OTTAWA – There simply is not a wireless services competition problem in Canada, according to a report released today by the University of Calgary’s School of Public Policy.
Wireless Competition in Canada: An Assessment argues that it’s too simplistic to draw conclusions about the state of competition by comparing Canada’s high average revenue per user (APRU) and lower penetration rates with international carriers. For instance, many countries tend to have significantly higher prepaid subscribers than in Canada and have a calling-party-pays protocol, “both of which encourage inflated user counts.”
During a press conference on Parliament Hill Thursday morning, one of the report’s authors Jeffrey Church, a professor in the Department of Economics and director of the Digital Economy Program at the University of Calgary’s The School of Public Policy, said these two metrics are inappropriate for assessing wireless service competition in Canada. Rather, an analysis that looks at the relationship between revenue and costs over an investment life cycle will provide a much clearer picture on the state of wireless competition in Canada. The paper explores Rogers Wireless’ rate of return over two periods: 1986 to 2008 and then 1986 to 2012. For the first period it was 5.92% and the second was 12.22%.
“The bottom line is that there is no evidence of excessive returns consistent with the exercise of market power, i.e. there is not a lack of competition,” Church says. “If anything returns are too low.”
The federal Conservatives have insisted on numerous occasions all summer long that there isn’t sufficient competition in wireless services in Canada and its plan to fix it is by trying to ensure there are four carriers in all regions of the country. Its first attempt to cement a fourth national wireless company was the 2008 Advanced Wireless Services (AWS) auction. Now the government has adopted rules that limit the incumbents’ ability to buy spectrum in the 700 MHz auction while newcomers Wind, Mobilicity and Public Mobile each struggle to survive
Church says the government’s approach is misguided because there is no evidence to support a claim that there is insufficient competition in wireless services in Canada, and political interference could also result in less network investment from the incumbents. He says the report studied many countries’ wireless landscapes and found that there is a “natural limit” on the number of wireless companies that can sustainability exist in any given market.
“It looks like three for a relatively small population density country like Canada is the natural limit,” he says in response to a question from Cartt.ca. In cases where fourth player exists, “they have very small market shares and financial difficulty,” he adds.
The Wireless Competition report argues this natural limit is born from ensuring margins are sufficient to cover sunk costs such as towers and backhaul deployment. The report says a wireless provider needs to earn a minimum margin to be “just profitable”, and without that it will run into financial difficulty.
“The number of wireless service providers will adjust in the long run to ensure this margin is realized. If there are too many networks in the short run, price competitive will be excessive and some firms will not break even,” says the report, adding that some will continue in the market but won’t make any further network investments. “In the long run, consolidation and exit will occur until firms are at least able to raise prices and earn gross margins sufficient to break even.”
Church acknowledges that shoehorning in more competitors may result in a drop in prices, but it will have the consequence of squeezing margins to a point where future investments are put on hold or moved into other areas. Adding more competitors “affects the incentive for investment of the incumbents because they expect to at least get a competitive return or they’ll invest their capital elsewhere. If you try to squeeze their margins too much then I think there is a legitimate reason to be concerned about their incentive for investment,” he says.
During the press conference, Church raised the issue of Shaw deciding not to enter the mobile arena (and decide to sell its spectrum to Rogers). He wondered why if the company has a wireline network, a recognizable brand, and access to inexpensive AWS spectrum, it opted out of deploying the spectrum. “If Shaw won’t enter, it shouldn’t be surprising that Verizon decided not to enter,” he said.
Asked whether the federal government’s four-carriers-at-all-costs approach has been wrong, Church explains that there will always be a viability problem with more than three carriers.
“You can see this in the AWS auction. The entrants got preferred or special set asides and that spectrum ended up being used to provide voice and text. But it turns out to be of very little value to Canadians, when we’ve got this big push for data. And so had that spectrum gone to the incumbents, it would have been used very differently,” he says.
The federal government is essentially fighting a perception problem, not a competition problem, notes Church. Rather than try to explain to Canadians that there is healthy competition and that costs aren’t too high because of significant smartphone and data usage, the Conservatives have taken “a populist approach”, saying “‘we’ll give you lower prices’ without recognizing that there are costs associated with reducing prices,” he says.
Canadian carriers’ leadership in investment per subscriber, high quality networks, smartphones and data use could all be in jeopardy with more competition, Church adds. “You put that whole trajectory in danger when you try to artificially shoe horn competition to lower prices and reduced margins,” he says.
Wireless Competition was funded through support from donors to The School of Public Policy’s Digital Economy Program. And while there may be some telecoms that have donated to the program, there are checks and balances in place to ensure the independence of the research.
