August 1st, 1995 Bureau of Competition Policy Industry Canada 50 Victoria Street, 18th Floor Hull, Quebec K1A 0C9 fax: 819-953-8546 Attn: Laura Joyce, Cal Gundy Dear Laura and Cal: Please excuse my tardiness in getting this information to you. As you're no doubt aware, one of the perils of small business is the invocation of the "headless chicken dance", evident around here much of the time. Answering your "Questions for Calgary ISPs" is a nontrivial task. You've posed questions that, for the most part, have either a large variation in possible answers, or require broad speculation, as we are by no means "industry analysts", rather independent businessmen focussed by necessity on the minutae of our own operations and survival. That having been said, I'll attempt to tackle your queries, one by one. 1. The six signatories to the statutory declaration represent the majority of commercial Internet dialup access in this city. As previously indicated, you'll need to poll them individually for details on their business (eg date of entry into market, etc.). Not appearing are the following: The Network Center: Run by an engineer of my professional acquaintance named Jack Smith. Jack is providing full time and ISDN access in addition to dialup service. He has also lined up some local computer/software retailers, notably Soft Options, to storefront for him and promote his service. I approached him in the course of marshalling support for this action, and he declined, confident, based on his many years of experience within the telecommunications industry, that left to their own devices, AGT would screw this up on their own, and wouldn't require our intervention to do so. Cybersurf Internet Access: Cybersurf is the true anomaly in the Calgary ISP business. They don't provide TCP/IP (SLIP or PPP) access. Instead, users must use their proprietary software, based upon some sort of "remote Windows display" scheme, to gain Internet access through their system, which also, I believe, limits them to serving PC/Windows users. Coming from a system design background, I personally feel that this is a foolish, misguided way to provide the service, but they promote their method as far easier to set up and use than SLIP/PPP. They also make some very extravagent claims, which I feel are at least deceptive and possibly fraudulent, regarding the "speed of access to the Internet" that they provide. I approached Gary Gardner, president of the company, while gathering signatories, and he too declined. He was apparently under the (I believe) rather silly impression that he was on his way to selling his nonstandard protocol to AGT for use in their service, thus lightening their user support load. It probably didn't occur to him to take a look at their tariff application, which specifically stipulates TCP/IP traffic. Calgary Free-Net Association: Like other freenets, this group provides extremely limited, text-only access to the Internet. There is no love lost between the Calgary Freenet and AGT, reportedly stemming from a promise made by AGT to provide Centrex service to them, then refusing to do so, sticking Freenet with full- price business lines. The upshot of this is that Freenet, with a fixed amount budgeted for phone lines (based on the Centrex rate) was then only able to install half the number of lines they had counted on, making it extremely hard for their thousands of users to gain access to the service. Shawn Henry, the Freenet's director, would have been very happy to have signed the statutory declaration, but was politically prohibited, since AGT is (ironically) a donor. There is growing assortment of minor players in the market, some running small dialup pools, and some providing only World Wide Web (WWW) services. But that's the picture with respect to the "major" suppliers at present in this market. To the best of my knowledge, none of the companies currently on the scene provided Internet service prior to early 1994. Aside from the obvious (AOL, Microsoft, the cablecos, etc.), it's very difficult to speculate on who might enter the market in the next two years. 2. Prodigy, Compuserve, and AOL are at present, not much of a threat. Notwithstanding their historical predominance in the field of online services, consumers want Internet access, and Internet as provided by those companies is still limited and relatively expensive. We (ISPs, that is) seem to be taking from them a steady stream of users. Many of the converts are people who signed on with those services simply because software was included in a modem purchase, and only after a month or two realized how much more expensive it was to get a more limited service. The Microsoft network is, of course, quite another issue. As you're probably aware, there are movements in the US, spearheaded by the Justice Department monopoly-busters, Ralph Nader, and others, to prevent Microsoft from bundling software for their online service with Windows 95. I have no doubt that ISPs would be damaged by the inevitable lemming-like migration of vast numbers of computer users to Windows 95 should it include the native Microsoft network access. Obviously, that's a fight already being waged by capable people, and one somewhat outside of our realm - at least for now. See my comments below on their apparently pending Calgary service. 3. This question is somewhat like "Describe selecting, reading, and understanding a book". Setting up an ISP is either a cheap, trivial exercise, or an expensive, difficult one. It all depends on who is doing it, and how they chose to proceed. The best thing to do, then, is present Canada Connect as a case history. Constructing a service such as this can be accomplished on the cheap, in a basement with used PCs and lax network standards - or it can be done with shiny new workstations, the poshest modems, and high-priced digs downtown. We've struck a very good compromise between the two, finding what we feel to be a near-optimum balance of high quality gear and low capital and operating costs. First, why would anyone want to jump into a market such as this, which, given all the present indications, is going to be a bloodbath? Quite simply, when we conceived of this company in February/March of 1994, it was because commercial dialup Internet service was unavailable in Calgary. I had been operating an old Silicon Graphics workstation at home - the machine I learned Unix on - and had a 'net connection courtesy a friend at the University of Calgary. It was through a scheme called UUCP (Unix to Unix Copy), which allows mail and news traffic only. UUCP is a batch system, which means that one Unix system will call another on the phone when there's data destined for the "callee", do the transfer, and hang up. This does not allow real-time use, such as is required for FTP, Web browsing, and most other desirable Internet resources. At the time, there were very few computers outside of the University and a few local technology companies with 'net connections, and my machine was probably among no more than a dozen such systems operated by people in their houses. Aside from the limitations of UUCP, though, severe mismanagement of the network, mainly between the University of Alberta and the Alberta Research Council in Edmonton, made the connection I had virtually unusable. I had just left a Calgary company that I had started up and taken public (on the Alberta Stock Exchange), and armed with a modest sum of money from my stock I decided to start Canada Connect. Net-hype hadn't yet hit, and I was doing it as much to get myself a good connection as for any other reason. The next few months were occupied by research, travel (scouting appropriate used hardware in Silicon Valley), and money-gathering. By early June I'd moved into a small office center, bartering rent for access to my network. The installation, at that point, consisted of a four-year-old Silicon Graphics Unix workstation, originally worth about $125,000 , but picked up used and on the cheap through connections in California. The remainder of the summer and early fall were spent bootstrapping the system up - getting a low-speed dialup network connection from UUnet in Toronto, and establishing the basic technical services for operation of the system. I was joined "on spec" by a longtime friend in his early 60s, a casualty of free trade. We contracted a local programmer to do the "tough guy" network setup and administration. In the late fall we installed our high-speed network connection (from a company called Insinc, now owned by Sprint), and after a couple of months of test and debug operation with a few dozen users - friends and people anxious for access who had learned of us by word of mouth - we officially opened for business (started billing, that is) on December 1st. Since that time we've signed on a steady stream of new users, performed experiments in marketting the Internet - a "new product" that the vast majority of the population still fundamentally fails to understand, developed our company's persona through agressive, unusual advertising, and witnessed an unforseen flock of competitors appear on the local scene, some dumping the service at below cost into the market in an effort to achieve predominance and market share. In so doing, we have brought the company into the black in under a year. This has been accomplished through extreme creativity in almost every aspect of our operation, and the not-so-creative move of not paying our staff much. At present, of the twelve people involved in the operation of the company, eight receive no regular compensation. Two are paid as contractors, and two receive regular monthly pay - the secretary/receptionist ($1100/month), and me ($600/month). The company is being built on goodwill and trust, and the belief that concerted, unselfish effort will not only lead to paycheques before the end of the year, but to a stock exchange early next year. 4. With lots of money, no time at all. A company of modest means, such as this, would have a damn tough time just surviving the startup. I certainly would not attempt to commence at this time the process just described above. There's just too much competition already among the established small players, to say nothing of the result of big business (such as AGT) getting into the game. A year ago this was a risky move. Now it would be unacceptably risky. 5. As this request has been extended to all the signatories, I am only providing information on ours: a) Canada Connect Corporation (provincially incorporated). b) A copy of our current price list is attached. Please note that our pricing is still in flux. For example, here is one of the problems we've been faced with for some time: What is our annual rate for a regular dialup account? We can't quote one. We charge $30/month. That translates, obviously, to $360/year, and it would seem reasonable to offer some sort of discount for a year's pre- payment. Our most antagonistic competitor, though, charges $129/year (they have no monthly rate). We know they're losing money at that rate, but it means that we can't quote an annual discount significant enough to appear competitive and still make money. So we have not published an annual rate, instead signing up customers at the monthly rate, and only accepting a year's prepayment at their suggestion, presumably after they've satisfied themselves that our superior service is worth the "premium". On a few occasions these customers have asked for a modest discount, such as 10%, and we have happily given it. c) I'm an engineer and kinda stunned in the accounting department, but our income statement apparently says that we've grossed about $83,000 since the beginning of the year. If you wish, we should be able to chart the growth for you - I think we're moving about $15,000/month through the company right now. At present we have about 600 users on the system, including 30 or 40 freebie accounts (friends and promos). We'll be doing a culling of the freebies soon and paring it down to "good friends" and the truly deserving. These users are being serviced by 48 dialup modems, which is significantly fewer than I'm comfortable with. The experience to date, as we've increased our modem pool from an initial 16 to 32 and finally 48, is that we shouldn't be running more than a (roughly) 10:1 user-to-modem ratio. That's the point at which people start to get busy signals during peak (evening) hours. We've been stalling on the installation of another 16 for a month or so, because we've outgrown the building we're in (and there's little point in adding more lines here just before we move), and because our connection charges (AGT lines for the dialup pool plus our network connection through Insinc) are beating the hell out of us. This year to date, those charges have come to about $20,000. And that's with the existing Centrex voice lines - the next 16 will be POTS (plain old telephone service), at about twice the cost per line, because AGT is refusing to give us any more Centrex lines. d) We're trying to keep pretty squeaky-clean books, in anticipation of going public next year, but nothing's been audited yet. Attached are the best we have, which are apparently pretty good. Please note, however, that they do not yet reflect the 3-4 man-years worth of so-far-unremunerated effort invested by a number of people, nor the approximately $30,000 worth of equipment supplied by myself, and yet to be rolled into the company. e) We'll have to hit the books on this one to give you more detail than the rather rough "$20,000 of $70,000 total expenses" that the income statement shows, but that gives you somewhat of an idea. f) A copy of our Centrex contract is attached. g) There has been no correspondence between AGT and Canada Connect regarding the provision of Internet services. AGT, it seems, only generates correspondence when dealing with the CRTC or CRTC-related issues. I do not perceive the CRTC as being the governing authority in this matter, so I have not engaged in the "regulatory debate" between AGT and the CRTC, which AGT appears to control. I chose to bring this matter to the Competition Bureau because the Bureau is the body charged with enforcing the relevant law, and is not in AGT's pocket. In fact, AGT has explicitly refused to document any of the matters in dispute, most recently their refusal to supply Canada Connect with additional Centrex lines. 6. I don't think that there's any doubt that the telcos are wetting themselves with fear over what the cablecos can do to them in the bandwidth department. Here's my take on the situation: AGT, and the other telcos in this country, should be totally and absolutely prohibited from competing with us until the cablecos can provide competing local loop, assuming that we (the independent ISPs) are given equal access to the coax. At that point, and only at that point, will the monopoly that we're combatting with this action cease to exist, permitting entry by the telcos and cablecos alike into fair competition with us. 7. Yes. If you tell them they have to. It is interesting to note that some of the more "provocative" and "radical" ideas offered above and in our Statutory Declaration may have been borne out by AGT President Don Lowry himself in his letter of June 26 to the CRTC. The bullying tone of this letter, and the "interim approval" granted to AGT shortly thereafter, hint at the political pressure rumored to have been brought to bear on the CRTC. But especially interesting is his comment on pending competition: "AGT is aware that large U.S. based Internet access service providers, specifically Microsoft and America On-Line, have installed systems in Edmonton and Calgary and are expected to commence service by the end of September." AGT may have been aware of this, but to the best of our knowledge nobody else (except, of course, Microsoft and AOL) was. This would suggest that the "paranoid" claim put forth in our Statutory Declaration, that "...AGT/Telus is uniquely privy to confidential and proprietary information...and the potential exists for abuse of this confidential and proprietary information." is more than justified. This would appear to be compelling evidence that AGT is quite prepared to exploit this insider's knowledge in order to further its own agenda. I hope that this answers your questions, and please accept my apologies if I've strayed too far into rambling tangents or diatribe. I shall be more than happy to, in a more timely manner, answer any further queries you might put forth. Thank you. Yours, Jonathan Levine