Three’s a Crowd: The Future of Telecom in Canada
By Teague Thackway · On January 10, 2016
Events in the past several years have given rise to increased debate regarding the Canadian telecommunications industry. Complaints about an unusually high level of poor customer service, hidden fees, fluctuating billing, and potential price-fixing between the incumbent “Big Three” telecom providers in Canada (Bell, Rogers, and Telus) have led to increased attention from the media and more active government involvement.
A 2013 Organization for Economic Co-operation and Development (OECD) Communications Outlook revealed that Canadians pay some of the highest prices in the industrialized world for wireless service. Canadian telecom firms report the highest average revenue per subscriber among comparable countries: Australia, Britain, France, and the United States. Additionally, Canada’s top three telecom providers hold more than 95% of the market share. Worries have surfaced regarding companies’ abilities to leverage their position in order to artificially inflate prices and provide subpar service.
There has been significant debate between government, business, and think tank leaders on the topic of competition in the Canadian telecom space. Those in favour of ushering in a fourth player argue that the United States is able to support healthy, close competition between Verizon, AT&T, T-Mobile and Sprint, stating that the Canadian and US markets are not that different.
The remainder of this article will briefly examine the reasons in favour of supporting a fourth telecom carrier in Canada and the Canadian government’s escalating involvement in the telecom space. The majority of this piece will discuss the reasons why a fourth carrier has not naturally emerged, and why artificially helping one to enter the market is not in the best interest of Canada and its telecom consumers.
The argument in favour of a fourth player and the government’s involvement
The primary issue pointed to by those in favour of encouraging the emergence of a fourth player is the fact that Canadian consumers pay a relatively high amount for cell phone service in a market where they have little choice between carriers in addition to receiving poor service and unfair treatment from providers. Professional organizations, including the OECD, have proven that Canadians pay a disproportionately high amount for the poor levels of service that they receive.
A customer looking to begin a cell phone plan has little choice outside of the Big Three if they want reliable service. What many consumers are not aware of is that the most prominent alternatives to the Big Three — Koodo, Fido, and Virgin — are actually all subsidiaries of Telus, Rogers and Bell. While these brands do offer some alternative solutions for customers, a trade-off is made between quality of service and price effectiveness. The de-facto fourth player in today’s market, Wind Mobile, comes nowhere close to the Big Three in terms of size or quality of coverage.
Proponents of supporting a stronger fourth player often point to the United States as a poster child of better competition. The US market features four players that compete for market share: Verizon, AT&T, T-Mobile (a subsidiary of Deutsche Telekom), and Sprint; all of these arguably have less issues, offering consumers a better experience.
The Canadian government has tried to artificially encourage competition and the emergence of a fourth player in a number of ways over the past several years, the most notable being restrictions on the acquisition of competitors and the process of spectrum bidding.
Spectrum represents the channels on which cell phone signals can travel. Certain levels of low-frequency spectrum, which allow for better transmission of cell signal through walls and underground, which were owned by the Canadian government, have been auctioned to various bidders.
Through controlling spectrum auctions, Industry Canada is able to effectively give preferential treatment to different telecom providers, and discriminate between the Big Three players, smaller Canadian players, and foreign companies. In 2013, the Canadian government allowed Verizon, an American company, to bid on two blocks of Canadian spectrum set aside for new entrants to the market and the procurement of small Canadian companies such as Mobilicity or Wind. The Big Three were blocked from both of these opportunities.
In December 2014, the Government of Canada announced that 60% of the spring 2015 spectrum auctions would be available only to new entrants to the wireless market, while the established companies can competitively bid on the remaining 40%.
In addition to controlling spectrum auctions to encourage the entry and subsequent strength of a fourth player, the CRTC has implemented more broad measures to improve customer satisfaction in the Canadian telecom space. In June 2013, the CRTC introduced a policy that capped contract terms at two years and extra data charges at $50/month, while also permitting cell phones to be unlocked after 90 days.
Why is there no 4th player yet?
The arguments above regarding high prices and low quality of service for Canadian telecom customers defend the encouragement of the emergence of a fourth player to increase competition and improve customer value. However, while these issues seem simple at first, the situation in Canada is not as bad as some may frame it to be.
The choice among providers is not great in Canada, but it is actually reasonable compared to other similar countries. Canada’s largest telecom provider, Rogers, controls just over one-third of the market; in France, the leading player holds a 44% market share, and in Australia, that figure is 47%.
The monthly prices paid by Canadians for telecom services are also cited regularly in the media as being outrageously high. The reality is that Canadians pay less than Americans do, regardless of the level of smartphone and data usage, though the US has more carriers. Furthermore, Canadians are the biggest users of smartphones, as a percentage of all cell phones, in the world, and they are among the largest users of wireless data, which costs significantly more than talk and text. Under these conditions, it is logical that the average Canadian would be paying more for wireless services.
Former Telus President and CEO Joe Natale noted in a press conference in 2014 that Canada’s wireless networks are among the fastest and most reliable in the world, and Canadian wireless speeds are more than twice the typical rates in Germany and Italy, triple of that in the United States or France, and almost 10x those of the United Kingdom.
While the Canadian government has placed special consideration towards competition in the telecom space, several other major Canadian industries like air travel, groceries, and credit cards are dominated by just a handful of major players, and these industries have far less barriers to entry. The fact that there are not more players should be getting more attention from regulators. If it is so easy to enter these markets, then why are there not more competitors?
The telecom industry is fundamentally more expensive to build a business in. Operating profitably in the telecom space requires very significant capital investment and a large customer base to support this, which is a massive risk for potential market entrants. Most Canadian telecom players have evolved from state ownership, explaining their strong infrastructure, long history, and breadth of product offerings.
Considering these factors, the argument can be made that the government’s level of involvement in the Canadian telecom space is unnecessary and is, in some cases, destructive. Restricting acquisition of spectrum and offering discounted prices to new entrants means that the government is receiving less revenue from these sales than they would in a market-priced auction. Additionally, the companies buying the spectrum are not capable of taking advantage of their full uses, based on the fact that they do not have the existing infrastructure. Offering this spectrum to the established players, who hold 95% of the market, would increase the quality of their product offering and benefit consumers. This concept applies to acquisitions of smaller players as well; the synergies will be realizable by the Big Three.
A similar story in Europe regarding the government’s involvement in the telecom space in the mid-2000s led to regulators giving asymmetrical treatment to new entrants in an attempt to stimulate competition. Europe now faces some of the slowest and least reliable wireless networks in the industrialized world due to stimulation of increased competition to force lower prices in the short-term and keep consumers happy.
There is a limit to the number of full-service telecom providers that a country like Canada can support, and that number is likely close to three. In Canada, the unique combination of a high preference towards smartphones, high data usage, and the country’s unique geographical footprint implies that it might be best for the government to yield to market forces.