Why only MVNOs can check the market power of the incumbents (Part Two)
By Tim Denton
THE SECOND MAJOR PORTION of the MacDonald-Menzies argument (part one can be read here) against mobile virtual network operators (MVNOs) is what I call the transmission argument. It holds that, by preventing conditions that would allow effective MVNOs, the profits left in the large carriers will be translated into investment in less profitable or unprofitable rural and remote broadband access.
Why would any rational capitalist organization reduce its return on investment to satisfy the distributive goals of the Canadian state? In various times, management of Canadian carriers have declared maintaining investor confidence through high and continuing profits is the basis of their ability to attract capital.
We see no reason to believe higher profits go anywhere than to investors. Absent a degree of coercion that a government would be reluctant to use, profits will be directed to investors, as they are expected to be. The other possibility is the government would bribe the larger carriers with the maintenance of super-normal profits indefinitely. It turns Canadian telecoms into a walled garden of protected carriers. This may well be the desired outcome, but it is bad policy.
The normality of MVNOs
MVNOs are normal. Today competition via MVNOs is offered in 79 countries. Wikipedia reports:
As of December 2018, there were 1,300 active MVNOs operating in 79 countries, representing more than 220 million mobile connections – or approximately 2.46% of the total 8.9 billion mobile connections in the world. The eight countries with the largest number of active MVNOs in 2018 were: USA with 139 MVNOs (4.7% market share), Germany with 135 (19.5% market share), Japan 83 (10.6%), UK 77 (15.9%), Australia 66 (13.1%), Spain 63 (11.5%), France 53 (11.2%) and Denmark 49 (34.6% market share).
In my time at the Commission (2009-2013) and since, I have not seen any published recognition by the CRTC, or a study, which has examined the world-wide phenomenon of MVNOs. Canadian thinking on this subject remains parochial.
It should be noted not all of these countries require access to underlying facilities by regulatory decision. However, most governments and regulatory agencies that have allowed MVNOs have also taken steps to regulate the terms on which MVNOs gain access to underlying carriers.
Competition through regulatory arrangements
We have to ask ourselves why Canada is so reluctant to allow MVNOs and to regulate the terms on which they might access the carriers. At the back of many minds is the assumption that competition made feasible by regulatory arrangements is not real competition. This ignores the extent to which the market power of incumbents is the outcome of government policy in times past, and the continuing effect of licences and legal privileges which persist today.
There is a strain of thought which says facilities-based competition, the kind where you own the network end to end, is somehow better, more real, than competition based on regulatory arrangements. This view is assiduously marketed by many “free market” think tanks.
“The facilities-based obsession is a kind of throwback to central planning carried out by governments, at the urge of carriers who benefit from the arrangement.”
This idea, deeply believed by those paid to believe it, and persuasive to many who have not thought about it at length, is antithetical to the capitalist idea, which is a discovery process. It presumes there is only one method to get to a competitive result when in fact, no one knows the optimal combination of materials, methods, and processes whereby competition is to be achieved. And if they are known for one period of time, they change in situations of rapid technological advance. Software can substitute for hardware. Virtual paths can substitute for wires. The facilities-based obsession is a kind of throwback to central planning carried out by governments, at the urge of carriers who benefit from the arrangement.
If the example of other modern economies were taken more seriously by the CRTC, it would be readily seen that places like Japan, Korea, Australia and Europe have actively managed the market power of the former incumbents without concern about market ideology.
The MacGuffins: Too hot, too cold, too vast, and 5G
There is always some excuse for thinking Canada special and unique. Countries as vast and sparsely populated as Australia have mandated MVNOs. Sweden, Norway and Finland have conditions as cold as ours, and have MVNOs. A thorough survey of the 79 countries that have MVNOs might open some minds, but so far we have not seen it undertaken by Industry Canada or the CRTC.
Then there is 5G. 5G will very much rely on frequencies which travel ultrashort distances and therefore have small cell sizes, requiring lots of new equipment to serve the microcells. Hence, the carriers need to be protected from MVNO competition because 5G investments need, you guessed it, higher profits that effective competition would undermine.
There is never a lack of reasons why carrier market power needs protection: national sovereignty, population dispersion, the cold, the heat, the size of the country, 5G. Anything will do, as long as policy makers believe it. In movies they call this the “MacGuffin”, the thing around which the plot is structured: the Maltese falcon, the missing nuclear codes, the suitcase full of cash. In Canadian telecommunications policy, 5G and population density serve as our telecom MacGuffins.
Higher than normal profits is the real objective. Suppressing competition is the actual means to achieve it. Anything that suppresses an inclination to more effective competition will suffice. Alas, there is never a lack of policy makers who are not in the regulatory game for long enough, who avert their eyes from foreign examples of success, or who persist in their sincere belief that to lower incumbent carrier profits is to engage in bad policy.
And in that regard, the MLI paper is another case in point.
Too bad, because MacDonald and Menzies are sound on many issues of national importance, about which we have here not said enough. Too bad, because except on the subject of MVNOs, their paper is mostly right.
Tim Denton is a lawyer, former CRTC commissioner, and chairman of the Internet Society Canada Chapter.
