The State of Competition in Canada’s Telecommunications Industry – 2015

The numerous interventions carried out by the federal government to encourage the establishment of a 4th wireless telephony player across the country will hurt consumers by undermining innovation in this industry. 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. This is one of the conclusions of the 2015 edition of The State of Competition in Canada’s Telecommunications Industry.

Media release: By pursuing its interventions in the telecommunications sector, Ottawa is hurting both the industry and consumers

The State of Competition in Canada’s Telecommunications Industry – 2014: Research Paper analyzing various aspects of the Canadian telecommunications industry related to competition (May 2014)
 

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The State of Competition in Canada’s Telecommunications Industry – 2015

Highlights

The 2014 edition of this report attempted to dispel the notion that Canadians pay uncompetitive prices for low quality telecommunications services, and argued that interventions aiming to increase the number of players through subsidies and mandated access were not likely to have the intended effects and might instead jeopardize investments and innovation. Here are some highlights from this year’s edition.

Chapter 1 – How Does Canada Measure Up?

• Canadians continue to be among the biggest consumers of telecommunications services in the world, an indication that we enjoy competitive, quality services. Only broadband Internet services leave something to be desired compared to other countries.

• The penetration rates of the latest wireless technologies in Canada are among the highest for industrialized countries.

• Canadians actually benefit from one of the most advanced and efficient wireless networks in the world.

• As for the prices Canadians pay for wireless services, they remain generally higher than in Europe (where low prices have been correlated with falling capital expenditures and a lagging deployment of new technologies) but lower than in the United States or Japan.

Chapter 2 – An Update on Wireless Competition in Canada

• Despite implementing policies aimed at increasing the number of competitors in the wireless market since 2007, Bell, Telus and Rogers still dominate the Canadian wireless market, and the provinces of Ontario, Alberta and British Columbia still lack a solidly established fourth wireless player.

• Since the federal government eased foreign ownership restrictions in 2012, no well-established foreign player has entered the Canadian market, despite the federal government’s courting of two American wireless providers in 2013.

• Over the past year, the government has reiterated its support for preferential spectrum auctions, and has passed legislation aimed at capping the roaming fees that large wireless carriers can charge small ones.

• Since last year’s edition of this report, Germany and Ireland have been added to the list of countries with only three national players, and ongoing transactions in Italy, the UK and Denmark may lead to more mergers in the coming months.

• WIND Mobile is the only pure-play new entrant whose fortunes have brightened since last year, acquiring additional spectrum in the March 2015 auction, although it now has to invest significant sums to deploy that spectrum, and it is still uncertain whether it can secure the funding to do so.

• Investments in wireless infrastructure in Europe have declined by 3% between 2007 and 2013, whereas they grew by 74% in the United States and by 21% in Canada.

• The government and the CRTC should stop emulating the failed policies of Europe and revive Canada’s historically less interventionist wireless regulation, which has served consumers well.

Chapter 3 – Mandatory Sharing of Broadband Networks: Fostering or Hindering Innovation?

• The CRTC is expected to issue a decision shortly on whether there is a need for mandatory wholesale access with respect to fibre-to-the-premises facilities (FTTP), which are replacing copper technology with optical fibre that runs directly to the homes and businesses of customers.

• Proponents of mandatory network sharing contend that it is necessary because certain elements of telecommunications networks are difficult to replicate, or cannot be replicated economically.

• Small, independent Internet service providers (ISPs), whose business model relies solely on the use of the large providers’ infrastructure at below-market rates, have fared well under the current regulatory environment.

• However, the presence of these additional competitors is artificially supported by the CRTC, not by actors in the marketplace. In attempting to strike a balance between the interests of the large companies and those of small ISPs, the CRTC has interfered with all market participants’ incentives to innovate and invest in advanced networks and equipment.

• The proportion of Canadians subscribing to mobile broadband in 2013 was 50.2%, as opposed to 32.8% for fixed broadband, due to the growing popularity of smartphones and tablets. This provides an additional and much more potent source of competition in the broadband sector.

• The stark contrast between the U.S. and European approaches regarding mandatory access should give pause to proponents of generous mandated access policies.

Chapter 4 – The Impact of Technological Changes on Competition in the Telecommunications Sector

• There are two visions of competition: the “static” vision of perfect competition, which continues to influence decision makers and the general public even though it has fallen out of favour in the field of economics; and the “dynamic” vision that takes into account the rapid evolution of markets, and in particular the potential impact of new, disruptive technologies.

• Those who favour the static vision generally advocate government intervention to increase competition, either by regulating prices or by promoting and subsidizing the entry of additional players, but the static model is of limited relevance to the analysis of an industry like telecommunications, which has undergone substantial and rapid changes thanks to technology.

• In contrast, a good illustration of the relevance of the dynamic model is that over the past quarter of a century, new technologies have gradually eroded the former telephone monopolies’ dominant market positions: first, through the provision of telephony services by cable providers, and then through the substitution of wireless telephone services for traditional wireline services.

• In 2013, cable providers accounted for 33% of all revenues from local residential telephony services.

• Households are increasingly deciding to abandon their residential telephones and keep just their wireless subscriptions: In 2013, 21% of Canadian households had decided to “cut the cord”—including 60% of young households.

• The potential competitors of today—which have no market share and which consequently are not considered relevant according to the static approach—are the ones that might revolutionize the industry of tomorrow.

INTRODUCTION

Last year, the first edition of The State of Competition in Canada’s Telecommunications Industry assessed how Canada measured up with other jurisdictions regarding the quality and pricing of its telecommunications services. The report also evaluated how competition was faring in key areas of the Canadian telecommunications market, and provided a critical assessment of Canada’s legislative and regulatory framework for this industry.

One of the primary motivations for the publication of this report was that many Canadians were, in our opinion, under the mistaken impression that Canada’s telecommunications industry compared poorly with that of other jurisdictions. The report attempted to dispel the notion that Canadians pay uncompetitive prices for low quality services. It also argued that the federal government’s and the CRTC’s interventions in the wireless and wireline sectors aiming to increase the number of players through subsidies and mandated access were not likely to have the intended effects and might jeopardize investments and innovation. Instead of these interventions, the report argued that the government should liberalize its policy on spectrum transfer and open up the market completely to foreign ownership.

This year’s edition continues to explore these themes. Chapter 1 provides updated statistics regarding the performance of the Canadian telecommunications industry compared with other jurisdictions. Chapter 2 describes the current state of Canada’s wireless market, with a look at spectrum auctions and CRTC decisions on tower sharing and roaming fees. Chapter 3 discusses the mandatory sharing of broadband networks and the impact of such a policy on investment decisions. Finally, Chapter 4 explores the role of innovation in assessing the level of competition that exists in a dynamic market.

Read the Research Paper in PDF format.

The 2015 edition of the Research Paper on The State of Competition in Canada’s Telecommunications Industry was prepared by Martin Masse, Senior Writer and Editor at the MEI, and Paul Beaudry, Associate Researcher at the MEI.