Proceedings of the Standing Senate Committee on
Transport and Communications

Issue 7 - Evidence, October 28, 2009


OTTAWA, Wednesday, October 28, 2009

The Standing Senate Committee on Transport and Communications met this day at 6:32 p.m. to study emerging issues related to its communications mandate and to report on the wireless sector, including issues such as access to high-speed Internet, the supply of bandwidth, the nation-building role of wireless, the pace of the adoption of innovations, the financial aspects associated with possible changes to the sector, and Canada's development of the sector in comparison to the performance in other countries.

Senator Janis G. Johnson (Deputy Chair) in the chair.

[English]

The Deputy Chair: This is the Standing Senate Committee on Transport and Communications, our eleventh meeting in our study of the wireless sector. This evening, we have with us representatives from MTS Allstream, Teresa Griffin- Muir, Vice President, Regulatory Affairs, and Jenny Crowe, Director, Regulatory Law. MTS Allstream is a wholly owned subsidiary of Manitoba Telecom Services Incorporated. The company's extensive national broadband and fibre optic network spans almost 30,000 kilometres. In 2008, MTS Allstream had nearly 2 million total customer connections spanning business customers across Canada and residential consumers throughout the province of Manitoba. We now invite the witnesses to make their remarks.

Teresa Griffin-Muir, Vice-President, Regulatory Affairs, MTS Allstream: Good evening. It is a pleasure to appear before you today. My name is Teresa Griffin-Muir, and I am the vice-president of regulatory affairs for MTS Allstream. As you mentioned, I am joined here by Jennifer Crowe, our regulatory counsel at MTS.

Our focus here today will be on what we and others believe are the reasons Canada is no longer a world leader in broadband and wireless and how we can regain our leadership as we move forward into the digital economy.

MTS Allstream is one of Canada's leading national communications solutions providers. Our enterprise solutions division offers business customers a full portfolio of telecommunications solutions for medium and large businesses across Canada. Our consumer markets division delivers a full suite of next generation services, including high-speed Internet services, digital television, wireless and voice data services, as well as traditional voice telephony services to consumers in our home province of Manitoba.

We have a long history of delivering competition and innovation to Canadians. We believe we bring a unique perspective to the issues your committee is examining because MTS Allstream is both a former monopoly telephone company, or incumbent, in Manitoba and also as a new entrant, or competitor, in the rest of Canada.

Our company incorporates the business assets and competitive spirit of such early competitors in Canada as CNCP Telecommunications and Unitel Communications, while at the same time operating as a full service incumbent telecommunications carrier in the province of Manitoba.

We embrace the policies that have been adopted by successive Canadian governments in relation to the Canadian communications industry, the most fundamental of which is the policy to promote competition. It is competition in all of its various forms that spurs investment, innovation and, most importantly, customer choice. The more competition there is in any given market, the more that companies are forced to be innovative and efficient, which in turn creates greater customer choice in products and services, and increased opportunities for investment in cutting edge businesses, network infrastructure, applications and devices.

Canada regularly relies on the principles of competition, innovation and choice to promote economic growth in a number of its industry sectors. We have seen several Canadian industries flourish in an environment where these principles serve as a foundational core.

Many of the problems we face in Canada's communications sector do not result from our inability to formulate a proper set of objectives. The real problem lies in inconsistent and weak implementation and enforcement of the regulatory framework that we have established for achieving these objectives. For a variety of reasons, our resolve in implementing and enforcing the mechanisms that are needed to promote the policy objective of competition and to achieve greater innovation and investment consistently falls short of the mark.

MTS Allstream is not alone in this observation. Several studies have shown that Canada's weak and inconsistent implementation and enforcement of the framework has contributed to a precipitous decline in Canada's competitiveness. This has resulted in higher prices and slower deployment of next generation wireless and broadband networks and services.

The most recent study to confirm these conclusions is the Harvard study, an independent study prepared for the Federal Communications Commission, FCC, in the United States, by thee Berkman Centere for Internet & Society at Harvard University. I would like to draw your attention to a few of the findings in this study as they relate to Canada's performance in the next generation broadband market.

According to the study, Canada has some of the highest prices for the lowest speeds among the countries surveyed in the study. In terms of prices, Canada ranks 21st for the lowest speeds, 23rd for middling speeds, and next to last in prices of high speeds. Only the Slovak Republic has higher prices in this tier of service. In terms of the top speeds available, Canada ranked nineteenth among the OECD countries. It is important to note that Canadian firms do not even appear in the rankings for prices for very high speeds because there were no offerings of service speeds of 35 megabits or greater in Canada as of September of 2008.

Interestingly, as the Harvard study points out, Canada used to be a leader in broadband penetration but is now lagging behind. In fact, Canada's decline in penetration per 100 inhabitants from second to tenth during the period from 2003 to 2008 is worse than the decline in our neighbours to the south, which dropped from tenth to fifteenth. The same holds true for wireless 3G penetration. Among OECD members, Canada ranks twenty-sixth out of 29 countries surveyed in terms of 3G wireless penetration, and dead last in terms of 2G and 3G penetration combined.

The Harvard study is among a number of studies which show that Canada's position in international rankings has slipped by a significant margin, not only in terms of penetration of wire line, broadband and mobile wireless services, but also in terms of the prices and speeds at which these services are offered.

For example, studies conducted by the OECD, Oxford University, TeleGeography, the SeaBoard Group, speedtest.net and even JiWire, which ranks Canada twentieth out of a total of 30 countries in terms of wireless hot spot penetration, have all come to the same conclusion: Canada is now a laggard in the digital communications sector where it should be a leader.

Let me just answer those who take issue with these studies based on criticisms of their methodology. It does not matter what study or methodology one relies on. None of these studies places Canada where it should be, which is at or near the top of the international rankings.

Our focus here today will be on what we believe are the reasons why this is the case, and what measures can be taken by Canada to regain its leadership role as we move forward.

In MTS Allstream's view, Canada's failure to sustain its broadband leadership role stems from our complacency and our reticence to unflinchingly implement and enforce a rigorously reasoned regulatory framework that is designed to achieve the greatest degree of competition possible. This can be illustrated by examining the factors that led to success at the outset of both our mobile wireless and broadband industries, and why this was followed by the stagnation of competition after an early and promising start.

In the early 1980s, when mobile wireless telephony services first become a possibility, the government looked for a new wireless operator to which it could award spectrum in addition to the spectrum that was awarded to the former monopoly telephone companies like MTS, the Manitoba Telecommunications System. As part of the competitive process, the government decided to award wireless spectrum to an operator known as Rogers Wireless.

However, the government did not stop there. Even though mobile wireless represented a new technology, the government realized that, absent regulatory safeguards, the market power and sheer financial clout of the incumbent telephone companies could easily wipe out a new entrant that, unlike the telephone companies, had no network it could augment and no customer base from which it could cross-sell its wireless services. So rules were put in place by Industry Canada and the CRTC to encourage the development of competition.

Unfortunately, in the mid-1990s, after a fair degree of competition had begun to develop, the government became more complacent and failed to establish rules that would ensure that the next wave of new entrants in the market would have access to infrastructure and roaming. The market consequences of this complacency — higher prices, lower rates of penetration and far less customer choice for Canadians relative to the rest of the world — had reached a crisis point by 2007. Canadians were not happy about the state of competition in Canada's mobile wireless sector.

Fortunately, the Industry minister at the time introduced new rules to encourage market entry by creating a spectrum set-aside, and to sustain competition over the long term through the mandating of roaming and tower sharing. These rules resulted in an auction that generated $4 billion in auction proceeds, as well as a roster of new players that have commenced building infrastructure in Canada and are poised to bring greater competition to Canadians.

Ironically, but not surprisingly, these very same rules have prompted the incumbent wireless companies to accelerate investment in the next generation of wireless architecture and technology.

The story with broadband is much the same. In 1999, after a relatively good start, independent ISPs had almost 39 per cent of the revenues in the Internet market. Most of this came in the form of dial-up Internet access.

As telecommunications networks and technology evolved, the wholesale requirements of the competitors changed. They needed access to the last mile, next generation broadband networks. The regulator failed to keep pace with these changing requirements. Consequently, competitors did not have, nor do they have to this day, non-discriminatory, economic wholesale access to next generation of incumbent network facilities and services that are needed to provide competing alternatives to the incumbents.

The absence of a robust wholesale framework for next generation broadband has had a dramatic impact. Today, independent or non-incumbent ISP competitors have about 6 per cent of residential market revenues. This leaves the combined incumbent telephone and cable company sector controlling nearly 95 per cent of the residential market for high-speed Internet services in 2008. The CRTC's 2009 monitoring report shows that for high-speed Internet services, the independent ISP's share of the residential mark is even lower, a mere 4.7 per cent.

Canada's international broadband standings make it clear that competition limited to two incumbent providers, as is the case in the residential market today, is not sufficient to stimulate the type of customer choice and innovation needed to distinguish Canada as a broadband leader.

The situation is even more alarming in the business markets for broadband, where the only ubiquitous network is that of the incumbent telephone company. This has left the business market — and, in particular, the small business market — virtually bereft of any meaningful choice of service provider.

This has ramifications for more than Canada's international broadband rankings. Given the role that broadband plays in increasing the innovation and efficiency of our businesses, it also has serious implications for Canada's future economic growth and productivity.

It is clear that the CRTC needs to take the same bold steps in relation to broadband that Industry Canada took in 2007 to promote more competition in the wireless industry. Competitors need mandated economic access to the underlying facilities and services of the incumbent telephone companies in order to provide next generation broadband services to customers.

Surprisingly, rather than correct this problem, the CRTC took a step backwards last year and decided instead that mandated wholesale access to next generation broadband services should be phased out. What is even more surprising is that the CRTC did so despite the fact that the incumbent telephone companies are overwhelmingly dominant in the market for the supply of these facilities.

The Harvard study commented on this particular CRTC decision, noting that ``it is possible that the investment environment is too expensive and too uncertain in Canada for non-incumbent entrants, especially when the CRTC's decision is combined with the presence of very strong incumbents in the market.''

MTS Allstream has appealed this decision to the Governor-in-Council, who will render a decision on or before December 11 of this year.

Canada's recent experience in wireless and broadband demonstrates the pivotal role that competition plays in driving innovation and investment. For Canada to regain its leadership role in the broadband future, we need to fully embrace competition. This necessarily includes recognition of the fundamental role that wholesale access to incumbent network infrastructure plays.

What the Harvard study makes clear is that countries that are winning the broadband race are those countries that have mandated an open access approach to the incumbent network infrastructure, and have accepted the reality that capital markets will never fully overbuild or duplicate this infrastructure.

Fair wholesale access is the only way to ensure robust competition. In mandating this access, both our government and our regulator must have a framework in place that anticipates and accommodates the evolution of networks and services. This will enable us to avoid situations like the one we are currently experiencing in the broadband market. To be effective, this exercise also requires a converged, interdepartmental approach with a common goal and a clearly articulated agreement as to implementation.

There are a number of overlaps in the technology and resources used by the telecommunications and broadcast sectors to provision their services. For Canada to regain its leadership position as a state-of-the-art infrastructure and applications provider, our government and our regulator have to be clear about the manner and timing of when certain resources will be made available.

As an example, the next block of spectrum we think the Government of Canada will auction off, is the 700 megahertz frequency band. This is the band that is currently used for over-the-air television stations that are migrating over to digital spectrum. Although it is believe that the deadline for this digital migration is August 31, 2011, the CRTC now appears to be considering rules which would permit digital migrations after this day or not at all.

Needless to say, this development has created a lot of uncertainty in the market. Moreover, when we look south of the border, we see that the U.S. conducted an auction of the 700-megahertz spectrum almost two years ago. As of June 12 of this year, all full-power, over-the-air television stations are broadcasting exclusively in a digital format.

Finally, our government repeatedly cites foreign direct investments as one of the key mechanisms that can be used to stimulate and promote competition, innovation and economic growth. However, Canada continues to maintain restrictions on foreign investment in the communications sector. These stifle investment, delay introduction of innovative products and services that are available elsewhere and seriously limit the level of competition that would otherwise exist in the market.

Canada is now one of the few countries in the world that continues to maintain these restrictions. It was partly because of our anachronistic rules that the House of Commons Industry, Science and Technology Committee, as well as various expert panels, such as the Telecommunications Policy Review Panel and the Competition Policy Review Panel, have recommended liberalization of these rules.

Before concluding our presentation, I wanted to offer some practical recommendations as to how Canada can reverse some of the findings currently contained in some of the international comparison studies, and regain our leadership position in the communications industry sector. In particular, we need a CRTC that recognizes the fundamental role that wholesale access plays in ensuring competition and is quick to establish and enforce rules that will actually increase the level of competition in Canadian telecommunications for next-generation broadband services.

In addition, both the government and the regulator must be more closely attuned to the pace of technological change. They must put in place a regulatory framework that is capable of adapting to rapid and dynamic change while, at the same time, ensuring timely implementation of regulatory mechanisms that are designed to promote competition, innovation and choice.

As a backdrop to all of this, we need our government to adopt a digital plan or strategy that can be communicated to the CRTC, as well as other agencies of the federal government, and which clearly enunciates the direction in which the government wants to move in order to better promote Canada's broad strategic objectives for the communications sector.

We believe that much of this could be achieved without any changes to Canada's telecommunications or broadcasting acts, as the current legislation already provides us with many of the tools that are needed to implement a digital strategy. The only thing missing is a clear vision, a coordinated approach and a firm commitment to use all of the tools at our disposal, including unbundling and network access rules, to increase the level of competition in Canada's telecommunications market.

If we adopt and implement the right rules, and if take a coordinated approach to achieving our goals, we can restore Canada's leadership position in the communications industry and make it a true player in the digital economy.

This concludes our presentation and we would be happy to respond to any questions you may have.

The Deputy Chair: Thank you so much. There will be questions from the senators. I would like to start out by asking a question. You had many comments about the CRTC, particularly the decision they took last year which you said was a step backwards. You also had many other comments with regard to the CRTC.

With respect to the December 11 decision, what are you feeling that might be or do you want to even surmise? Have they taken heed of your comments?

Ms. Griffin-Muir: December 11 is about the government; it is with the Conservative government as opposed to the CRTC.

Based on more recent decisions, I think we could say that they have not taken full heed of our comments, no. At best, they still seemed very ambivalent to the role that open access will play. Even on the most recent decision on net neutrality, which was issued Wednesday or Thursday of last week, on the wholesale side, it is our view that they have not got the right framework in place. That is because they do not have unbundled access to the facilities that competitors would need. As well, they rely to a very large extent on the incumbent telephone providers to assess the necessity of certain measures that they are applying to wholesale, and to assess the impact they are having on their competitors' customers.

They are free to go ahead and do them, as long as they are purportedly not more restrictive than what they do to their own retail customers. If the competitor thinks the measures the incumbent telephone company has taken are either discriminatory or too harsh, it is only after the fact that we can bring that to the attention of the commission.

If we look at our history with the commission, it is a very long process to have resolved. Therefore, no, I would not say they are heeding us.

The Deputy Chair: I have one other question. According to observers, MTS had plans to become a national player in the market, but the financing consortium of yourselves, the Canada Pension Plan Investment Board and Blackstone Capital Partners was dissolved before the 2008 AWS spectrum auction.

Can you comment on this? How much capital is needed to become a national wireless service provider?

Ms. Griffin-Muir: A lot of that would go back to the economic climate change and the fact that we did not anticipate the price of the spectrum would be quite as high as it was. There was a limited amount of capital made available to us.

As a publicly-traded company, we are answerable to shareholders who are perhaps more risk averse in some instances. They are only willing to commit to a certain level of capital for the spectrum. It would cost a company like us, who already have backbone, close to $1 billion to build infrastructure across the rest of Canada, in addition to the spectrum. We did not have the ability at that time to raise that kind of capital.

The Deputy Chair: Thank you.

Senator Plett: Welcome to the committee. I am a fellow Manitoban, as our chair and Senator Zimmer are. Half the committee here is from Manitoba, so you are in friendly company.

Clearly, as a result of where I am from, my questions might become a little more personal to me. Let me start off by saying that your website mentions that you have a national broadband and fibre-optic network that spans almost 30,000 kilometres. Can you give us some background on how you built or acquired this network? How is the network related to your operations as a provider of telecommunications services in Manitoba? Do you intend to expand that network?

Ms. Griffin-Muir: In 2004, MTS acquired Allstream, which was formerly AT&T Canada and formerly Unitel. It is through that, right back through to CNCP Communications, that the national network was built and augmented to what is today an IP backbone. The 30,000 kilometres was acquired through the acquisition by MTS of Allstream, the national competitor.

Within that, there are some fibre rings around major cities like Toronto, Calgary, Edmonton and Ottawa. We offer business services in these areas. We are continually augmenting that network, and it is connected to the operating network inside Manitoba. Therefore, we can offer services to multi-national or multi-provincial customers like Great West Life, which has a head office in Winnipeg as well as offices in the east that offer business services. I am not sure I answered all of your questions.

Senator Plett: You touched on them. I am not sure that you answered them, but you did certainly touch on them.

Ms. Griffin-Muir: You had a question on how it relates to Manitoba?

Senator Plett: Yes.

Ms. Griffin-Muir: It is a network interconnected to Manitoba. Most of the network synergies come from the provision of long haul or backhaul services across the country. MTS would have been part of what was known as the Stentor Alliance of incumbents, such as Bell and Telus. They would have agreements with each other once they left the province to offer long distance voice and data services. As a consequence of the acquisition of Allstream by MTS in 2004, MTS is a wholly independent operation from the other incumbent telephone companies.

Senator Plett: Much of your report centred around CRTC-related Canadian problems. This committee has heard recently from both SaskTel and Alberta SuperNet. Both Saskatchewan and Alberta have put in backbone networks to help provide universal or near universal broadband access to their citizens. Being from Manitoba, I think we are lagging desperately behind these provinces. How would you compare Manitoba to these provinces? Do you plan to bring wireless availability to all Manitobans?

Ms. Griffin-Muir: Certainly we will expand. We have just announced a joint modernization with Rogers, so we will build together to move to the next generation of wireless inside Manitoba.

To all Manitobans? Each year we expand. We think with HSPA, the next generation of wireless, we will have greater reach. As part of the broadband initiative that the federal government has put in place, we are also planning to apply to extend broadband with some federal funding to 28 rural and remote communities that have either no access or are underserved.

In terms of households, 93 per cent of Manitoban households have broadband, not necessarily wireless. In terms of expansion, there are certain areas of Manitoba where it would be economically very difficult for us to expand service. We are looking at perhaps partnering with a satellite service provider who does broadband satellite.

Senator Plett: Partnering with Rogers does not give me a warm and fuzzy feeling.

Ms. Griffin-Muir: We did not partner with them. Just to be clear, we still compete with Rogers. This was more from an economic point of view so we could expand our network. It is only to build network and share network resources like towers or nodes on towers where one has one as opposed to the other. It has nothing to do with competing with Rogers directly.

Senator Plett: I was in Manitoba when MTS was privatized. Although I am a huge proponent of privatization and not having government own too much, one of the reasons that I over the years have used MTS versus Rogers is because as a government-owned company, they did a better job of providing services to remote areas. Their prime focus was not necessarily the bottom line: They believed in providing services to the province.

This is more of a comment than a question. Since they have privatized, I do not get that feeling anymore. Of course, it used to be I would hear the argument that we cannot go into the Northern communities and onto the reservations because economically it does not make sense. I live in Landmark, which is about 18 kilometres southeast of Winnipeg. A year and a half or two years ago, we did not have wireless in Landmark. We did a lot of fighting, screaming and complaining, and we finally got it there.

I have a cottage at Buffalo Point, which is at the southern-most part of Manitoba, at the American border. I must have my own satellite for Internet, and I have to roam in the United States for cellphone service. I simply want to say that when I heard the folks from Saskatchewan and Alberta tell us the moves they have made in supplying services to all of their rural areas, clearly they have found the wherewithal to do that. I would encourage you to find ways of doing the same thing. Clearly, they must be experiencing the same CRTC problems and Canadian government problems that I am sure were implemented before we came to power. I do not know.

I am sure they are experiencing the same problems, and I would encourage you to try to bring services to rural Manitoba. Thank you very much for appearing.

Senator Zimmer: Thank you for your presentation. As Senator Plett stated, as you have three of the six senators on this committee from Manitoba, my home province, you not only have a majority, but as our licence plate says, ``Welcome from friendly Manitoba.'' Thank you for your presentation.

First question: One of our previous witnesses stated that rural economic broadband was uneconomical. Please comment on this and offer your opinion on the resolution of this issue.

Ms. Griffin-Muir: Certainly. In Manitoba, about 93 per cent of the households are being served. The rest are more difficult because of the geography, which is not unique to Manitoba. The problem is right across Canada. This is a part of the country that is very sparsely populated, which makes it difficult to roll both broadband and wireless out to rural communities on an economic basis.

If I go back to the Alberta and Saskatchewan examples, there is provincial government funding associated with both SuperNet in Alberta. As well, the incumbent in Saskatchewan is still a public company.

For certain areas it will be impossible, unless there is some sort of public funding or private-public partnerships, and in some cases only public funding or funding through satellite. Even companies like Barrett Xplore, for example, who have done a lot of rural broadband through satellite also receive some public funding.

I think it would be difficult to make a case to serve everyone in addition to those who we serve today. We could probably continue to expand. In Manitoba, it is our intent to serve everyone. To reach a level of 99.9 per cent of everyone would require some sort of public-private partnership.

Senator Zimmer: I think you are right. Part of the solution will be to have some public or government support to work in combination with you. Otherwise, it would not be economical.

My second question was asked by Senator Plett. My final question is the following: When some of the departments, organizations and even governments start dealing with space, it gets a little weary and they become apprehensive. In your opinion, do you believe the CRTC is following its mandate and doing its job?

Ms. Griffin-Muir: I think the CRTC has a certain perception of what its mandate was or is. It is following what it believes it was supposed to be following as a consequence of the policy direction from the then Minister of Industry. That seemed to be to deregulate the telecommunications market. I think they have lost sight of the fact that part of that policy direction had clear instructions about ensuring that there was competition as they were deregulating, and ensuring that the regulations and wholesale services were in place to ensure that competition would continue after retail deregulation came into place.

The CRTC was focused on the deregulatory part of the equation and not very focused on what would occur after deregulation. That is, what kind of market forces would be in place to discipline the behaviour of the incumbent, including us in Winnipeg. Where there is little underlying access, there is little competition, in particular in the business market. I think they were a little taken up with the cable telecommunication competition in the residential market.

Senator Zimmer: In the beginning, they seemed to follow their mandate and had a good focus on it. However, with this industry exploding, especially into space, I believe they are not keeping up with the times and are not anticipating what is happening out there in the future. Would that be a correct statement?

Ms. Griffin-Muir: It is fair to say that they are not focused on making regulation that works with all technology. They are focused on rectifying things once something is apparently wrong. I would agree with that, yes.

Senator Zimmer: Thank you.

Senator Mercer: Thank you for your presentation. I do not live in Landmark; I do not have a cottage in Buffalo Point. I am from a part of the world that you do not service; I am from Nova Scotia. While you have good points in your brief, you have also raised a whole lot of questions. You have also given me an idea for the title of this report. On your final page, you talk about clear vision. That would be a good title — that is, if we had a clear vision.

The difference between what government/Parliament says and wants and what the CRTC actually does seems to be an issue here. You mentioned that a number of times. For example, on page 8 of your brief you said that ``the next block of spectrum we think the government will auction off is the 700-megahertz frequency band. Although it is believed that the deadline for digital migration will be August 31, 2011, the CRTC now appears to be considering rules which would permit digital migrations after this date or not at all.'' You go on to say that the Americans did this two years ago.

You may not have the answer to this, but who gave them direction to do this? Who is running this show? It seems to me that this may be the tail wagging the dog here.

Ms. Griffin-Muir: I think some of the problem stems from division of power — that is, who is responsible for what pieces? The CRTC is responsible for broadcasting or implementation of the Canadian Broadcasting Act. The migration of the television part of it is the CRTC's jurisdiction; the wireless spectrum or radio communication is the responsibility of Industry Canada. Industry Canada does not have access to the spectrum until the over-the-air broadcasters migrate to digital.

I recognize that the CRTC is an arm's length body and is not supposed to take government direction, but there does not seem to be a plan in a broad sense in terms of timing. There does not seem to be coordination between when we want to do the spectrum auction and when we think broadcast will be over digital as opposed to analog.

Senator Mercer: I have been operating under the misconception that we, meaning Parliament — that is, the House of Commons and the Senate, collectively — set the rules and they are supposed to follow our direction. That is probably a debate for the next study.

On page 9, you say that ``both the government and the regulator must be more closely attuned to the pace of technological change.'' I think this is an element that underscores part of the reason we are having this study, namely, that something is missing. In your estimation, who is quicker in this recognition of technological change, the CRTC or government? I mean ``government'' in a generic sense.

Ms. Griffin-Muir: The CRTC is responsible for the implementation. To a certain extent, when the government recognizes or gives a mandate to promote innovation, investment or state-of-the-art technology, it is up to the CRTC to be able to implement that mandate.

Everyone in government recognizes that technology is changing. Take, for example, broadband access to the Internet and for other purposes. Furthermore, digital or IP television is happening. Absent competition in those environments, the CRTC is not responding fast enough to have those things implemented.

Senator Mercer: They may have too much on their plate.

My final question is built around Senator Plett's comments about not being able to get service in Landmark and in Buffalo Point and your comments that rural broadband is not economical. When we heard from SaskTel and from the people in Alberta, they said that it may not be economical but they are doing it. We saw last week that Finland has mandated 100 per cent coverage in their country. They are guaranteeing it.

What would your company and your competitors do if delivering broadband to rural Manitoba or to other parts of the country where you operate were a condition of your licence or of your relicence? That is, when you apply to be relicensed, what would happen if a condition was added that you must cover and must help deliver 100 per cent coverage, to use Senator Plett's example, to all of Manitoba?

Ms. Griffin-Muir: As I said, in the case of Alberta and Saskatchewan, public money is involved. For terrestrial carriers, there is no real license renewal, but if it were a requirement for us to offer basic service, we would need public funding in order to do that. We would not just be able to roll it out. Economically, there would have to be some sort of compensation for that.

Senator Mercer: One could make the argument, then, that if it is part of the licensing agreement and you want to be in the business of delivering to Winnipeg, then you better be prepared to do business in Landmark, Buffalo Point and the Interlake.

Ms. Griffin-Muir: I guess it is a question of what we consider to be the basic service objectives and what services should be made available and whether or not it is a single carrier. Is that applicable to every carrier who wants to carry in Winnipeg?

Senator Mercer: Oh, yes. I am not picking on you. I am picking on the whole industry. Thank you very much.

Senator Plett: You have mentioned public money several times now. I have no issue with SaskTel. I know there is definitely government money there. Were we told by the Alberta people that they had public money? If you say they do, do you know what percentage? I was under the impression that they were not publicly funded.

Senator Mercer: My recollection was there was more government money in Alberta than there was in Saskatchewan, which surprised me. I looked at the political history of both provinces and said it does not make any sense to me, Conservative Alberta and formerly NDP Saskatchewan. It sort of flipped. That is what I recall.

Senator Plett: Do you know how much public funding they get?

Ms. Griffin-Muir: I do not know the quantum of public funding, but the Alberta SuperNet is built with public money.

Senator Frum: I liked your description of our anachronistic rules. It is intriguing that Canada is one of the last protectionist countries in this field. Can you think of any other nation that has recently relaxed its protectionist rules on this and has seen growth? I am a newer member of this committee, so can you explain the lingering rationale for protectionism against foreign investment? Lastly, what would be the immediate effect on your company if foreign investment were allowed?

Ms. Griffin-Muir: We have been an advocate for a while to have the foreign investment restrictions relaxed, and obviously several other independent committees have come to the same conclusion.

The rules were only put in place in 1987. They restrict investment in telecommunications at the holding company level to a third and at the operating company level to 20 per cent. There are ways around it, and there is a proceeding right now in front of the CRTC over one of the wireless carriers suggesting they do not have control in fact.

I think only Mexico has that kind of restriction. Every other developed country allows foreign ownership of telecommunications infrastructure. There is no particular reason. There has been, in other countries, especially in wireless, a lot of foreign investment. In the U.K., I think all their carriers in the wireless world are foreign. Removing restrictions does invite in a lot of investment. It definitely results in a lot of building of infrastructure. Even if we look at the wireless option we had in Canada and the company currently under review, they are coming in to build wireless infrastructure in Canada. All the telephone companies in Canada but for the government telephone companies were built from foreign money. That was Bell Canada,. I am not entirely sure why the rules came into place. Why they are still here is a political issue.

For us and for most telecommunications companies, it would increase our ability to raise capital and make greater investments and maybe even change your risk profile of investors. There would be a lot more opportunity for expansion with foreign money. I am not sure about expansion to all the rural and remote areas, necessarily, but definitely there would be more funds coming into Canada.

Senator Merchant: I will throw out some ideas, and I hope I am not pilloried by this committee. I was looking at some interesting comparisons with some of the states in the United States. The U.S. has ten times our user base. I was interested to see that of 28 American states, the majority of the 50, less than half provide coverage to more than half of their geography. Am I making myself clear? We are talking about Saskatchewan with almost 99 per cent coverage. The numbers I looked at today are about a year old, but that was all I was able to access. This might be of interest to the rest of us here. Even in places like California, the coverage is only 31 per cent. I am just talking now about area. These are places where the population concentration is high. In New York, it is 56 per cent. In Texas, it is 41 per cent. In places like Nevada and Montana, it is about 10 per cent. We complain a lot, but here is a country where people are wealthy, maybe wealthier than Canadians per capita, and competition is high, yet their numbers are very low.

Do you know what it costs to bring coverage to a household? I am talking about universal access. If you wanted to bring universal access to every household, what would it cost per household? It is a very expensive process.

The Deputy Chair: Do you have the answer?

Senator Merchant: I do not have the answer. I just wonder what it costs. In Saskatchewan, we are very proud, as they are in Alberta. We cannot feel too badly, and we should not feel too badly. Sometimes we compare ourselves to countries that are very small.

Senator Plett: In Manitoba, we are 56 per cent of households.

Senator Merchant: Canada is all about our geography.

The Deputy Chair: Ms. Griffin-Muir, could you just provide that information to the committee? You do not have to worry about it now.

Senator Merchant: I just wanted to provoke a little discussion. I was just interested.

Ms. Griffin-Muir: You do not need me to answer that question?

Senator Merchant: Sure, if you have the answer.

Ms. Griffin-Muir: There are a couple of things. When we were applying to rural areas with a couple hundred people spread apart, we were looking at a couple of hundred thousand dollars per household. That is wireless, broadband, all the services everyone wants.

If we look at Australia, and I do not know the population there, the government is purportedly going to spend $43 billion to bring it to everyone. That gives you a frame of reference, once you get into sparsely populated areas. As well, there is the cost of not just getting it in there but also of actually operating the network. The cost of that is high over time.

The Deputy Chair: Thank you, Ms. Griffin-Muir and Ms. Crowe for your information. You have given us a dense and extensive summary of your activities, and the questioning has been excellent for our study.

We will now begin the second round of the committee meeting. Before we start, I have to ask permission to distribute the backgrounder in English only. There was not time to submit it in French. Do I have the permission of the committee to submit the presentation? Thank you.

Colleagues, we have our second panel. Welcome to Erik Boch, Co-Founder, Chief Technology Officer and Vice President of Engineering, DragonWave Inc., an Ottawa-based high-tech firm that is playing an important role in rolling out next-generation broadband systems. It was, for example, selected by one of our previous witnesses, Globalive, to help construct its new national wireless network.

Erik Boch, Co-Founder, Chief Technology Officer, Vice-President of Engineering, DragonWave Inc.: Thank you for inviting me to speak tonight. I have a few words on DragonWave. DragonWave is a company I started in Canada — western Ottawa, as a matter of fact — just under 10 years ago. We are a publicly traded company on the TSX, and we recently went public on the NASDAQ.

We are experiencing growth rates of around 400 per cent per year this year, with annualized revenues reported in the neighbourhood of more than $150 million.

The technology that DragonWave set out to develop has focused on the construction of next-generation broadband networks, primarily those focused on mobility. We are in full-scale deployment in many countries around the world, primarily in the U.S. That has given us a unique perspective on how that technology gets adopted, why it gets adopted and what some of the cost sensitivities are.

With today's invitation, there is an opportunity for me to bring forth subject matter surrounding the cost of government fees associated with these deployments.

On the second slide is a view of what the world is doing in terms of mobile broadband evolution. The timelines along the X-axis are the timelines associated with construction. They might be different from what you and I experience in terms of service availability because those networks have to get built, sometimes one or two years before when those operators turn around and sell a given service to regular human beings like us. The timelines might appear shifted.

We are seeing a trend of a move from what we call ``2G'' service, which is conventional digital voice, through ``3G'', which is the availability of things like browsers on your BlackBerrys, some video applications and so forth. Admittedly, there are not too many places on the planet where you can harvest all the great things that the commercials show you about the BlackBerry or an iPhone. That is primarily because the networks behind those hand-held devices are not up to delivering the service rates, particularly related to data rates. That is the technology that DragonWave brings to the marketplace.

Moving further to the right, which is more futuristic, you probably heard terminology related to ``4G'' networks. They are targeted at bringing a completely rich, mobile broadband environment to the hand-held. Your phone will do everything you expect your laptop to do. If you think about it, it is already gobbling up everything in sight. It is a camera. It is a movie camera now. It is a video box. It will be a live video streaming machine shortly.

You and I might not enjoy it but the kids will pick these phones based on what does YouTube the best. They do not even care about the things we are just adopting,. They are the next wave of consumers to whom operators I am sure you have heard from are focused on delivering those services.

To capture that evolution, the networks need to be constructed; the backbone part of it behind the handsets needs to be constructed to deliver these services. That is where DragonWave spends all of its time in the business sector. We get to see how that happens, globally — some are Third World countries and one is the United States. As a matter of fact, DragonWave is the largest supplier of this kind of equipment in the U.S. today. That ought to give you an idea. You can get that information from the FCC website. That is not just DragonWave rhetoric on a marketing slide but ``government factual'' information.

On slide 3, what do broadband networks with really mean? Increasing this is focused on the mobile environment. There are operators on the planet that are building fixed networks, but primarily this is all about mobility. That is really the killer application that has been brought to the market.

Mobility drives the need to build networks which can generate coverage. These distributed networks. They are not single points or selective. We heard some dialogue about the percentage of coverage and how it gets focused on large metropolitan areas. However, think about a city like Ottawa. You cannot bring a great mobile service just to the Parliament Hill area because you have customers in Kanata that are commuting. Therefore, you have to provide ubiquity. Then you have people in Arnprior and Renfrew who are wondering what is happening. A service has to provide ubiquitous coverage for roaming, and continuity.

That brings about a ferocious need for a technological capability to build a very large distributive network quickly. It is an amplified problem when you have a country like Canada with a tonne of geography. You go to smaller countries with highly congested population bases and the task is orders of magnitude easier.

In the context of that, the government can play a role in making that just a little bit easier to get done.

Broadband networks are built with three layers. First is an access layer, which you and I use directly by communicating to local base station towers. Behind that is a feeder layer, called a backhaul layer. Then there is a main conduit layer, like the TransCanada highway. It is primarily optic and conducts all of this data into portals for the World Wide Web which drive into Chicago and New York, into the core of the Web.

Optical received a tonne of investment attention in previous decades. Access devices like these are all the splash at shows and are the things we see them when we go to stores. They are the cool next-generation gadgets.

In between lies the real work horse of the network, called the backhaul layer. I would have to say that is the most overlooked part of it. This is where DragonWave focuses its attention and where much network construction is focusing on now. If you heard from Globalive, the phase they are in now is constructing that backhaul layer, the layer that aggregates what you and I would transmit into the local base station sites into an optical core.

Slide 4 amplifies what I just talked about. These types of networks are plagued by deployment challenges where there is a lot of geographical expanse. Canada has a classic problem. We have these little pockets of population distributed across the country. People in the outside world typically think of Canada as 66 small cities and maybe two or three big ones. There is a lot of geography to cover and a lot of cities that are not that big. We think of them as big, but they are not big in the scheme of global cities.

Back haul in Canada is focused on building this distributed network, but there is also a huge problem in fulfilling the obligations to people in the surrounding rural areas. That traffic all has to get back to the main World Wide Web hotels, where a traffic can be dumped to the Web. Although I might be sending you an email, it does not go to you. It goes down into some virtual web server which might be somewhere else on the planet — maybe India — and come all the way back. It is the same with VOIP services; you might have a VOIP call that goes through a soft switch in Indiana and then comes back through the Web.

It is a highly distributed infrastructure.

To build that backhaul layer between the handsets and the fibre core, there are two technology mechanisms. One is fibre. I will not belabour that point. I am assuming you are well versed in that implementation technology. The second is the more recent use of high-speed or high-capacity wireless technology. Fibre is really viewed as the ultimate in delivering infinite bandwidth, but it comes with a lot of baggage in terms of cost and a huge delay in deployment.

You are talking about expense. In westernized cities on the planet, you are looking at somewhere between $15,000 and $30,000 a running kilometre. It is roughly another 50 per cent burden in Canada because of weather constraints associated with the build cycles and the lack of existing infrastructure there to capitalize on, such as conduits that go across bridges. There are not that many bridges and, therefore, not that many conduits. Everyone is already in there. Therefore, when fibre providers try to get an extra piece of cable through there, it is a huge problem.

High-capacity wireless, thanks to recent technological advancements, has done a fantastic job at driving up the capabilities of these pieces of equipment and taken all the cost out of them. That is the work of companies like DragonWave and our competitors.

To give you an idea, there has been about a 10 times decrease in the cost of the equipment in terms of capital expense in the last decade thanks to technological advances. The companies are there innovating and able to deliver the boxes to the service providers that are deploying. They can deliver the kind of capacity that is needed to do fibre-like deployments.

The message is that the equipment is available for these folks to build with. All they have to do is decide to fund it and get on with it.

Slide 5 is a view of how these deployments are looking as time goes by. On the left, the pie chart shows what has been happening. This is a view from approximately the last 10 years in the U.S. A very large chunk of copper was deployed — primarily T-1 infrastructure for backhauling voice and connecting voice-based networks. Around 10 or 20 per cent of the sites in industrial and enterprise buildings are connected with fibre in North America — it is consistent with the U.S. — and a small percentage of microwave deployments for that same kind of infrastructure build.

Moving to the right, we are seeing a wholesale change in the deployment methodology. Fibre is definitely growing. However, fibre takes a long time to grow and to get its share of connection locations. Wireless deployments have skyrocketed, to the point where they will wipe out alternative technologies for this kind of deployment in the years to come.

That is great news for companies like DragonWave. As I have said, we have other competitors on the planet.

What about Canada? This is on slide 6. It gives you an example A 400-megabit link connection would be typical. In Ottawa, a given service provider providing high-bandwidth mobile coverage might have somewhere between 50 and 200 locations interconnected together. They would dump the traffic on a local metropolitan switching centre, which would offload Web-based traffic for interconnection to the World Wide Web. You might have hundreds or maybe thousands of these types of radial links deployed to interconnect infrastructure in a city the size of Ottawa. For a city the size of Baltimore or Washington, that goes up to around 2,000 to 3,000 connections to provide similar functionality.

The equipment would cost you somewhere around the $10,000 to $15,000 range. In the last decade, that has come down by a factor of about 10, so about 10 years ago, that same equipment would have cost $100,000-$200,000.

Near the bottom, you see an Industry Canada licensing fee of $27,000 across 10 years. That is a leasing fee to lease spectrum to run that particular radio link. You can imagine that an operator who wants to deploy in a city the size of Ottawa needs to replicate that $27,000 hundreds of time, because each one of those links has its own spectrum leasing charge. Roughly 25 per cent of the total cost of ownership is government fees.

I use the 400 megabit example, which by today's build standards would be marginal or small. Typically, these links are going in at twice or three times that rate. That $27,000 would scale exactly linearly. If it were double the speed, the $27,000 would be $54,000 but all the other costs would remain the same. Therefore, the percentage of burden from leasing would rise to somewhere in the neighbourhood of 50 per cent for a gigabit wireless link, which is what the service providers are currently thinking they need to build. It is a pretty heavy overhead.

Moving to slide 7, I will talk about how Industry Canada makes those charges. We have an older system based on RIC-42, which is predicated on 64 kilobit per second incremental charges, 64 kilobit being an old measure of a switched voice line.

Today, there are no switched voice lines in broadband. It is just a giant highway of lanes that get shared amongst a pack of traffic. There is no discrete service bandwidth that gets allocated to you as an individual; you make a request for bandwidth to send that piece of email, the network says okay, hang on a second, and then it forwards your packets when there is a slot available on the highway. That is how the world turns.

The problem with scaling it linearly is there is no incremental revenue associated with the incremental bandwidth. The Internet pricing model does not work the same way the voice model did. The voice model says, ``I make more calls, I earn more money.'' The Internet model says, ``I want more and more bandwidth and I want it as near free as possible.'' When thinking about home Internet, we want megabits of service and we want the service provider to provide it to us for $9.95 per month, all you can eat. Megabits a service? You are paying $25 per month for a voice phone line that you get 64 kilobit service on, and you use it three times a day or week? You are getting no bandwidth for $25, yet you want your Internet to be hundreds or thousands of megabits per month of service delivery for the same price or less? Believe it or not, that is the way the Internet prices things.

The service providers work that way. Subsequently, they need from us, as equipment providers, bigger bandwidth radios for the same price they are paying for the tiny bandwidth radios to build those networks. Consequently, they need the same thing from their other overhead expenses. They need the leasing fees to be consistent with that kind of pricing model so they can ultimately deliver that all-you-can-eat, flat-rate Internet service to these mobile devices for consumers. If those things do not scale the right way, they cannot ever get there. That is how we see it. There are a number of things wrong with that model. I will not belabour that further.

What is going on in the U.S.? On, slide 8, it is the same basic pricing model and same equipment costs. You must hire the same guys to install the stuff on the roof. Looking further down, you see an FCC licensing fee that is only $1,500 over 10 years. Not only that, but if that same link is 1,000 megabits, that service provider does not pay any more for that. They lease a chunk of spectrum, and they are allowed to do with it what they can in terms of overall throughput. They end up with a small overhead associated with the FCC, approximately only a couple per cent or less of the total cost of ownership associated with leasing spectrum for these applications.

Guess what? All the new service providers that are doing alternate build-outs in the U.S. are all running wireless backhaul. In fact, DragonWave's largest customers are major alternates building out competitive networks in the United States today, namely Clearwire and its affiliates. Their business model is predicated on the fact that it is the cheapest and fastest possible way to get that competitive network up and running. They have a pretty big challenge in and of themselves where the U.S. is smaller, but there is much more population coverage necessary and more major cities to deal with. That is their recipe, which is getting replicated in other places on the planet.

As a matter of fact, we are now doing work with the large incumbent cellular providers. Although they have existing cellular infrastructure, the migration path to delivering the things we call 4G on these phones, to make an iPhone work, to make the GPS on this actually function while you walk down the block, you need these broadband networks, and their old copper networks just do not cut it. Therefore, they are looking for a way to generate at a competition position quickly. Wireless technology is the same sort of vehicle.

Interestingly enough, the U.S. government has also taken steps to further reduce licensing burden costs through a process called ``light licensing.'' This is being applied to new chunks of spectrum that have been opened up for these types of applications, and the price drops further to $75 over 10 years for a similar link running whatever bandwidth you can get through it. Compare $75 to $28,000 and think about that cost per site.

To build a big network like Globalive is building across Canada, you are talking about tens of thousands, maybe hundreds of thousands of locations that have to be connected in order to get the kind of service we think should exist and would exist in Buffalo Point and other rural destinations. It will not be trivial for them.

Senator Mercer: We will get service in Buffalo Point!

Mr. Boch: If it is any consolation, I live across out in Dunrobin, and I do not have cellular service at my house. I do not live anywhere near Buffalo Point, but I can get to my house in 25 minutes from this room and there is no cellular service, forget about broadband.

Slide 9: So what can we do? Something I have been working on for a while is to try to get the pricing models associated with the RIC modified to better enable and give and incentive to the use of wireless technology for broadband build-outs. We think adopting U.S. like models would have very useful and real influence on the build-out strategies of these alternate providers. The use of wireless would escalate their ability to build out faster and at lower cost, which translates into better service and lower price points for Canadian consumers.

I also think we should think about some way to create incentives for those operators to buy Canadian products. We have some great equipment manufacturers and integrators right here in this country, and I believe we should do what we can to foster those types of relationships. Those service providers are using a Canadian resource in the form of spectrum. If we cut them a break on the price of said leases, maybe they can kick some back into the Canadian economy. Although ``protection'' is a bad word these days. I heard of a little thing in the U.S. called Buy U.S. or something like that? Buy American?

A quick summary on the last slide: We believe next generation broadband networks will need very large backhaul investments. Wireless microwave technology is a key enabler for those networks. We believe that reduction in spectrum leasing costs for that kind of infrastructure will play a key role in the utility of the technology and the adoption of it to the benefit of Canadian consumers. Thank you for your time.

The Deputy Chair: Thank you, Mr. Boch. That was excellent. I think you know what you are talking about. It is scary that you cannot get cell service outside of Ottawa. That is worse than Buffalo Point.

Perhaps you can start off by telling us, what lessons can DragonWave provide to other high-tech firms in Canada?

Mr. Boch: Timing is everything.

The Deputy Chair: That is a good one.

Mr. Boch: Invest on the down slope. Terry Matthews is a seed investor in DragonWave, and one of his investing philosophies for start-up companies is: When everyone else is running, that is when you get your chequebook out.

Start-up companies have to innovate and create products while others are cowering, and be ready to bring those products to market when the upswings occur in the normal business environment. Certainly, DragonWave is a living example of that philosophy.

The Deputy Chair: When was it formed?

Mr. Boch: We were incorporated in 2000.

The Deputy Chair: Almost a decade.

An official from Industry Canada told us that Canada represented 3 per cent of the global wireless market. Given the size of the Canadian market, must a firm look outside Canada to prosper?

Mr. Boch: I am not sure what the wireless backhaul market size of Canada is. I would not debate south of 5 per cent as a reasonably accurate number. The wireless backhaul market globally is $4 to $8 billion annualized. About half of that is Western European-centric and the other half is the rest of the world.

The U.S. has been a laggard in adopting the technology, primarily because the build-outs of broadband networks historically have consumed T-1 copper lines. The Telrex models forced the Ilex to unbundle T-1 infrastructure in legislation from 1996. They forced legislated tariffing on those unbundled T-1s, which made them insanely cost effective at the expense of the incumbent operators.

That technology was adopted far and wide in the U.S. Wireless technology at the time was quite expensive, so the business models drove those operators to primarily copper infrastructure. The problem with those decisions is that in the scheme of things, there were short-term benefits. Now those same networks that were not built with fibre or wireless have to go through massive open-heart surgery to make them 4G.

For those of you who pay attention to these kinds of things, when AT&T brought the iPhone to market in New York, the network crashed. It crashed because all of a sudden people had access through their handhelds to all kinds of cool Apple applications to do intriguing things on their phone, but the network was incapable of coping with it. Today, AT&T is undergoing a post-mortem: A network-wide strategy review, a technological review on what they will do to make this right.

Their consumers are complaining. They bought the iPhone and none of the applications run. Would you be disappointed? I just bought the car and it does not start.

The Deputy Chair: Where are your major markets?

Mr. Boch: We are in the U.S. predominantly. Secondarily, it is the Far East, Asia. Third would be Europe, and Canada would be a distant fourth or fifth. We do a lot of rural build-outs with Barrett Explorer across Canada — I am not sure if you are familiar with Barrett — and more recently, with Globalive; I guess it is called Win now.

Senator Mercer: I am not going to pretend I understood everything you said. I am going to rely on our researcher to help us with some of it, but you have raised some very interesting questions.

On your slide on page 5, where you talked about fibre versus microwave and broadband backhaul, your second pie chart is extremely interesting when you compare it with your first pie chart. Basically, copper disappears. If you had to put a date on both of those, what would those dates be?

Mr. Boch: I would say the left one is 2000 and the right one is 2020.

Senator Mercer: What is in the way of getting there?

Mr. Boch: Infrastructure takes time to build. That is the reality of it.

I do not know what you heard from Globalive, but to do a nation-wide build-out like that is a multi-year undertaking, probably three to five years. Clear Wire has been building in the U.S. at a rate which their competitors have publicly articulated as being impossible. They claim to be building at five or seven times the rate that other people claim is sustainable; yet they are able to escalate from that stated rate, using wireless technology.

They are probably three years into a six- or eight-year build-out plan. That would get them a basic population coverage of maybe two thirds of the U.S. population.

Senator Mercer: While we are examining the issue of wireless technology, you did say toward the end of your presentation that there were companies in Canada that could build some of the equipment that would go with this. We are all interested in making sure there are more and new jobs in Canada.

Who are these companies and what is in the way of them doing their job? Is government in the way of them doing their job, or is it just the technology that they have to keep up and the speed with which they have to work?

Mr. Boch: When these networks get constructed, a lot of sophisticated state-of-the-art telecommunications equipment gets consumed in the implementation. That equipment can come from Canadian companies, by and large.

DragonWave is one example. In the wireless space, there is a company called Red Line in Toronto, as another example. There are dozens of highly competent start-up companies in Kanata. A larger incumbent is Nortel in its current manifestation. Alcatel, although not a Canadian company, has a large Canadian contingent of network equipment that gets sold to the likes of TELUS. A lot of it is designed and manufactured right here.

It pushes the technological capability that is harnessed in the form of Canadian natural resources. People that go from Alcatel come and work at DragonWave and so forth; it helps us technologically on a global competitive basis.

Senator Mercer: You talked about the costs of licensing in the U.S. and in Canada. This is a very simple question that may not have a simple answer: What do you get for your $27,000 Industry Canada licensing fee, and what do you get in the U.S. for your $1,500 licensing fee?

Mr. Boch: They are effectively identical. When you license a microwave radio link path, a chunk of spectrum, you create a specific beam that goes from one location to the other. That beam is like a laser pointer; it has a specific path. I could come along the next day and cross that path hundreds of different ways and not interfere with you. Your dot would still show up on the wall.

Microwave licensing is done exactly the same way. If you look at the FCC licensing in Manhattan, for instance, and you drew from the database all the paths that were licensed there, you would not be able to see the island on a map. There are hundreds of thousands of links running concurrently on that island in that very small piece of geography. It is not different from downtown Toronto or any other place.

What you get for that licensing fee is exclusive use of that little physical beam space, direction and orientation, and the private use of Industry Canada spectrum and in the U.S. it is private use of U.S. government spectrum.

There is no difference.

Senator Zimmer: What problems did you have in establishing yourself — for instance, problems in tapping venture capital or other sources of funds? Specifically, what current policies would have helped overcome those problems? What would you suggest?

Mr. Boch: Raising money is always a problem. At the best of times, it is a problem because venture capitalists do not understand the technology. They understand how to make money and how to place an intelligent bet. In the current economic climate, the post-meltdown post-1999 time frame, the problem is that venture capital funds were gun shy because they lost so much money during the late 2000 time frame. That money has all but dried up. You talk to start- ups in today's context and they are doomed. There is no start-up environment.

We were told when we did our recent NASDAQ public offering that DragonWave is an insanely unique offering to the market in the last four or five years. It has tremendous revenue growth, high margins, large backlog, yet it is a small start-up company. That is almost unheard of.

The other thing that is hurting the small companies against a backdrop of having difficulty raising venture capital money is getting to the public markets. There is now a lot of escalated burden in maintaining public position on the public markets. For example, there are the auditing requirements and a huge escalation in legal costs.

That says a company like DragonWave has to have a million dollars a quarter to throw away to pursue being public. That is $4 million a year. For that to be pocket change, say it is 5 per cent of your take home money. If you have a great product and you can sell it at phenomenal margin, say 50 per cent, you have to be earning $100-$150 million a year to have that spare money to be public. That is the entry bar.

Venture capitalists have to fund you all the way to that number. The problem is that it is hard to grow at the growth rates that will warrant the risk investments at the front end. You cannot grow ten times when you are making $75 million a year. It is hard to double that. It is easy to grow a $1 million company into $2 million; $2 million to $4 million is a little bit more painful; $4 million to $8 million becomes a problem.

In what used to be the $20-million corridor, you could go public. You cannot do that any more because you cannot afford the burden of being public. The investors on the street and the underwriters know that, and they will not take you public. They will turn you down; they will not be able to raise the money. Underwriters get a commission out of your fee to go public, so if you are not going to succeed, they do not want to do it.

Senator Zimmer: They do not want to get anywhere near you.

Mr. Boch: That is right. DragonWave has been in a very fortunate and unique position in the financing realm. We have had fairly unique revenue growth and track record since our inception, so that, along with great timing and some great financial partners, has afforded us the luxury to be here today.

Senator Zimmer: Several witnesses before this committee have noted the obvious importance of spectrum to the wireless industry. In the 2008 Advanced Wireless Service, AWS, spectrum auction in Canada, wireless service providers spent over $4 billion acquiring spectrum.

Does the way spectrum is allocated, in Canada or elsewhere, affect DragonWave? I know some companies in the past have been awarded spectrum, and they sit on it. Finally, the CRTC and Industry Canada said either use it or lose it. Are you finding they may bid on it, get it and sit on it for the future? Are you finding any reaction like that?

Mr. Boch: Spectrum availability for access, that is, AWS spectrum and other area-licensed spectrum, is a different kettle of fish. It is associated directly to revenue-generating capacity for handsets. The spectrum for wireless backhaul is nothing but a burden for the operators. It is a necessary evil. It is not directly attached to revenue from consumers. It is a cost of operating to deliver that service to consumers.

We do find there are operators who have gotten nationwide licences to do backhaul. In the U.S. companies like Nexlink and Winstar, who went out of business, unfortunately, had such licences where they had corner-to-corner footprints to do the backhaul layer.

I would not say they sat on the spectrum. I would say that in the era where they owned the spectrum, they had financing problems. It stalled their ability to build out. Equipment was available. They had the desire, but the market dealt them some unfriendly cards. It caused them great difficulty in raising the necessary money to consume the spectrum in an efficient way, more so than any sort of desire to warehouse it.

Senator Zimmer: So it was a financial issue?

Mr. Boch: I would say.

Senator Zimmer: At our first public hearing, an official from Industry Canada stated: ``Technological developments make possible the use of the parts of the radio spectrum that were previously thought to be unusable.'' On your website, you mention that your award-winning Horizon1 solutions are known in the industry for their spectral efficiency.

Is DragonWave one of the companies making spectrum more useable, and can technology overcome any threat of scarcity of unusable spectrum?

Mr. Boch: Spectrum consumption efficiency is just good business. It is a limited resource. I would say it would be true to say that regulatory authorities globally apply pressure to their leasing operators to use that spectrum responsibly and efficiently.

I do not think Industry Canada is any different. I would not say there is a scarcity of spectrum for these types of applications. I would say Industry Canada policy in administering their regulatory affairs associated with that spectrum for backhaul — not AWS or other spectrum that may go to auction — is consistent with what we have seen in countries around the planet.

Typically, westernized countries are similar — different policies and so forth, but very consistent. There are international organizations where spectrum policy and regulatory people get together and share information. We find a great deal of consistency in the technical rules between here and the U.S. and even Mexico, which is beneficial. It is different from Europe, of course, but consistent on this continent, which is helpful.

Senator Zimmer: Thank you for your candour and good luck in the future.

The Deputy Chair: Thank you, Senator Zimmer.

Are there any further questions, senators?

Thank you very much for coming, and I commend you as being one of the top-10 wireless players in Canada in terms of revenue in 2008. Is there anything further you would like to add?

Mr. Boch: No, just thank you so much for inviting me to speak.

The Deputy Chair: It has been excellent. I appreciate it very much, as do my colleagues.

We are adjourned until next Tuesday at 9:30 a.m.

(The committee adjourned.)


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