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The Berkman Center for Internet & Society at Harvard University released the final version of its report Next Generation Connectivity, A review of broadband Internet transitions and policy from around the world.  The final version incorporates some updates and revisions and as a result, Canada moved up the rankings from 22^nd to 19^th out of 30 countries.

Canada’s ranking according to the Berkman Center’s report gives the impression that broadband service is relatively poor in this country.  However, closer examination of key indicators shows that Canada’s results are not substantially behind many of those in the top tier. 

Canada’s broadband penetration is within a few percentage points of the top three countries, particularly when household penetration rather than per capita measures are used. 

Canada’s broadband service delivered download speeds that are within 1.5 Mbps of the fastest countries (after Japan and South Korea), as measured by Akamai’s “State of the Internet”, as noted in the previous observation. 

Canada’s broadband service prices, at least for cable modem services, compare favourably with those in highly-ranked countries such as Denmark and the Netherlands, as shown in the following chart taken from a recent submission by the Canadian cable companies.

As was noted in an observation posted after the draft report was released, the Berkman Center’s rankings were based on penetration (service adoption), speeds and prices.  The final version fixed some aspects that were problematic in the draft report but the vast majority of the indicators remain unchanged for Canada. 

First, more data on prices was incorporated from a new source – Point Topic that included more recent price information from mid-2009 and, in Canada’s case, prices for services with speeds greater than 35 Mbps that had not been used for the rankings in the draft report.

Second, it abandoned the practice of assigning a last place score for any indicator for which there was no data available. 

Taken together, these changes had the greatest impact on Canada’s ranking on relative price of broadband service, which improved from 25^th to 19^th. 

However, Canada’s ranking on price remains biased downwards because the Berkman Center continued to rely heavily on OECD data, which has flaws as previously discussed. In addition, it excluded pricing information from all but the top four service providers.  In response to an earlier critique posted here, the Berkman Center stated at footnote 57 that it only looks at the top four providers and in doing so it excluded Vidéotron. 

The rationale for taking data for the top four might be justified in countries where there is a legacy of a single national provider (often formerly government-owned) and competitors that rely on national access to that provider’s infrastructure and/or are affiliates of incumbent providers in other countries.  However, in Canada, the market is mainly served by regional providers facing different market conditions that can affect the price and services offered.  These are not “smaller, more marginal providers, who might be small providers in uncompetitive remote markets or who are not well known to customers” as stated in the Berkman Center report.

Including only the top four providers in Canada excludes more than 30% of the market based on subscriber numbers. In fact, recent reports of subscriber numbers suggest that Vidéotron has edged out TELUS for fourth place.  Interestingly, the Berkman Center appeared to have calculated the price of broadband based on the top five providers as noted at footnotes 58 and 226 and found that the prices for Canada decreased as a result.  If these results had been incorporated into the analysis, it is likely that Canada’s ranking would have improved further.

The other notable change was the addition of an indicator for average download speed achieved based on Akamai’s “State of the Internet”.  However, this data was blended with the same data from the draft that used the flawed OECD data on advertised speeds and Speedtest.net’s data on user-generated speeds (see discussion here).  Interestingly, adding the one indicator from Akamai improved Canada’s ranking from 20^th to 17^th on service speed.  Even more significantly, this was based on Akamai’s “State of the Internet” report from the fourth quarter of 2008 when Canada ranked 13^th among OECD countries.  The most recent report indicated Canada ranked 10^th. 

Canadian broadband service has been criticized for being too slow.  However, information from Akamai Technologies Inc. indicates that actual achieved speeds of broadband service in Canada compare positively with several countries.  This is according to data that Akamai collects from 444 million unique IP addresses in countries around the world.

Akamai’s “State of the Internet” report for the third quarter of 2009 reported that the average achieved speed was 4.25 Mbps downstream for wireline internet connections in Canada.

Most OECD countries were reported to be delivering similar speeds, with the exception of South Korea and Japan.  Sweden ranked third after these two countires, with an average speed of 5.7 Mbps, only 1.5 Mbps greater than the average in Canada.  As shown in the chart below, several countries achieved speeds in the 4 to 6 Mbps range.  Most users would find little difference in their internet experience within this range.

Canada’s average speed of 4.25 Mbps downstream reflects the types of services to which consumers subscribe.  If the bulk of subscriptions are concentrated among tiers of service with maximum speeds of 5 Mbps, then the achieved speed will tend to be closer to that, regardless of the potential speeds of the fastest service tiers.  In 2008, more than 40% of Canadian subscribers used a service with advertised speeds of less than 5 Mbps.

Further details from the Akamai report indicated that 77% of internet connections in Canada achieved speeds of at least 2 Mbps or greater and 24% were at 5 Mbps or greater.  Canada ranked tenth in terms of high broadband (5 Mbps or greater) connections per capita.

The four largest cable operators in Canada posted overall growth in revenues of approximately 12% in 2009 compared to 2008, according to information posted by the CRTC.  Total revenues topped $8.3 billion for the period ended August 31, 2009.  Profit (before interest and taxes) reached $2.3 billion.  These results include the cable operators’ video programming services and their non-programming services – internet and telephony services.

Most of the growth was due to higher revenues from non-programming services, which increased by 24%.  Subscriber growth is likely the primary driver, with internet subscribers up more than 6%; and telephony subscribers up 23% between the third quarter of 2008 and 2009, as indicated in the four companies’ quarterly financial reports. 

Video services revenues increased by 7%.  A small portion of the increase can be attributed to subscriber gains of 1.4% - which is consistent with normal household growth.  Another source of the increase comes from subscribers adding digital services and related equipment (personal video recorders, high-definition set-top boxes).  Increases in the prices for video services account for some of the gains as well.

The faster growth in non-programming services has boosted these services to about 45% of the total revenues earned by the large cable operators.  Current trends indicate that these services could become the predominant source of revenues within the next couple of years.

Non-programming services already account for about two-thirds of operating income.  The higher operating income for these services is due to much lower operating expenses, which account for only about 25% of the total.  Non-programming services do not require expenditures on community channel or programming content (affiliation fees), which together account for 37% of cable operators’ total operating expenses.

There are a few gaps in the data publicly released for the cable operators that require some estimates to derive the profit before interest and taxes (PBIT) for the video programming and non-programming segments, respectively.  An allocation of the depreciation expense is necessary to determine the PBIT for video only services.  Information filed in a recent CRTC proceeding, combined with historical data, supports an allocation of about 65%.  

This analysis indicates the large cable operators earned PBIT from video services of less than $250 million – about 10% of the total profits before interest and taxes.

The following chart provides a comparison of the revenues and profits (PBIT) for video programming and internet & telephony services of the four large cable operators in 2009.

Canadian broadcasters have felt the effects of the recession in the form of declining advertising revenues for their over-the-air broadcast stations.  This has been made evident in the CRTC's publication of financial data for selected companies the fiscal year ended August 2009.  

CTVglobemedia Inc. and Canwest Media Inc. – the two largest private OTA broadcasters – filed results indicating year-over-year ad revenue decreases of 6% and 9%, respectively. 

At the same time that broadcasters experienced decreased advertising revenues, CTV and Canwest increased programming expenditures by 5% and 8%, respectively.  Since programming expenditures represent some 80% of their total operating expenses, it is difficult to offset the decline in revenues through cuts in other expenses.

Expenditures on foreign programming increased, while those on Canadian programming decreased.  This widened the spending gap between foreign and Canadian programming expenditures.  In 2009, CTV spent $1.82 on foreign programming for every dollar spent on Canadian, while Canwest spent $2.12 on foreign programming for every dollar spent on Canadian. The chart below illustrates the relative levels of programming spending for each company in 2008 and 2009.

Canada’s main public broadcasters, CBC, continued to spend the vast majority of its programming budget on Canadian content.  However, CBC's English language stations also increased spending on foreign programming, from $26 million in 2008 to almost $40 million in 2009 - an increase of 52%.

Studies providing international comparisons of internet services are having a veritable baby boom.  The Berkman Center for Internet & Society at Harvard University released a draft of the report Next Generation Connectivity, A review of broadband Internet transitions and policy from around the world.

There is much to be learned from the growing body of international comparisons, including the Berkman Center Broadband Report.  Unfortunately, for Canada, many will put too much emphasis on a few select rankings from the Report without taking the time to consider how these were derived. 

As noted in the previous post to this website, the report Lagging or Leading, The state of Canada’s broadband infrastructure, covered similar territory and looked at many of the same sources for data.  The Berkman Center’s rankings were based on penetration (service adoption), speeds and prices – all factors considered in Lagging or Leading. And yet the Berkman Center Broadband Report found Canada ranked 22^nd out of 30 – towards the bottom of the pack.

The Berkman Center relied extensively on OECD data for a number of its comparisons.  It used OECD data on broadband penetration per 100 population as a key input.  However, as noted in Lagging or Leading, this measure is biased against countries such as Canada.  The Berkman Center Broadband Report also included penetration per household but relied on older OECD data where Canada ranked 8^th even though more recent international comparisons where Canada ranked as high as 5^th (see Lagging or Leading, Table 4.2.2).

The Berkman Center incorporated into its ranking data on the penetration of 3G mobile services.  Canada was reported to have a very low level of 3G subscribers per 100 population – less than 10%.  There are two concerns with this data point.  First, Canada and the United States do not compare well on measures of mobile penetration per 100 population because subscribers in these countries generally do not have multiple accounts (or SIMs).  The Berkman Center Broadband Report acknowledged this difference yet did not make any adjustments.  Second, Canada’s very low ranking on 3G penetration is not consistent with the fact that the service is available to 91% of the population, as noted in the CRTC Communications Monitoring Report.  Since the Berkman Center’s ranking assigns a 30% weight to this indicator, Canada’s overall ranking on penetration is pulled down.

The Berkman Center next turned to measures of broadband service speeds where OECD data once again played a significant role, accounting for one-half of the country rankings for this indicator.  As noted previously on this website, the OECD rankings on speeds are not reliable.  In the case of Canada, the OECD relied on only 16 observations and, among those, significantly under represented higher service levels and over represented lower service levels.  The OECD relied on many more observations for most other countries, with some countries' lists including duplicate services for these higher speeds.  

The Berkman Center made some effort to address the multiple and duplicate offerings for its analysis of service prices among the 30 countries.  It supplemented the OECD observations with its own analysis of advertised service prices.  Some of these included higher speed services available in Canada, as noted in Figure 4.15 of its Broadband Report.  Yet, none of these observations were included for the speed comparisons.

The other components of the Berkman Center Broadband Report rankings on speed were drawn from results of user-generated tests of achieved throughput speeds and latency conducted using Speedtest.net.  It was acknowledged that this data has “several confounding factors that [require] we interpret the data with caution,” and the results on latency “produced very counterintuitive results”.  Yet, the resulting rankings from this data accounted for the other half of the countries’ rankings on speed.  Concerns respecting the use of data from Speedtest.net were discussed previously on this website.

Prices composed the third aspect of the Berkman Center Broadband Report on international comparisons.  The OECD data on prices figured prominently here as well, accounting for one-half of the overall price ranking.  As noted, the Berkman Center took additional measures to update and expand the OECD pricing data to derive new rankings based on the price across different levels of service.  In each case, Canada’s ranking improved by four to six places. 

While the steps taken to improve the pricing data were helpful, it is curious why the Berkman Center decided to create its overall ranking on price based on both the OECD price observations and a combination of the OECD and its own updated and expanded data.  The latter would, for the most part, encompass the former observations so there is no reason to use both.  In the case of Canada, using both sets of price rankings pulls Canada down in the rankings. 

The other significant factor affecting Canada is the exclusion of very high speed services (download speeds of at least 35 Mbps), notwithstanding the fact that Figure 4.15 of the Berkman Center Broadband Report clearly indicates that it had price data from Canada for such services.  Because this data was ignored, Canada was assigned a nominal ranking of 30 out of 30 for this category.  And because the OECD also failed to include any such services from Canada, this very poor ranking was double-counted. 

The Berkman Center Broadband Report does not do justice to Canada’s broadband performance because of these missteps.  Compounding this is the Report’s heavy reliance on OECD data that have serious methodological problems and biases that weigh against Canada.  Since the Report is only in draft form and is being review by the Federal Communications Commission, perhaps some of these concerns will be addressed.