Liberalization of Markets

Federal government should drop its seven-year crusade to force competition in telecom

When it decided this week to impose caps on the roaming fees that the three national wireless providers (Rogers, Bell and TELUS) can charge smaller regional ones such as WIND and Videotron, the CRTC let slip an interesting bit of analysis.

The Commission declined to regulate the rates that would apply to MVNOs, virtual providers that only resell services provided by facilities-based carriers. “(T)his permanent network access,” it wrote,“would likely discourage continued investment by wireless carriers, because they could rely on this access rather than investing in their own mobile wireless network infrastructure.”

It was a revealing admission, for this disincentive to invest is precisely what is at the heart of the debate over the appropriateness of forcing large players to share their networks at cheap prices with the smaller, regional ones. Does it really encourage competition by temporarily allowing small players to amass the necessary capital to build their own facilities, or does it simply promote long-term dependence on the part of those small players?

Interestingly, the CRTC believes there is too much risk of encouraging dependence in the case of MVNOs, but argues that this won’t be a problem for small regional providers developing some network infrastructure. The logic, however, is fundamentally the same in both cases. And there is no indication in Canada or elsewhere that this “stepping stone” theory, as it is called, has worked in practice.

This CRTC decision is only the latest volley in a seven-year crusade conducted by the federal government to ensure the presence of at least four well-established wireless carriers in all regions of the country, ostensibly to reap the benefits of increased competition.

But propping up small players with regulatory privileges is not costless for the industry, nor for consumers. This week’s decision will force national providers to share a larger part of their networks at a time when demand for bandwidth is fast increasing, thanks to everyone watching videos on their smartphones. And at a time when the government is preventing them from buying as much spectrum as they might want in order to meet this demand.

Since 2008, there have been three spectrum auctions with preferential rules favouring small players, essentially handing them spectrum at subsidized prices. Much of this spectrum remains either underutilized or unutilized to this day.

But this hasn’t stopped Ottawa from preventing transactions that would allow a more efficient use of spectrum. It blocked the sale of Mobilicity, one of the bankrupt new entrants, to TELUS in order to prevent the latter from getting its hands on more spectrum. It also blocked the sale by WIND of spectrum it is not using to SaskTel, on the grounds that the latter is the major player in Saskatchewan (thus ironically hampering WIND’s efforts to fund the deployment of its own network). Shaw still has spectrum it bought cheap in the 2008 auction and never used, but cannot sell to carriers that might need it the most.

As for Videotron, it has yet to make a decision on whether or not to deploy licences it acquired in Ontario, Alberta, and British Columbia for a bargain price in the 2014 auction. Given that it currently has no presence outside Quebec, most analysts doubt that it can exploit a wireless network in several provinces unless it teams up with other providers from Canada or elsewhere. The company itself has admitted that it might simply “sit” on its spectrum licences and perhaps sell them for a profit one day.

The federal government’s policy of artificially creating competition in the wireless sector is not only wasteful; it is trying to solve a problem that does not exist. As international metrics show, Canadians continue to enjoy one of the most advanced telecommunications networks on the planet. And while prices are higher than in Europe, they are lower than in the United States and Japan. This explains in part why Canadians are among the biggest consumers of telecommunications services in the world.

This is also happening while the trend in the rest of the developed world has been toward consolidation. In recent years, Austria, Australia, Japan, Ireland, and Germany have gone from five or four to three national wireless providers. Ongoing transactions in Italy, the UK, and Denmark may soon lead to more mergers. If these transactions go through, the vast majority of developed countries will have only three national wireless providers.

How long will Canadian consumers need to wait to see if this policy experiment is working? This is all the more worrisome given that important technological revolutions are in the works that will require billions of dollars of investments from the country’s telecommunications companies.

The convergence between the telecommunications sector and the television broadcasting sector, which is making it harder and harder to distinguish the two sectors and regulate them separately, is forcing the entire industry to restructure itself. The development of new fields, like machine-to-machine (M2M) communication, could occupy a central place in the coming years.

Furthermore, competition over new services will increasingly come from foreign giants like Apple, Google, and Netflix. And other innovative companies, unknown today, might revolutionize the industry of tomorrow.

The most appropriate public policies are those that will allow Canadian telecommunications companies to prepare for these technological revolutions and to face this global competition. Unfortunately, Ottawa is still mired in its pursuit of a fourth wireless player, a costly distraction that could well backfire for Canadian consumers.

Martin Masse and Paul Beaudry, respectively senior editor and associate researcher at the Montreal Economic Institute, are coauthors of “The State of Competition in Canada’s Telecommunications Industry – 2015.”

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