Competitive telecoms need no CRTC shield

The Canadian Radio-television and Telecommunications Commission argues there is not enough competition in the telecommunications industry. In a public notice issued last December, it suggested artificially handicapping the former telephone monopolies (such as Bell or Telus) to enable new providers to enter the market. Ironically, such regulations are anti-competitive.

In economics, the concept of competition has been evolving over time. An ideal of “perfect competition” once required many small competitors, so many that none could individually influence the market price. This ideal gave politicians the theoretical legitimacy to regulate economic activity. In this respect, even modern antitrust legislation aims unrealistically at preserving a reasonable number of competitors and at restricting firms’ “dominant positions.”

In modern economics, a more realistic and relevant vision of competition replaced the “perfect competition” model. It views competition as a dynamic process of rival entrepreneurs who must make guesses about the future and engage in risky investments. The number of competitors in one sector is less important than the presence, or not, of market rules and the possibility of free entry. Even with a concentration of activity in one sector, and even if entry may turn out to be costly in terms of initial investment, competition can still be intense. The competition comes not only from the potential entry of new competitors in the same sector but also from the supply of similar products and services, satisfying the same consumer needs, from firms in other sectors of the economy.

This new concept of competition calls for less regulation from public authorities. Not surprisingly then, the CRTC ignores it and still persists in its impossible attempts to ensure a high number of telecommunication providers in order to artificially stimulate “perfect” competition.

Although the CRTC may argue that little competition exists (i.e., former monopolies still control more than 95% of local wirelines), the competitive process is, in fact, rather strong in the telecommunications sector, as seen in recent months.

Until the 1990s, public authorities (the CRTC since 1976) had been forbidding free entry in the sector of wireline telephone services. But instead of simply removing all the legal barriers to entry when it decided that this regulation no longer had economic justification, the CRTC has been artificially favouring new competitors entering the sector.

On one hand, the CRTC requires former monopolies to price their own basic retail services (say, access to a local loop) at 25% over estimated cost, while they are obliged to sell the same services to their competitors at wholesale prices of cost plus 15%. In other words, the CRTC wants to force the former monopolies to give their competitors a margin guarantee. However, these new protections – even if they might occasionally increase the number of providers – are cutting the competitive potential of former monopolies and are contrary to the very nature of the competitive process.

On the other hand, the CRTC wants to force on the former monopolies a 10% cap on the discounts they offer on bundled services (for example, local and long-distance service with Internet access), plus limits on the discounts offered on high-volume and long-term contracts. Obviously, the competitive process is again hampered.

Even when measured by the number of competitors and their market share, competition in the telecom sector is well established. New competitors have a 20% share in long-distance calls. In a number of large urban areas, they supply 10% to 20% of local business lines. In certain urban markets, their residential penetration is much higher than the CRTC’s aggregate data suggest.

But more importantly, competition comes not only from firms operating in the traditional wireline telephone industry but also from other related industries. It is likely that phone (wireline and wireless) companies, cable companies, Internet-based competitors, and perhaps even electricity utilities will soon offer the same telecommunications and broadcasting services. For example, Rogers Communications, whose Rogers Cable subsidiary is the largest cable company in Canada, recently announced its intention to compete with phone companies by offering Internet telephony (VoIP) services. Vonage and Group Telecom have just launched VoIP services on the Canadian residential market. AOL Canada and Microcell have announced that they, too, will join the fray.

All this suggests new technologies and ways of providing telecom services by means other than through the traditional networks are a clear manifestation of the competitive process at work. There is no legitimacy for the CRTC to continue to be concerned with the number of telephone providers. Real competition will only be curbed by artificial handicaps and regulated prices. Instead of extending them to the new field of Internet telephony, as the CRTC last month suggested, it would be better advised to consider a complete deregulation of Canadian telecommunication.

Valentin Petkantchin is MEI’s Research Director and author of the Economic Note entitled Do we still need to regulate telephone services? on the CRTC’s regulation of telecommunications.

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