis and recession and ensure that regulation and taxation are employed as tools only where necessary and in the least intrusive manner feasible in order to further similar investment behaviour. To do otherwise would interfere with the ability to recover these investments over a reasonable period of time and would have the unintended but disasterous consequence of creating disincentives to invest.

8.

Spectrum capacity will be the next big barrier to growth

TELUS has observed consistent and significant improvement in wireless data use and associated revenue increases from the use of wireless data over the last 5 years. We expect this trend to continue in coming quarters and years as mobile wireless broadband is embraced by more Canadians, both urban and rural. New devices and Internet keys designed for the mobile broadband environment, along with a burgeoning list of applications designed to meet every conceivable need of consumers and businesses will drive continued investment and innovation in the broadband ecosystem.

Wireless data revenue

$229M $181M $116M

BlackBerry Tour

Q3-07

Q3-08

Q3-09

27% annualized data growth driven by continued smartphone adoption and to be enhanced by iPhone launch

Globally, this trend is confirmed and interestingly, but not surprisingly, video content plays a growing and significant role in the transformation of mobile broadband wireless usage. This forecast of the importance of data, but most importantly of video data, in

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global mobile data growth should provide ample impetus for the public policy apparatus to take notice and act. As O2's CTO, Derek McManus, said: The introduction of world-class smartphones, in combination with a wide variety of data applications, has brought about a dramatic change in customer behaviour and created an exponential demand on mobile data networks. Data on our network has increased 20-fold in the last year alone, and to put this in context, watching a YouTube video on a smart phone can use the same capacity on the network as sending 500,000 text messages simultaneously. For mobile network providers, the Internet has required an increase in network capacity and will continue to do so for the foreseeable future and beyond. As illustrated by the chart below, the global growth in mobile data traffic is quite staggering.

Global Mobile Data Traffic Growth Video will account for 64% of mobile traffic by 2013 131% CAGR 2008 - 2013

19% 10%

64%

7%

Source: Cisco Visual Networking Index – Forecast, 2008-2013

For network providers this is both a blessing and a curse. Increased mobile data use expands the usefulness and revenues associated with the use of the devices and the networks they ride on beyond basic voice. However, it also is the canary in the coal mine because of the spectrum and backhaul capacity required to handle exponential traffic growth, particularly video. Wireless also remains constrained by the laws of physics which is near to immutable – spectrum shortage and availability! Spectrum is the real estate upon which mobile broadband will be delivered. Radio spectrum is a scarce public resource. Spectrum is more rapidly consumed when consumers and businesses adopt more and more data applications. As we move inevitably toward a converged mobile broadband data world, policy makers will need to find ways to make 14

available more spectrum, in quicker cycles, and in ways that don’t distort the marketbased value of the resource, like auction set asides and arbitrary spectrum caps do, but also in ways that don’t negatively impact the creation of the applications, content and services that will be developed by creators and innovators. The new reality for wireless services is a need for even more spectrum and greater scale, as a prerequisite for next generation broadband demand. The scale and scope of this problem can be illustrated in the following chart that shows that approximately 149,000 terabytes of data will flow across TELUS’ network and by 2018 will consume more than TELUS’ available spectrum capacity. By way of comparison to demonstrate the speed at which capacity is consumed, in 1993 it is estimated that total Internet traffic amounted to 100 terabytes. In June of 2008, Cisco estimated Internet traffic at 160 terabytes/second (for those who need to know, this is in the order of 5 Zettabytes for the year. Oh, and 1 Zettabyte = 1 billion terabytes). While total Internet traffic will continue to increase, wireless broadband Internet traffic will make up an increasing share of it.

The projected data growth will pose challenges for TELUS

The graph above amply illustrates the problem. There will, in the very near future, be a need to provide more spectrum to operators in order to service the burgeoning opportunities for applications and content over mobile wireless broadband networks. For network operators, the planned auctions of spectrum at 700 MHz and at 2.5/2.6 GHz will provide, in the short term, an opportunity to ensure that adequate spectral resources are available, provided they are made available through an open auction 15

process that does not employ market distorting set aside frameworks or spectrum caps designed to manipulate outcomes. Beyond that however, the auction of spectrum will provide to public policy makers an opportunity to apportion funding, not otherwise available given current economic circumstances, to make public investments in furthering a national digital strategy that would increase Canada’s social, cultural and economic welfare by encouraging the creation, adoption and use of ICTs and, in particular, application and content creation. TELUS called for precisely this use of funds garnered from the recent AWS auction that netted the Canadian treasury some $4.2B. These are areas (Canadian application and content creation and innovation) are fertile ground for a properly conceived and executed national digital strategy that would have an enduring impact on investment and innovation in Canada. The billions of dollars that will be raised through upcoming and future auctions should be invested, at least in part, back into the digital economy in order to support application and content creation, broadband expansion, the digital TV transition and the stimulation of Canadian new media opportunities. We welcome and encourage the debate. Perhaps these 10 principles can serve as a catalyst to realizing a vision and action plan for launching an ambitious national digital strategy that will serve to enhance and sustain Canadians for years to come. The wireless broadband example provides a window into a rapidly growing and transformative shift in consumer preference. It serves as a signal that mobile wireless broadband is moving from being a complementary lesser cousin of traditional wireline broadband to a significant component in a converged broadband environment.

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Coda

Will Canada be ready? Will Canada move quickly to recognize the linkages and interrelationships in the whole converged broadband ecosystem? Will Canada invest in the future? Who will champion this vital initiative? Who will have the vision and be the champion? Who will be this century’s Sir Francis Hincks? Will Canada have a national digital strategy that will keep pace with and exploit the world class network developments and achievements that are occurring as we consider these fundamental questions, or will others pass us in the fast lane while we ponder?

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