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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.
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“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.” |
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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.
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