Current Threats to Innovation: Centralizing Control and Throttling

Canada’s Voice Over Internet Protocol industry is made up of large VOIP providers, such as Primus and Vonage, and several small VOIP providers. While the smaller companies lack the developed customer base of larger VOIP providers, they provide competition in pricing and product features. For instance, Unlimitel, an Ontario-based VOIP provider, competes by offering ‘no commitment’ plans, in contrast to larger companies like US-based Vonage, which requires subscribers to commit to monthly plans.

The open Internet is critical in the VOIP industry. Under a discriminatory communications regime, an ISP could require those who run VOIP services to pay a greater premium for a faster connection or superior Quality of Service. Such a requirement would radically alter the relationship between companies like Vonage and Unlimitel. Rather than competing based on pricing, product features, and customer service, these VOIP companies would compete based on which firm could pay the highest ISP premiums. In such a competitive landscape, the market shift for Unlimitel would be significant; that is, if Unlimitel could not afford the premium connection, it would be forced to remain on a basic connection that could not handle the demands of providing VOIP service. As a result, this pricing would degrade Unlimitel’s quality of service, while Vonage’s would improve or remain the same.

The threat of a discriminatory Internet puts Unlimitel — as well as other potential small businesses and startups that are reliant on the open Internet — at a disadvantage to existing, better-resourced, and possibly foreign competitors. The open Internet empowers Canadian-based online service providers to compete against their bigger, foreign rivals.

Incumbent ISPs are motivated to centralize control because of the Internet’s transformative economic impacts. ISPs’ focus on “pursuing innovations that fit their resources, their capacities, and their economic position” means they do not innovate as fast as the mass of non-incumbent innovators.³⁰⁵ Because many prospective research portfolios will not align with the big ISPs’ own goals and ends, they miss and will continue to miss opportunities.

The past has shown us that big ISPs typically employ excellent network engineers who can broaden the scope of their networks, but that these same ISPs are less apt at identifying how users will adopt the network, the reasons behind that adoption, or the value users find within the network itself.³⁰⁶ What users, on the other hand, seem to recognize, is that fast data speeds facilitate previously unthought-of applications and content provision types.³⁰⁷ An incumbent business is more path dependent, and therefore less attentive to technologies and processes that are incompatible with its “capabilities at the technological level, at the organizational level, or with respect to its economic position in the market.”³⁰⁸

Big ISPs are further threatened as their complementary products and services (e.g. TV content broadcasting, telephone service) are threatened by disruptive Internet services that restructure those product groups’ basic profitability (e.g. streaming video services and VOIP reduce costs of business and thus may not generate as much profit for ISPs as their traditional broadcasting/phone services have).

Incumbent ISPs are at a particular disadvantage when they rely on flat-rate pricing strategies. Under flat-rate strategies, significant changes in Internet usage (e.g. adoption and high usage of streaming video) that reduce profitability of complementary products (e.g. broadcast television) are not balanced by increased Internet transmission revenues.³⁰⁹ In other words, ISPs do not make more money as users increase their bandwidth use. This gives big ISPs an incentive to push for different pricing schemes, such as usage-based billing, where users are charged more for using more bandwidth over a certain monthly cap. This type of billing scheme, however, discriminates against some of the most innovative uses of the Internet that require significant bandwidth.

The value of e-commerce and online shopping is a critical part of the Canadian economy. Since 2001, Internet sales have increased steadily as Canadian businesses and citizens use the Internet more often to sell goods and services, and to obtain product information. In 2009, around 39% of Canadians 16+ used the Internet to place over 95 million orders. This was up 7% and 25 million orders from 2007. Similarly, 51% of Canadians between 16-34 made an online purchase of a product in 2009, equating to $15.1 billion worth of goods and services — an increase of $2.3 billion from 2007.³¹⁴ The increase in value of goods and services purchased online was both a result of more shoppers and higher-order volumes.

Yet it is not just the monetary value of e-commerce that makes it a pervasive force in the online environment. E-commerce is not exclusively about sales, but more broadly concerns the exchange of values between businesses and customers, and this exchange is made possible with Internet use. That is, e-commerce successfully acquaints customers with the offerings of brick and mortar businesses (i.e. businesses with a physical presence, like a store) and complements traditional shopping — as demonstrated by the 52% of Canadians who used the Internet to “window shop” in 2009.

Further, 69% of those who window-shop online reported that they subsequently made a purchase from a store.³¹⁵ Online shopping plays a fundamental role in the sales of many brick and mortar businesses, particularly those selling electronics, appliances, furniture, clothing, jewelry, and accessories. ³¹⁶

Ensuring that Canadian businesses are able to utilize online tools to develop high quality customer relationships is critical in an online economy. Constantinides, Romero, and Boria emphasize that Web 2.0 tools permit interaction between e-tailer personnel and customers. Such interactions “can enhance customer confidence and trust (e.g. live agents, virtual communities) and improve customer service (e.g. chat or live agents, VOIP applications). At the same time, the shopping experience is improved both by richer stimuli and by different tools that allow a more enjoyable and easier interaction with the web site.”³¹⁷

Discriminatory practices affect businesses of all types, but educational, cultural, arts, entertainment, and recreational industry sectors may be disproportionately impacted, given their often-limited resources for online commerce and branding. If we keep in mind that e-commerce is about more than just sales (in that it is about enhancing value propositions across any division of a business using Internet-enabled systems), the e-commerce activities of retail, trade, transportation, warehousing, and manufacturing industries may also be negatively impacted by discriminatory treatment of their traffic. Given the importance of on-demand supply chains, the inability to pay ISPs for rapid data transit pertaining to inventory queries and shipping orders could have adverse consequences for smaller firms within each of these industries.

A tiered Internet, that degrades access to retail goods, customer services, or communication tools, would impact sales, trust, and brand effectiveness. Under a tiered Internet infrastructure, restricted access to content and services will reduce incentives for businesses to transfer their services online, especially when this tiered system discriminates against the key tools they depend on to develop and spread brand awareness and build consumer trust. Such a discriminatory digital communications regime would have the effect of reducing Canadian businesses’ productivity in the marketplace and eroding their ability to compete against companies in other jurisdictions that enjoy the benefits of non-discriminatory Internet infrastructure.

Economic activity has been steadily moving online. Businesses large and small have and will continue to benefit from the operational efficiencies and opportunities for innovation that the Internet offers, but any interference with the fast and secure exchange of information online will negatively affect the competitiveness and profitability of Canadian businesses, and the Canadian economy in turn.

The open Internet plays an important role in the video game industry. The Canadian gaming industry is among the world’s largest, placing just behind Japan and the United States.³²⁰ Ubisoft, a Montreal-based company, is a market leader, developing games such as Assassins Creed and Splinter Cell.

For video game developing companies like Ubisoft, latency times are critical to the multiplayer gaming experiences. The multiplayer function is a key element in most games released today and thus traffic delivery is essential to proper functionality. Delays in delivering traffic that result from a discriminatory Internet structure will negatively impact a game’s playability and create unfairness between competitors.³²¹

Given that degraded or non-functioning multiplayer functionality can significantly threaten a company’s ongoing presence in the market, if traffic discrimination were to expand, Ubisoft and other gaming companies would need to divert resources away from the research and development of innovative games to address latency issues — for instance, paying ISPs to maintain present levels of service.³²² Failing to do this would undermine the community-related benefits of online gaming, thereby reducing product attractiveness to consumers and weakening sales in turn.