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May 6, 2014

6 May 2014

The State of Competition in Canada’s Telecommunications Industry – 2014

Research Paper analyzing various aspects of the Canadian telecommunications industry related to competition

To the detriment of consumers across the country, the federal government has been encouraging artificial competition in the telecommunications industry for the past seven years. Fixated on the goal of promoting the emergence of a fourth wireless carrier in each of Canada's regional markets, the government has lost sight of the ultimate goal of promoting the development of a dynamic, efficient industry, according to this Research Paper.

Media release: Telecommunications: Ottawa is harming consumers by encouraging artificial competition

Media release: New spectrum auction in Canada: Government is trying to solve a nonexistent problem, say MEI authors (July 7, 2014)

 

Links of interest

   
The fed's wireless hangup: Does Canada really need more players in its telecom market? (Financial Post, May 7, 2014)       Interview (in French) with Martin Masse (ARGENT, May 6, 2014)

Interview with Paul Beaudry (Business News Network, May 6, 2014)

Interview with Paul Beaudry (Business News Network, July 8, 2014)

 

Executive Summary

Canada’s telecommunications industry has been criticized on numerous occasions for being insufficiently competitive. Critics of Canada’s wireless sector in particular have claimed that additional regulation is required to foster more competition, improve service quality and lower prices. The federal government has relied on these criticisms to justify interventionist spectrum allocation policies and advocate for additional regulation of the wireless sector. In the fall of 2013, it even took the unusual step of launching an ad campaign aimed at publicizing its efforts to support greater competition in wireless.

But how does one analyze competition in an industry like telecommunications? This question pits two visions of competition against one another: the “static” vision of competition and the “dynamic” vision of competition. Proponents of the static vision of competition will generally favour government intervention to prevent a monopolist (or oligopolists) from charging prices above what would have been the competitive price. Proponents of the dynamic competition model emphasize that competition should be viewed as a process rather than a fixed state of affairs. They notably fault the static competition model for ignoring the crucial role of the entrepreneur in the competitive process.

The negative perception of the industry that justifies interventionist measures is simply mistaken. Canadian consumers actually benefit from one of the most advanced telecommunications networks in the world, are among the biggest users in the world, and generally pay prices that are about average with respect to other industrialized countries.

Despite this, since 2008, the federal government has intervened in various ways to foster the emergence of a fourth wireless provider in each of Canada’s regional markets that would compete with the so-called “big three” players (Bell, TELUS and Rogers). It has set up rules governing the auction of new spectrum in such a way that the large players are prevented from acquiring all of the available blocks of frequencies, thereby leaving some for smaller regional providers and new market entrants. But none of the new players that purchased spectrum in the 2008 auction (Public Mobile, Mobilicity and Wind Mobile) ended up being successful.

There has to be a level playing field for the auction process to work. Rules such as set-asides distort the process and prevent the optimal allocation of resources. The misallocation of resources only becomes evident further down the road, when the business venture hits a breaking point and cannot be artificially sustained any longer.

The federal government has also actively promoted the emergence of wireline competitors since the early 1990s by providing emerging competitors access to the networks of the incumbent telephone providers (i.e., the former monopolies) at low, regulated rates. Such measures have sheltered competitors from market forces and undermined the competitive process. Instead of micromanaging competition in the telecommunications industry, the government should remove the barriers that prevent real, dynamic competition from taking place. Two such barriers prevent the transfer of assets, and thus a more efficient allocation of resources: (i) foreign ownership restrictions and (ii) restrictions regarding the transfer of spectrum licenses.

The federal government has lost sight of the ultimate goal of promoting the development of a dynamic, efficient industry. It should set up fair rules for all that would allow fourth players to emerge if the market could support them. This would have the effect of actually encouraging sustainable competition in Canada’s telecommunications industry and consolidating the dynamism of this industry, to the great benefit of consumers across the country.

Research Paper prepared by Martin Masse, Senior Writer and Editor at the Montreal Economic Institute, and Paul Beaudry, an associate in the Ottawa and Montreal offices of Stikeman Elliott, where he practices competition law.

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