Proceedings of the Standing Senate Committee on
Transport and Communications

Issue 9 - Evidence, November 25, 2009

OTTAWA, Wednesday, November 25, 2009

The Standing Senate Committee on Transport and Communications met this day at 6:31 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 Dennis Dawson (Chair) in the chair.


The Chair: Good evening. This is the Standing Senate Committee on Transport and Communication's fifteenth meeting in our study of the wireless sector. This evening we have, from TELUS, Michael Hennessy, Senior Vice-President, Government and Regulatory Affairs, and Craig McTaggart, Director of Internet Policy. Welcome to the committee.


According to the Communications Monitoring Report 2009 from the CRTC, TELUS is one of the three main players in the wireless market, with Rogers and Bell.

At the end of 2008, TELUS had 27 per cent of subscribers and 29 per cent of revenues in the wireless industry.


They also won a pretty good court case this week. That is what I was told in the back of the room.

TELUS prepared a presentation. Being the francophone of the committee, I feel a little bit bad saying we will accept it in English only, but I can assure you that if someone were to make that proposal, I would find it acceptable.

Senator Plett: So moved.

The Chair: Thank you. Mr. Hennessy, the floor is yours.

Michael Hennessy, Senior Vice-President, Government and Regulatory Affairs, TELUS: I appreciate the opportunity to come here to talk about wireless and broadband. If I may, I would not mind talking off script. For the record, you have our submission. We are a small group, and some of what you are talking about is my passion.

I have been involved in communications in this country now for the last 25 years, originally at the CRTC — Canadian Radio-television and Telecommunications Commission — with Bell Mobility, and heading up the Canadian Cable Television Association. With TELUS, I have been on the board of the Canadian Television Fund and I am currently chairing the Banff World Television Festival. I have spent a lot of time over the years in my different jobs — and you can ask me why I have had so many — on a broadband vision. I want to talk a little about that today and about some of the excitement around what we are doing.

Mr. McTaggart is recognized these days as one of the preeminent authorities and academics on the issue of network neutrality and many of the new social issues emerging out of the Internet. If you have questions there, I will advise you to ask him; there is probably no one better to ask.

Getting into vision first, you have probably heard from many people, and it is something I believe, that communications has always bound this country, even when we look back over two centuries. Communications and trade ran on the waterways and then the railways. We built telegraph and telecommunications networks. Today, we are looking at broadband. At TELUS, we consider broadband to be critical, not necessarily wireline broadband but more and more wireless.

Why is broadband critical for the country? I would say there are a number of reasons. In today's age, the Internet age, broadband is a means to increase productivity. It can bring the smallest business in the smallest town to a world market, as long as the broadband facilities reach out there. It can bring health care to the North. It can bridge gaps between small communities across the country. As we are learning in the cultural area, it is actually allowing a new generation of creators to create and share their works without any intermediary, whether that is a broadcaster, a cable distributor or a film producer, and that in itself is very exciting.

All of that is a multi-billion dollar challenge to get where many people have talked to this committee about getting, which is to have the kind of facilities in place today that many of our trading partners have.

Let me start with who we are at TELUS. Many people still see us as a telephone company. We started out as B.C. Telephone Company and Alberta Government Telephones, and in Eastern Quebec we were QuebecTel. About 10 years ago we began to combine those companies, and less than 10 years ago we bought Clearnet, a wireless new entrant, and became Canada's third network force.

Seventy-five per cent of our revenues today come from wireless and from data Internet. The old monopoly telephone business is now at 25 per cent of our revenues and growing less. That is because we have become national. We are probably the most significant competitor for Bell Canada when it comes to national business accounts. We are now Canada's number one provider of eHealth services through our TELUS Emergis. We have begun to provide, over fibre networks in Western Canada, a cable television service based totally on Internet technology. But the jewel in the crown is the wireless network.

I am sure you have heard from many people here today about the state of wireless networks. I would like to start with a good-news story about that. On November 5 of this year, we completed a billion-dollar investment in a new wireless network that is state of the art. It is I believe the largest advanced wireless network in the world, and it is among the most advanced, if not the most advanced, wireless network in the world in terms of speed, reach and capacity. That is not hyperbole. That is demonstrated by the technology we have and the reach this network has.

Unlike many people who have come or who will be coming into the market and looking to serve markets like Montreal, Toronto, Vancouver and Calgary, we built a network so extensive in its size that when we launched on November 5 this year, we immediately covered with broadband wireless service 40 per cent of the communities in Alberta and B.C. that Industry Canada had just put on the list of underserved communities for stimulus funding. Before the applications were even flowing into the department, we had basically removed off the list about 40 per cent of the communities that had been identified as underserved for broadband.

We are talking about networks at their peak capacity that can deliver 21 megabits per second, which in our environment today, when you break it down to what a consumer actually gets out of that — and it depends on the handset you have — is as fast as any of the Internet services we are presently providing to the home. This is really a brand new, next-generation network. It is immediately available to 93 per cent of the population as of this month. It is operational.

Bell Canada, with whom we built the network in part, has launched its own network using its spectrum and sharing some of those facilities. That is two networks with the same scope.

To give you some other idea of the scale, it is four to five times the size of the Rogers network which, as of last October, had ranked as Canada's most advanced, fastest and extensive network. According to the courts yesterday, they can no longer make that claim, but I am not here to criticize Rogers. We built our network to compete with Rogers. I have been in the cable industry and was lucky enough to work for a while with Ted Rogers; he is one of my heroes.

We were able to build this network in a time when the country is in a deep recession. At a time when everyone in the industry in North America was cutting back in investment, we increased our investment by over 10 per cent, to just over $2 billion last year; $950 million of that went into wireless and fibre. No other telephone or cable company in North America had that type of per capita spending.

There you have one of your challenges: How do we get wireless broadband out to most communities in Canada? We have just this month delivered it to 93 per cent of the population. There is still 7 per cent left on the list by any stretch of the imagination, and we did it spending our own money.

Why is that important? Many people have been before you and have criticized the industry. They have said we need more advanced networks. I think we have achieved that at least on the wireless side. There are many challenges on the wireline broadband side.

One thing people have not been able to suggest to you is how do you actually do that, how do you continue to spend billions of dollars. Government may have a vision that we need broadband to drive our economy, to increase social welfare or to lead into the next generation of cultural products. However, the government is broke and may be running a $60-billion deficit by the time the year is over. It will not put money into this. You have to count on the private sector to do that.

That takes us to the next question: How do you stimulate that investment, particularly in a period of economic downturn? Clearly we are willing to do that to compete. We were willing to do it to extend our wireless service because we ultimately believe that in remote areas wireless will be the future, not wireline. However, there are limits to that spending.

Let me give you some prescriptions for how we can help to bridge the broadband gap that still exists in this country. I would say the number one thing we could do for the industry, not surprisingly since I am speaking for a corporation, is to reduce taxes and fees. I am sure you have heard that from businesses before. However, when you think about it, whether it is the fees people are fighting over at the CRTC, or the fees we pay to use the spectrum, or the fees we paid — which was too much — for spectrum that was recently auctioned, every time we spend $10 million or $50 million just paying fees, that is money that will not flow out, particularly to rural areas. We have to build fibre, for instance, in the major centres in Western Canada because we are way behind Shaw in terms of the quality of our networks. If we do not do that, we are ultimately out of the wireline business. Unlike the cable companies, we are price-regulated. While you have seen cable rates go up by 30 per cent since 2002, according to the CRTC data our rates have gone up only 6 per cent. That limits considerably one's ability to finance business from internally generated funds, relative to a competitor.

We have to build anyways in Vancouver, Calgary and Edmonton to compete. However, for every $10 million you take out of the business in taxes or fees, we do not have to extend the footprint into more remote areas. In fact, you retract. Every $10 billion you have to give the government is $10 billion that you otherwise cannot spend.

The Canadian Wireless Telecommunications Association suggested accelerating capital cost allowance. That is a brilliant idea. In a period of stimulus, rather than inventing programs to put money towards, if you actually incent the people who were going to build at some point anyways to build faster, you will see returns and real jobs maintained in large corporations. You will see the benefits because the money is being spent on something that it was intended to be spent on in the first place.

The other area that I think needs serious consideration for many reasons is spectrum auction. In the last spectrum auction the government set aside a lot of spectrum for new entrants. I will not debate the rightness or wrongness of that. I have probably written enough papers and articles in newspapers about why I disagreed with that.

Because of the way that auction was designed, it ultimately resulted in the treasury receiving about $4 billion. That sounds great on the face of it, but according to the research we did and according to what investment analysts had predicted would be spent in the auction, it ended up costing the bidders about $2 billion more in a relative value than they would have paid for similar spectrum in the U.S. You would think that in the U.S., because of the size of that economy, you would pay more.

That is $2 billion gone that could have been turned around and spent on broadband in the wireless sector or for converged company on fibre as well as wireless broadband. Because of the recession, that money ultimately did flow through into infrastructure projects, but I do not know where it went. All I know is that monies we could have otherwise spent ended up, because of the poorly designed auction, propping up various old economies or going into roads and bridges, never to be seen again.

For us, the U.S. consultants estimated that the cost we paid for spectrum, which was $800 million, was about $400 million more than was necessary, because of the design flaws in that auction.

What is $400 million? The government of the day has said it is willing to spend $250 million this year on stimulating the rollout of broadband to remote areas, and it is a $500-million project over two years. We overpaid virtually as much as the government is willing to spend in totality on both wireless and wireline broadband. In other words, the government really is not prepared to spend very much.

This gets me back to the point of why it is important to stimulate investment. If we do not spend or the new entrants do not spend or the cable companies do not spend, no one will spend, because the government clearly cannot afford to do this.

Our premise is not that you should not have auctions or that it was a bad thing that new entrants came into the market. It is not necessarily a bad thing. We have new entrants today like DAVE Wireless and Public Mobile. The government has subsidized, through our overpayments, the entry of companies like Shaw and Videotron, and EastLink in Atlantic Canada. They decided that some of the new entrants in the market would be the regional telephone companies in Saskatchewan and Manitoba, even though they had a 65 per cent share of the market.

That has caused some consternation and problems because of the overpayment. Obviously there was an ineligible bidder. That is history.

The issue is that in the next couple of years, the government will auction off spectrum in the 2.5-2.6 gigahertz band, where Inukshuk, one of the companies, is operating today. This will be prime mobile spectrum for data services. The government will also auction spectrum in the 700 megahertz band, which is the spectrum currently occupied by over-the-air broadcasters.

It is anticipated that those two auctions as well as forthcoming auctions could bring another $2 billion to $3 billion to the treasury, and this is where I think the important point is. You do not want to have an auction where there is overspending. That just means people will spend more in urban areas and less in rural to make up the difference.

The government also has to consider seriously — and this is a message we have been pushing for a long time and pushing with people in the cultural community and the information and communications technologies, ICT, sector — that if you run auctions for communications spectrum that result in billions of dollars flowing into the treasury and if you believe that broadband is critical for economic, social and cultural development and for removing regional disparity, then why not take that money and put it back into the sector to fill the gaps that the market cannot deliver on? The National Broadband Task Force under Brian Tobin about six or seven years ago was talking about numbers like $1.5 billion to finish many of the remote area builds. That money could be available through the auction process.

Also, rather than only expanding the broadband network itself, which is the critical first step, we need to put money into things like digital literacy. One of the reasons we do not have 100 per cent penetration of wireline broadband in a country where probably 90 per cent to 95 per cent of the population actually has access to broadband is that not everyone has access to a computer, understands how to use computers and is conversant in that. Money should be put into education.

I would also suggest that for media itself, for the next generation of Canadian culture creators, if we really want to get away from the subsidized Canadian content trap the television sector found itself in, we have a young generation of entrepreneurial Canadians interested in using the Internet to create business or media products using applications in software, but they do not have the seed funding to develop the application or software nor the venture capital that people in the U.S. have. Again, spectrum auctions, which are taking money from the communications sector, could be used to put that type of money towards creating economic opportunities in the country, for regional development, for digital literacy, for the platforms, for application and software development. If we are developing applications and software, we are developing intellectual property. In my mind, intellectual property is ultimately the currency that defines success or failure of the Canadian economy.

That is our story at TELUS. While people sometimes refer to us as part of the big three or whatever, we would remind the committee that we were a regional telephone company that invested tens of billions of dollars to become a national competitor where none existed before. As I said, we are now Canada's number one eHealth service provider. We are now operating Canada's fastest and largest network, perhaps the fastest and largest in the world, and we have repeatedly beat up Bell Canada for some of the largest federal and provincial government contracts here in Ottawa, in Ontario and Quebec, well outside of our territory. We have done all that by investing, by believing in broadband and by believing in wireless.

At this point, we are probably open to answer many of your questions.

The Chair: Thank you, Mr. Hennessy.

Senator Johnson: Welcome to the committee. Congratulations on your success. You are doing well, coming from the Prairies and building up your company the way you have. Congratulations on the wonderful Banff World Television Festival. It is one of our great institutions in Canada.

Mr. Hennessy: It is. Thank you, senator.

Senator Johnson: Has your wireless subscriber market share by province increased significantly since 2008? We have a graph with the numbers from last year, but I wonder whether they would show a preponderance of the Bell group in Eastern Canada and then a split pretty much in the rest of the country between Rogers and yourselves. Is any change happening?

Mr. Hennessy: There would have been in the last year.

Senator Johnson: In Saskatchewan and Manitoba?

Mr. Hennessy: In Saskatchewan and Manitoba we made very few inroads, particularly in Manitoba, because we have not been able to negotiate data agreements. Senator, that is your home province.

Senator Johnson: It is.

Mr. Hennessy: Many people who use a TELUS BlackBerry will find, as they are heading out to the lake in Kenora or wherever, that it does not function anymore, and that is in part because we have never been able to get an agreement with MTS Allstream to use their networks. There are roaming problems there.

In Saskatchewan, we just announced in the middle of November a network-sharing agreement that will provide our customers with full service in that province, so that is very useful.

Next to Saskatchewan, MTS Allstream may have the largest market share of any wireless in Canada in a province, but it is considered by the government to be a new entrant. While it is allowed to request roaming and tower access from us under the option rules, we are not granted the right to use its network in return. It is a very sore point for us.

Senator Johnson: It must be. It is especially bizarre when we cannot get service driving north of Winnipeg.

Mr. Hennessy: It is good for MTS Allstream, which is why it has the largest market share outside of Saskatchewan. We are just going to build out as much of the province as we need to. We are negotiating with them. There may be some agreements that extend service. I am certainly hoping that we are close to an agreement that will help people who are driving through the province so they do not hit a dead zone, but if that is not the case, then we will build the rest of the country. It has been a disappointment to us. Bell and MTS Allstream had a deal for a long time. We are the only company in the country that does not have a complete roaming or sharing or any kind of deal in Manitoba.

Senator Johnson: Thank you for that. You were talking about wireless to communities in Canada. Where is the 7 per cent that is left? Is it just generally spread all around the country?

Mr. Hennessy: There was a significant amount in British Columbia, and I would think probably then Ontario and Quebec are the most significant areas. Saskatchewan has been extremely well built by the provincial government system. The problem is we are talking about not even clusters often of homes.

Senator Johnson: You do have a network-sharing agreement with Bell and with SaskTel. Could you explain how these work?

Mr. Hennessy: Yes. It goes back to the days of Mobility Canada, which was the initial joint wireless venture of the provincial telephone companies, because they all had regional licences. Mobility Canada was created by the Stentor group of the time. Stentor was the telephone company operating arm that allowed national services to be provided by regional companies. When we all went wireless, that was how service was delivered on a national basis. There were roaming agreements; there were business agreements with that.

When Mobility Canada and Stentor broke up in 1999, some companies decided to compete with each other, some companies decided to share networks. Originally TELUS and Bell decided to fully compete with each other but had a resale deal to allow things to continue their business.

In the mid-2000s, as we moved into a data world, the cost to replicate that entire network infrastructure everywhere in the country and catch up with Rogers was substantial. We agreed that we could use each other's networks. In return for doing that, we also agreed that we would continue to invest in the network. These were not pure sharing arrangements where I come to you and say I will borrow 100 minutes from you and will pay you 10 cents a minute. These were agreements where you literally had to spend $50 million to $100 million in different cities to build up dual networks.

We continued on these shared networks, and it is kind of interesting. We built Quebec in the latest round as well as Western Canada. Most of Quebec was actually built by TELUS this time around. We continue to operate our own separate networks using the spectrum we own. It is not a completely joint network, but parts of it, particularly roaming between cities, are shared. Towers are shared, just as they are shared with Rogers and increasingly with new entrants.

Senator Johnson: How do such agreements affect competition in the wireless industry, or do they?

Mr. Hennessy: I think this agreement has actually enabled much more competition because it allowed the creation of not one but two national competitors to Rogers. Rogers has now done a deal with MTS Allstream, where MTS Allstream will resell some of the Rogers networks.

What makes them different from the classic resale deal is that in order to be part of that you have to be committed to spending hundreds of millions of dollars, as we did with these new advanced networks, to ensure that the total country is covered.

From a competition point of view, the situation is that last year, or even last month, Rogers was the only company in the country using the new high speed packet access, or HSPA, and now three competitors offer that. In fact, the launch of the Videotron system in Quebec makes four, and DAVE Wireless and Public Mobile launched, making five and six competitors, and Shaw has just put out a deal for $600 million to spend on that spectrum. You will see other companies combining, while they continue to operate their networks separately, to share various aspects of the build to get that kind of coverage.

It would be impossible, I think, to have multiple facilities-based competitors in this country without those kinds of arrangements.

Senator Plett: Thank you, gentlemen, for coming out. I want to encourage you to come into Manitoba and make some deals there, because I, along with Senator Johnson and Senator Zimmer, am also from Manitoba and am quite frustrated with what we have.

Mr. Hennessy: I used to spend the summer at Caddy Lake.

Senator Plett: I do not have a cottage at Caddy Lake.

Mr. Hennessy: I do, or I did.

Senator Plett: I have a cottage at Buffalo Point.

Senator Johnson: I knew you would mention that.

Senator Plett: I did it for your benefit, senator, because you asked me to.

The Chair: We are going to start talking about football pretty soon.

Senator Plett: We will. Senator Johnson talked about going north of Winnipeg. In fact, Buffalo Point is south and into a populated area. When I go to my cottage I am on roaming from Warroad, Minnesota. I know that is not your fault.

You have spoken a few times tonight about going into remote areas. In the areas where you are working, how remote do you go? Is MTS unique in that it does not want to go anywhere more than two hours away from what it has built?

Mr. Hennessy: No, we have seen that in the past. We could put together some maps to deliver to the committee. As I suggested, we have managed to cover 93 per cent of the population. In Alberta — which is part of our core area — we pretty much cover the province. British Columbia is a much different terrain because it is completely mountainous. Again, we cover virtually all the population centres.

We estimate that when the government identified remote communities that were underserved and deserving of this $250-million stimulus fund and we launched the network, we actually covered with broadband service over 2,100 small rural communities outside of Manitoba that had not had broadband before. It is an extremely extensive network. It is bigger than anything that has been built before.

Senator Plett: In Canada, cell phone penetration still appears to be relatively low; I think it was 74 per cent at the end of 2008 and 86 per cent in the United States. What factors explain the relatively low penetration rate?

A few committee members were in Estonia a few weeks ago. The penetration rate there is 125 per cent. I believe that is the number they gave us.

Why would we in North America be at 86 per cent, and in Canada at 74 per cent?

Mr. Hennessy: Maybe this will not surprise you, but the number one reason is not price, or perhaps it is but from a different perspective. Within the Organisation for Economic Co-operation and Development, OECD, Canada has the least expensive basic telephone wireline service. It is one of the cheapest services in the world, whereas in Europe people were coming out of the old monopoly Post, Telephone and Telegraph system. In Canada we have always had a world-class, universally affordable, accessible telephone service because government has deliberately, through the CRTC, kept rates artificially low. People in Europe have picked up cell phones because home phone service was awful or they had to pay for calls. You do not see that in Canada. That is issue number one.

Second, you would think that most countries would be happy with 100 per cent penetration. The Italians, I think, are actually at 160 per cent now. You say to yourself, wait a minute; there must be something wrong with these numbers.

Part of the reason is that within the European community, and even within some of the European countries, prices range from very cheap to quite expensive, depending on time of day and whether you are roaming. What the Europeans have that we never had, until we launched this network, is a standard technology. They have the GSM technology, Global System for Mobile communications, which is now used by 80 per cent of the world. That allows people to take the SIM card out of the back of their telephone when they are travelling or at a certain time of day and switch suppliers. People do not actually have 1.6 telephones, but they have subscriptions to multiple suppliers.

Those are probably two of the reasons why penetration looks different in Europe.

If you want to compare apples to apples, then we have to ask ourselves why the U.S. is ahead of Canada. I would say one reason probably has to do with the rural nature of our country. Penetration in urban areas tends to be higher than in rural areas. We have the same penetration as the U.S. in urban centres, but overall, because we have more rural areas, our penetration goes down. It may simply be that when you have cheap, regulated, affordable basic telephone service in a small community, unless you are running a small business or something where you really need the phone, particularly when there are gaps in coverage after you leave the community, there is not that need for it. I may be presuming too much on that, and if I am, I am sorry, but it is a hunch I have that may explain why we see different penetration numbers.

Before we talk about high prices, which many people come to as the primary reason — I do not believe that — those are probably the big reasons, and I think the biggest reason still is that we have subsidized phone service.

Senator Plett: MTS Allstream seemed to put some of the blame on lack of rigorous competition.

Mr. Hennessy: That is kind of funny given the discussion we just had.

Senator Plett: I would agree with that, and that is why I thought I would mention it.

Mr. Hennessy: Thank you for that. I enjoyed that.

Senator Plett: Is TELUS Canada's most reliable network?

Mr. Hennessy: I would think so, but the judge said to Rogers something like, ''Since they all have the same technology you have, and if that is a really reliable technology, then you all must be reliable; therefore, there is no evidence to suggest you are more reliable than they are anymore.''

Senator Plett: Congratulations.

Mr. Hennessy: Thank you.

Senator Zimmer: I apologize for being late. Thank you for your presentation, which I did not hear, but I will pick it up in the minutes.

I will come to one comment, first. How do you define ''reliable''? It is so open.

Mr. Hennessy: Yes. Actually, to use the word ''reliable'' in advertising, you have to be able to provide evidence from independent third parties like J.D. Power of meeting certain criteria. They actually measure things like dropped calls and the clarity of a signal. In that sense, reliability is a measurable element. For all of these marketing terms, I would agree with you there is a lot of give and take on that kind of thing. Being fastest really depends on the number of people on a network and how far you are from the tower at a given time of day.

Senator Zimmer: It is like a yardstick, like a Stats 201 course. You tell me what answer you want and I will find the statistics to support it. It is really a loose comment.

My question is a supplementary to Senator Plett's question, somewhat. Right now I am helping a friend to rent or buy a phone. I am trying to compare the rates on the phones, the message time. It is like comparing apples and oranges, potatoes, onions, cabbage. They are all different. Then I saw on the television the timid little puppy with the pirate patch called Fido. Their phone is free, with unlimited text messaging. Now, I have not gone down yet. How can there be such a range of prices and quotes and time? What is the hook?

Mr. Hennessy: We have a Fido-like service called Koodo that is similarly priced. With pricing, you start with the handset, so when we give somebody a three-year contract, which has become a point of irritation with many people, we are really giving them a handset on which the subsidy could be as high as $500. With the new Apple phones that we have just started launching, it could be even more.

Senator Zimmer: It was a BlackBerry Pearl.

Mr. Hennessy: A BlackBerry Pearl probably has a $300 subsidy. On a three-year contract, you are looking at probably $40 for even a basic data plan. If you work out that $300 over two and a half years, you are really talking about a $10 subsidy. If you had just bought the phone, as they do in some European markets, then you would see a much lower price per month.

We try to get exclusives and opportunities on the best phones in the market because that seems to attract people, bundle that in with a lot of free minutes and then put the contract in place, because often it will take 24 months to recover the investment we have in the subsidy and the free minutes.

The Americans use the same technique, and it is one of the reasons Canada and the U.S. have the highest minutes per use of any countries in the world, because of the way we sell.

Now, that Fido phone is a very simple phone. It probably does voice and text. There is no data application; it is not an expensive BlackBerry or iPhone. The phone cost the company $50, and, with some cheap advertising, it is their cost of acquisition. Their hook is that they will sell you only voice and data minutes for a specific price. It is often a very clear bundle. It is either unlimited or whatever. They figure you will not phone them; and if you try to phone them, you will have a really hard time getting through. They are deep discount; if all you want is a voice phone and not want all the fancy bells and whistles, here is the product. There is clearly a market for that.

The biggest market in Canada is for things like the smartphones, the BlackBerry, the fancy devices that cost us hundreds of dollars. I sometimes think we are as much trapped as the consumer is in this cycle of subsidization. If we gave an iPhone today with a one-year contract, we would never recover our costs. We would lose money on every customer we signed up, and we would probably sign up a lot of customers because we would be giving away $800 devices for $100.

Senator Zimmer: They have done their research and have empirical evidence they can look at and say, ''Okay we will give it to Peter or Paul,'' but one way or the other they will get it. They can get it either way, depending how they lay out the plan.

Mr. Hennessy: It is very important in our market, and that is why people say we are not competitive. I think the fact that we saw a shift of almost 10 points towards Rogers over the last couple of years would indicate there is some form of dynamic competition going on; otherwise, we would always have the same markets year in, year out.

It is critical that you have a sufficient number of customers to load up your network, because really we are in a scale of business. For its first 15 years, the wireless business was losing billions of dollars because massive investment was being put in infrastructure and there were multiple suppliers in a highly capital-intensive industry in a country like Canada that potentially cannot support that number of suppliers, and we all lost tens of billions of dollars. When the market shrank to three for a while, and penetration and usage ramped up, that is when profits happened. You hit the sweet spot in your economies of scale.

For the last two years, our company has seen on the voice side approximately a 7 per cent drop in voice revenues year over year. We are starting to make that up with data traffic, but the problem is that voice is a very profitable business once you hit the scale on the network. Data is a much more expensive product to operate, so the margins are smaller.

We will see some tough years coming up, as we have more entrants coming into the market. As we move to a data world where people will use our phones just like they use the Internet today, we will see the wireless network swamped with video as we have never seen before. We probably will need from the government double the capacity we have at networks today to be able to support the demand for Internet traffic, particularly from our younger customers.

Senator Zimmer: My last question is about spectrum. I understand that some obtained it, but they sit on it and do not use it. Should there be a time limit on it? I agree with you that the auction is a bit of a show game; it is cute. It is almost like a parliamentary or government fundraiser where you use it for other purposes of general revenue or balancing budgets. You are absolutely right: that money should be plowed back into the industry to support digital literacy, industry research and development, media products, economic development and so forth.

The problem with the auction is that the person who wins the bid may not have the best technology but nevertheless wins the bid. I would like to expand a little on the auction and the spectrum. If they have it and do not use it, should there be a time limit on it and they lose it?

Mr. Hennessy: In most spectrum, there has been some time limit or an opportunity to review. We have spectrum in certain bands that we have had for seven or eight years that we have never used, but that is because in the wireless business the period of time between when you want to acquire spectrum and when it becomes commercially reasonable to roll it out can be significant.

Some of the spectrum at 26 gigahertz and 19 gigahertz was supposed to be the next future in a Texas Instruments, or somebody said that we would build all these handsets, and then nobody built them. In those circumstances, you often have an industry that is sitting on a whole bunch of spectrum that nobody is using. That is a consequence of a world market that has not developed and not created the infrastructure equipment.

Let us narrow it down to the question of what you do if it is spectrum that you know is used and useful. There has to be at least a significant gap of anywhere from three to five years. Take the advanced wireless spectrum, AWS, auction: we bought that spectrum, but we see that spectrum in combination with the broadcast 700 megahertz spectrum that is coming up in 2011 as something we will use for long-term evolution, LTE, or the fourth generation of wireless products.

We are good for the next couple of years in terms of the code division multiple access, CDMA, spectrum that we have started to reconvert over to other spectrum, and analogue spectrum that we made more efficient by being digital, but we are waiting for the next wave to hit. In both AWS and 700 megahertz, when we look at the United States, which was earlier than we were, there has been very little product or network infrastructure built out yet. It is a bit like satellite and other businesses. It sometimes requires a very large capital expenditure at the front end and can involve a waiting period.

The issue of hoarding spectrum then becomes the classic question. A couple of studies from the U.K. by Dr. Martin Cave were provided to Industry Canada. I am pretty sure they have been made public. His proposal is that we should be moving much more towards a property rights' type of market for spectrum. That would also include penalties for spectrum in fees for not using something that is valuable but, equally, the right to sell to anybody without necessarily obtaining the kind of government approvals needed today. You treat spectrum a lot more like real estate, which does not mean that no monies flow anymore to the public Treasury Board, because spectrum is a public resource, but it is a lot like mineral rights or anything else — it is done much more on that market basis, and that is probably the best way. If you have the ability to have a healthy secondary market where people can ultimately decide it is better to sell than to hold, because there are some costs imposed by the system if you just sit on spectrum and do not use it efficiently, and people are able to trade, that can ultimately lead to a very efficient structure.

One of the biggest problems we will face in the next couple of years is that not only do we need to double the spectrum we have today to provide wireless Internet, but that spectrum has to be contiguous to be efficient, which means that Industry Canada has to start thinking about how to take back spectrum — whether it is from the Department of National Defence or all kinds of public users — that is being underutilized and put it back in the market in such a way that it can be re-banded, if you will, so that it works for the Internet. A band, like the 700 band, is a grouping of spectrum. It is a huge problem. I do not know what all the answers for that are, but the government must stop thinking about putting a little more spectrum in the market today. They are almost playing the supply and demand game against the industry, so that the government will put out a little right now, or like the spectrum auction we were just in, it will restrict your access to supply while it makes sure the new entrants pay less and you pay more. I do believe we have to have a spectrum market.

Senator Zimmer: I just want to say it sounds a bit like the stock market — sell, hold and trade.

Senator Cochrane: When you came before us, you certainly made an impressive statement about now reaching 40 per cent of communities that could not receive wireless before. That is impressive. We have been hearing all this fall about the remote areas not having access to wireless networks. This is just a great improvement. Maybe for the benefit of our listeners you could elaborate a little bit on which remote areas. I know you mentioned Alberta and British Columbia, but what about further east? You did mention Northern Quebec as well. Have you gone into some of the other areas, such as the eastern section?

Mr. Hennessy: Let me just clarify first. In the wireless extension I referred to, we have provided 40 per cent of communities that did not have anything but dialup Internet with a broadband service. Some of them may have had wireless before, but they did not have broadband. They did not have broadband wireless or they did not have broadband wireline. There is a slight nuance there. They might have had voice phone, but not Internet service. That is the first part of the question.

Because we built different parts of the country jointly with Bell, while we built Alberta and B.C., as I said, we also built much of Quebec. In Eastern Canada, Bell Aliant has pretty much covered Nova Scotia, New Brunswick, Prince Edward Island and most of Newfoundland.

As I said, when you think about 93 per cent of the population, it is incredible. If you look at the map, there is still that huge gap in terms of many of our northern communities where not many people live.

The good news there is that while we hit maybe 40 per cent of the communities that were identified, there are big strides being made in the satellite business. I was talking to John Maduri at Barrett Xplore, which is headquartered down in New Brunswick, and his company has been rolling out satellite Internet service. I have it up at my cottage. It is a lot better than dial up, but it is what they call 500 kilobits. It would be seen in the city as kind of slow, but it is awesome at my lake. They are about to launch next-generation Ka band satellites that will deliver above the standard that Industry Canada has set as minimum for broadband under the stimulus program.

I would think that just as satellite in the 1960s started to bring the North into contact with the rest of the country, satellite in many of these remaining communities will be the tool that delivers Internet to those communities. My sense is that it will not be as expensive or prohibitive as people might think. At my cottage, for broadband at the 500 kilobit speed I pay just under $60 a month. For low-income people, that is still a huge barrier.

That has always been the problem with our universal system. It has never been predicated on affordability. Within those auctions, in addition to all the things we have been talking about, you may need to have a fund that ensures the poorest Canadians have access to technology or to a credit that puts the satellite dish on their home or whatever. That is probably a great idea.

I would say that by 2012 or 2013, there will be a significant satellite Internet service available to the rest of the country, whether it is cottage country or the Far North.

Senator Cochrane: You do not have a move afoot to go further east with your technology?

Mr. Hennessy: We tried that a couple of years ago, but we were rebuffed by the government in our proposal of marriage to BCE when the private equity companies were chasing it. We will go east in the wireless business, and we are east in the wireless business. We do not have a large foothold in the Maritimes or Atlantic Canada. We find that some of the greatest loyalty still remains in provinces like Prince Edward Island and New Brunswick, where Island Tel and NBTel were an essential part of those communities. So many people were employed by them that many people will probably go to their grave sticking with the phone company, no matter how much of a discount we want to offer.

Senator Cochrane: They are very faithful down there, I must tell you.

I am concerned about the high roaming charges for these mobile applications. I now leave my cell phone back here in Canada when I go to the U.S. because the roaming charges are just unbelievable. Will anything happen to that? I think I pay $2 a minute just for voice.

Mr. Hennessy: It is dependent on the carrier we have the roaming agreement with. One of the benefits you will see with the new technology is that we have now been able to enter into roaming agreements with some 200 countries under the GSM alliance because of our new technology, and that technology is also starting to be rolled out in the U.S.

Interestingly, roaming is not really a business or a profit centre for us. In fact, it can be a real irritant and a problem for rolling out services both in the U.S. and in Canada. I am more familiar with some of the Canadian situations, but a good example would be when we rolled out a product called Connect 75 Unlimited, which gave you unlimited roaming and data service for $75. We forgot to put into the equation that when you are using the TELUS service in Atlantic Canada, you were often roaming on the Bell Aliant network and paying high data rates. We found that about 50 of our customers were costing us in the neighbourhood of $300,000 a month. Being smart business people, we had signed them up to three-year contracts, and we spent some time trying to convince them we could give them better deals if they switched. A couple of them threatened to take us through the consumer complaints process. We are slowly phasing that service out. It is difficult to offer things like unlimited voice services if you are at times dependent on other people and on paying high roaming fees.

We would much rather see the roaming fees come down, because they are often dictated by a state provider. Some of the worst situations we see are when people are on holidays in Mexico. The complaints always come back to us. We have been pretty good when people occasionally end up with $1,000 invoices or multi-thousand dollar invoices. We have managed to avoid that just by keeping a close eye on when that happens and have been good about making those things disappear, because you do not want to be seen in the newspaper looking like you charged somebody $20,000 and you did them a favour by writing their bill down to $5,000. That is bad PR.

In Europe, the government decided to regulate roaming fees. They basically put a cap on the roaming fees between countries, because many of the European operators were making back money from the money they lost in the auctions over there for 3G. Solutions to roaming would a great thing and is an issue worth discussing.

Senator Merchant: In Europe, they have a different culture for paying for calls. They pay for calls they make but not for calls they receive. Does that benefit the consumer?

Mr. Hennessy: I would say it depends on whether you are primarily a wireless customer or a home telephone customer. In many European countries, people pay by the call for their home phone. When you phone out to a neighbour or to a wireless network, that part of the call is charged to you. In Canada, we have unlimited local calling. It is for a flat rate. I think back in the 1970s somebody proposed charging people per minute and a revolution occurred before the proposal had even gotten in the door at the CRTC. People like the flat-rate calling. They like the very cheap service.

As a consequence of that, we ended up with a system that was designed by regulatory fiat such that anybody competing with the local telephone company had to pay for traffic both ways. I remember being at the CRTC in 1984 when a proposal came in that companies should interconnect; the telephone company should pay its share and the wireless should only have to pay for wireless traffic.

That was turned down at the time by the commission because there was no competition in Canada in the 1970s and 1980s, and the public policy objective was to assure that we had 100 per cent affordable and accessible telephone service. That was done by keeping long-distance rates high and making any business competitor — when the wireless guys came into the business — pay full freight for traffic both ways. It was a great advantage to the telephone companies who were always made whole as long as they promised to keep rates low.

This is part of the problem with the OECD studies. When you talk about how much it costs a cell phone user in Europe, you have two problems. One we discussed, that people may have multiple SIM cards for one phone, so they are using more minutes and paying more than the evidence shows. The other point is that they are not paying half of the bill that wireless customers in Canada are paying, because the local telephone subscriber over there who is paying per call is paying that part of the wireless call.

When I phone the wireless network in Sweden, I, the home phone user, am paying that. You end up with what seems to be cheaper wireless service and much more expensive home phone service. Since 75 per cent of our revenues today come from wireless and data, we would probably be willing to say, sure, we will do local, measured service and you can cut our costs and load up the costs on the home phone subscriber.

I still think that Canadians would overwhelmingly object to the idea of paying per call on their home phone or losing their unlimited calling or finding that whenever they phone a cell phone they will be billed extra. We have gone down two different paths, and you cannot turn back the clock. It is very much an apples and oranges situation.

It looks like cheaper cell phone service as long as you neglect the fact that part of your home phone bill is also your wireless bill. If you combined all that together, I am not sure there would be as significant a difference as people think.

Senator Merchant: Thank you for that clarification because sometimes we are comparing things but not dealing with the same kind of thing. Like you said, it is apples and oranges.

Mr. Hennessy: It is difficult. It is like these OECD studies that put Canada almost at the highest. Then you have to question when an OECD study says that the only country more expensive than Canada is the U.S. and that the U.S. is the most expensive country in the world. You have to think those studies are suspect and not using the same criteria for everyone.

Senator Merchant: I hope you will let me use the opportunity of having a major player with us to ask about the coming request for proposals. This deals with the Government Enterprise Network Services project. An RFP is in process that will lead to the purchase of data networking, IP work and hardware and software within various government centres across the country. The contract is to be eight years in length with an option of renewal.

I would be interested in the views of TELUS on cooperating with smaller players like SaskTel, Videotron or Télébec. The RFP gives no encouragement to TELUS, Bell or MTS Allstream to involve the regional players. As a Saskatchewan senator I would be interested in your views on how to make it possible for regional players to be part of this important Government Enterprise Network Services RFP. Would you, for example, support or fight initiatives to modify the RFP to give some points and therefore encouragement to any of the three major companies who agreed to involve the regional companies as a part of their bid?

Second, if the RFP were changed, has TELUS worked favourably with SaskTel and with either Videotron or Télébec in the past? Would TELUS be prepared to investigate working with these regional players on a revised RFP over the coming long-term contract from Government Enterprise Network Services?

Mr. Hennessy: A lot of that question I cannot answer because I simply do not know. If you do not mind me turning my head for a second, I will find out to the extent we may already be in the application process. If we are in the application process, then I have a feeling we are bound by certain contractual terms of confidentiality with respect to that particular contract. I can talk about some of the other things.

I think the best way to deal with the first half of that question is probably to give an undertaking.

The Chair: Would you like to provide an answer to the clerk?

Mr. Hennessy: Yes.

With respect to working with other people, we won the Government of Quebec contract, which is one of the largest provincial contracts that have ever been granted. In that situation Videotron is actually a partner of ours.

In today's business world there are very few contracts where you find there are not subcontracted parties involved in that kind of an undertaking. To the extent where you are at the point where the bidding process has not started yet, we will often talk to other carriers because there are gaps. Often when there are large contracts, there are gaps you cannot fill totally by yourself. I will have to go back and talk to our business people as to where it is at so that I do not say something inappropriate.

Senator Cordy: I am not a regular member of the committee, but I would like to congratulate the committee on undertaking such an interesting study.

Thank you very much to you for the information you have brought here this evening. The field of communications has changed dramatically, and what we are seeing today would have been science fiction when I was a child, which certainly dates me, looking at the wonderful things happening in communications.

I have had the opportunity on a number of occasions to meet with parliamentarians around the world, and particularly the NATO countries, because I have an involvement in that. My colleague talked about Estonia. I had the occasion to sit with parliamentarians from Estonia who talked about cyber attacks on their communications system. They referred to it as cyber terrorism, and it brought their country to a standstill because their communication systems were bombarded with so much information that it shut the systems down.

When you look at what we are doing now with technology, with eHealth, with banking, it could technically bring a country to a standstill. Estonia was hit hard. Do we have safety mechanisms in place in Canada so that this kind of thing can never happen here?

Mr. Hennessy: We have a large security department, with various arms of national security. This is one of the most significant issues they worry about. They pay a lot of attention, as do our allies south of the border, to technology transfers, who builds networks, who can sell technology and to what part of your network, and how to protect against those types of attacks. It is a frightening proposition.

Although I do not usually watch it, I happened to catch 60 Minutes two weeks ago. It might be worth getting the tape of the show for the committee to view, because they did a segment on this issue and mentioned the problem in Estonia. It is a game that many of the major states are playing in terms of putting spyware and other things into networks that ultimately could have the potential to disrupt banking systems or other information systems in the economy.

We have multiple layers of security built into the network. When we do contracts with departments, such as National Defence, multiple layers of security clearance are required for people who work on the networks. However, no matter what you do, all networks are vulnerable.

Senator Cordy: Do you put these mechanisms in place voluntarily? If something happened, from a PR perspective it would be devastating for any company. Is there any government regulation in place?

Mr. Hennessy: Absolutely. There are many levels of government regulation within the security services. I am not talking about eavesdropping but about the security of networks. Under Industry Canada there is an emergency preparedness group that studies whether there is enough redundancy in networks and if something goes down whether there is backup in the network to support the continuing of the economy or our health care system. If you have an opportunity to watch 60 Minutes, you will be frightened. You might want to put some of your money under your pillow just in case.

Senator Cordy: It is not earning much interest in the bank.

The Chair: We will look into obtaining a tape of that episode of 60 Minutes. Earlier you started to mention Globalive. Someone wanted to ask a question about the CRTC and its process, because people have gone halfway to setting up a system and then have been told by the CRTC that they are not allowed to do it. I promised people that we would finish at 8 p.m. so you have two and a half minutes.

Mr. Hennessy: I believe that in the case of Globalive, the CRTC made one of its best decisions in a long time. The decision makes it crystal clear that Globalive was ineligible to bid in the auction, should not have been granted a licence and is controlled by a single carrier in Egypt; 82 per cent of the capital structure of Globalive is owned by Orascom, an Egyptian company. It controls the brand. It has a $100-million licensing agreement with respect to the brand and purchases of equipment with penalties built in. It has the right to buy out certain board members, including to the supposed majority shareholder. When the CRTC put all the information in the case of Globalive on the public record, one could only be astonished to try to figure how it possibly got into the business in the first place.

That decision was absolutely the right one to make. Otherwise, you would be saying that as long as there is about 18 per cent capital in a communications company from broadcasting or telecom, then it is good enough to be Canadian, which is simply absurd. We are concerned that if this decision is overturned, the government has effectively gutted the foreign ownership restrictions not only for wireless but for the telephone company business, cable companies, and broadcasting. In the telecom sector, we have most-favoured-nation clauses under both the General Agreement on Trade in Services, GATS, and NAFTA. The only body that can change the foreign ownership laws is Parliament because Parliament made the law in the first place.

On that one, I would give the CRTC 100 per cent support.

The Chair: What about other decisions? No, never mind.

Mr. Hennessy: We have had our arguments in the past.

The Chair: Thank you. Senators, we will not meet next week. We were supposed to consider Bill C-27 but it is still in the house. Wednesday is your caucus Christmas party. The following Tuesday the Privacy Commissioner will appear before the committee. Wednesday will be our Christmas party. The week after that, we will hear from both Videotron and Bell on Tuesday and Wednesday.

The Chair: Mr. Hennessy and Mr. McTaggart, thank you.

(The committee adjourned.)