The fed's wireless hangup: Does Canada really need more players in its telecom market? | QL

May 15, 2014 • No 322 | Archives | Search QL | Subscribe

OPINION

The fed's wireless hangup: Does Canada really need more players in its telecom market?*

by Martin Masse and Paul Beaudry

Mobilicity, one of the small new entrants in the wireless sector, is trying for the third time to sell its business to TELUS, one of the big three telecom companies. Since Mobilicity has not succeeded in establishing a strong customer base and is now under court protection from its creditors, you might think Ottawa would look favourably upon such a transaction. TELUS is certain to use the small carrier’s spectrum more efficiently, which would benefit both companies’ customers.

But senior federal government sources recently told The Globe and Mail that was out of the question. The government is prepared to exclude TELUS from the upcoming spectrum auction if the company keeps trying to acquire Mobilicity’s spectrum through the courts. It is even contemplating reviving the old “beauty contest” method of spectrum allocation whereby bureaucrats would distribute spectrum licences to companies based on a necessarily arbitrary evaluation of their business plans.

This shows the extent to which the federal government, with its campaign to encourage the emergence of a fourth wireless carrier in each of Canada’s regional markets, has lost sight of the ultimate goal of promoting the development of a dynamic, efficient industry. Such a campaign should hinge on the setting up of fair rules for all that would allow these fourth players to emerge if the market was able to support them. Instead, the government has multiplied the number of interventionist measures aiming to subsidize small, inefficient carriers while simultaneously interfering with the major players’ development efforts.

There is—or at least there was—a better way. Shortly after it took power in 2006, the current government adopted two frameworks that were meant to institute an entirely different approach.

In an Order adopted in 2006, the government mandated the CRTC to “rely on market forces to the maximum extent feasible as the means of achieving the telecommunications policy objectives,” and when relying on regulation, use measures that interfere as little as possible with the operation of competitive market forces. Six months later, Industry Canada renewed its Spectrum Policy Framework for Canada by adopting similar guidelines for spectrum management.

This approach has been contradicted by practically every measure taken by the government over the past seven years. In the two most recent spectrum auctions—for the AWS band in 2008 and the 700 MHz band in 2014—the government implemented exclusionary auction rules that had the effect of subsidizing new entrants in the wireless market. These measures benefited well-established regional providers, who likely did not need a subsidy, and allowed for the emergence of three new entrants (Public Mobile, Mobilicity and WIND Mobile), none of which were successful.

Despite this, three of the largest markets (Ontario, Alberta and British Columbia) still lack a well-established fourth provider. Is this situation so detrimental to consumers’ interests that it warrants yet more policy intervention?

Mainstream competition theory posits that the presence of more players in a market will generally enhance consumer welfare. This is the view espoused by the federal government, which asserts on the webpage advertising its wireless policy that it will bring “More choice. Lower prices. Better service.”

No one disputes that in a context in which a former government monopoly has just been broken up, the arrival of new competitors will force the incumbent to lower its prices and to offer better services to retain its client base.

But if there is an optimal level of competitive intensity, then there must be a limit to how many new players there ought to be. Canada is the second-largest country in the world geographically, but its population is roughly the same as California’s. The costs of building a wireless network from coast to coast are in the billions. Would Canadians be better off with one more wireless network? What about three more, or 10 more? Obviously, at some point, it becomes wasteful to add another network and society is better served if scarce financial resources are allocated elsewhere.

“With three national wireless players and several regional ones, Canada is far from being an aberration among developed countries. If anything, due to the ongoing consolidation processes in many countries, the three-player model may well soon become the norm.”

Also, it may be preferable for financial resources in the telecommunications sector to be concentrated in the hands of a few strong players willing to invest in new technologies and services rather than scattered among several small and weak competitors trying to survive by selling at prices barely above marginal costs. Stronger, well-capitalized players are able to compete more aggressively, not just on price for basic voice and text services (which is what the three failed new entrants focused on), but on a whole range of higher-end products in attractive bundles. Although it may sound counterintuitive, more concentration may sometimes be in consumers’ best interests.

Just as an insufficiently competitive market can lead to a sclerotic industry extracting rents from consumers, a market with too much competition can affect the industry’s willingness to innovate and invest in new technologies, ultimately harming consumers.

The trade-off between competitive intensity and the incentive to invest can be observed in Europe, which used to be a leader in wireless technology and is still seen by many as a consumer paradise because prices tend to be lower than in North America. However, investments on that continent have fallen behind North America and Asia in recent years, and European markets also lag considerably in terms of the deployment of 4G networks.

Not only is Europe highly fragmented into national markets, but several of these markets also have four competitors, many of which are unable to cover their capital costs because of the level of competitive intensity. Partly as a result of price wars, mobile revenue in Europe has fallen 12% between 2008 and 2012. Investment in that sector has declined by 4% over the last five years, whereas it has increased by 35% in Canada and 51% in the U.S. It is no coincidence that 14% of mobile users in Canada are connected to the fastest network (LTE, or 4G) compared to less than 4% in the United Kingdom and less than 2% in Germany, France and Italy.

This helps explain the current consolidation drive in several European countries. The number of players has recently gone from four to three in Austria. There are also ongoing corporate moves and regulatory approval procedures in several other countries, including Ireland (3 and O2 Ireland), Germany (E-Plus and O2), Italy (Wind and 3 Italia), France (Bouygues and SFR), and the U.S. (Sprint and T-Mobile), that could result in a similar situation. Australia also saw its number of players go from four to three. And in Japan, the number of carriers went from five to three after Softbank’s purchase of Willcom in 2010 and eMobile in 2012.

With three national wireless players and several regional ones, Canada is far from being an aberration among developed countries. If anything, due to the ongoing consolidation processes in many countries, the three-player model may well soon become the norm.

Canadian critics of the telecom industry, including the federal government, never point to the adverse consequences that can be brought about by an excess of competition. From their perspective, there are only benefits to having more competition, and no downsides. The European example shows that going too far in that direction can cause as much harm to the industry and to consumers as not going far enough.

We don’t know for sure if there is too much, too little or just enough competition in Canada’s various regional markets, or how many players these markets can support. This is up to market participants to decide. However, there cannot be a properly functioning market if the government distorts it in one direction or another.

Although governments and regulators can help increase the number of competitors through regulatory measures, they cannot bring about real and sustainable competition beyond what the market can support. Artificially sustaining small new players and hampering the growth of larger ones does not lead to more sustainable competition. On the contrary, it leads to a waste of resources and delays the use of spectrum at a time when companies need more and more of it to meet growing consumer demand.

It is not too late to change course. The 2006 Order still stands. With the CRTC getting ready to hold hearings this year “that basically review everything we regulate in one way or another,” as its chair Jean-Pierre Blais recently said, the damage will have been limited if the government once again takes inspiration from the market approach it promoted many years ago.

*Op-ed first published in the Financial Post on May 7, 2014.

Martin Masse and Paul Beaudry, senior editor and associate researcher at the Montreal Economic Institute, are coauthors of “The State of Competition in Canada’s Telecommunications Industry – 2014.”