Telecommunications: Ottawa is harming consumers by encouraging artificial competition

Montreal, Tuesday, May 6, 2014 – 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 a Research Paper published today by the Montreal Economic Institute (MEI).

“Contrary to popular belief, with three national wireless players, and several regional ones, Canada is far from being an aberration among developed countries,” says Martin Masse, co-author of the study. “As Europe’s experience shows, high levels of government regulation and competition may bring down prices, but they also discourage investment and innovation.”

Specifically, between 2007 and 2012, wireless capital expenditures grew by 51% in the U.S. and by 35% in Canada, whereas they fell by 4% in the European Union. Europe is now lagging in the deployment of the latest wireless technologies: 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.

When it came to power in 2006, the current government committed itself to relying on market forces as much as possible in achieving its telecom policy objectives. But this orientation has been contradicted by set-asides, spectrum caps, mandatory network sharing and other interventionist rules that have distorted the market process, leading to a misallocation of resources.

“Well-established regional players that benefited from preferential treatment in the 2008 auction very likely did not need the subsidy,” points out Paul Beaudry, co-author of the study. “And as for the new entrants that likely would not have entered the market without the subsidy—Public Mobile, Mobilicity and Wind Mobile—they have not fared well.”

The federal government’s handling of telecommunications has wider implications, too, says Michel Kelly-Gagnon, President and CEO of the MEI. “The government changing the rules in order to prevent TELUS from acquiring Mobilicity is very worrisome, not only for the telecommunications industry but for the economy in general,” he explains. “It sets a dangerous precedent of state intervention into economic matters that will harm the development of dynamic industries, and the consumers they serve.”

The paper provides data to counter the mistaken perception of the Canadian telecommunications sector’s dismal performance. It also explores in depth the federal government’s repeated attempts at fostering the emergence of a fourth wireless player and the meagre results it has achieved in the wireline sector through its mandatory network sharing policies. Finally, it proposes the liberalization of Canada’s foreign investment regime in the telecommunications sector and of its spectrum licence transfer rules.

The Research Paper entitled “The State of Competition in Canada’s Telecommunications Industry – 2014” was prepared by Martin Masse and Paul Beaudry, respectively senior writer and editor and associate researcher at the Montreal Economic Institute. This publication is available on our website.

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The Montreal Economic Institute is an independent, non-partisan, not-for-profit research and educational organization. Through its studies and its conferences, the MEI stimulates debate on public policies in Quebec and across Canada by proposing wealth-creating reforms based on market mechanisms.

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