Mark Goldberg

Regulatory arbitrage

In just under 2 weeks, the CRTC will begin the oral hearing phase of its Mobile Services Review proceeding, TNC 2019-57.

Much of the media coverage has looked solely at the potential to mandate resale of mobile facilities via Mobile Virtual Network Operators – MVNOs. At least one reporter has mistakenly described it as a “hearing on Mobile Virtual Network Operators, wholesale service providers that offer services at cheaper rates”. In fact, no it isn’t, and no they aren’t.

There are other components to the CRTC review, including an important review of whether additional regulatory measures are required “to reduce barriers to the deployment of cellular infrastructure”, given that the next generation of mobile architectures imply “a large number of small cells will be required to properly cover any given area.” The public has not been as engaged in that topic, despite the potential impact on intergovernmental relations, electro-magnetic radiation concerns, issues associated with the visual impact of antennas on every lamp post among other matters. My views on such issues are already documented from my days in 2012-13 working on my local municipality’s tower siting protocols [for example, see “We need more towers” • Sept 2012].

But the question of mandating MVNOs is indeed on the agenda.

As I read through the business plans and follow the Twitter rhetoric, I just can’t get over the feeling that there is a parallel between many of today’s proposed MVNOs and the long distance resellers of 30 years ago.

Those businesses went through two distinct waves of failures.

The first wave was triggered by a dependency on regulatory arbitrage. The CRTC mandated wholesale inputs and the marketplace determined the maximum price that could be charged. Non-facilities based service providers relied on regulation to provide a sufficient margin to enable them to eke out a living.

The second wave was a failure to add value through innovation or differentiation. The product was the same as everyone else, just cheaper – and cheaper in every sense of the word. As retail prices fell, price savings became less meaningful and margins shrank. Resellers operating with regulated access became dependent on going back for rate reviews in order to maintain viability.

Some of those businesses survived; most have faded into oblivion.

What factors allowed a handful to survive?

Consolidation was a part of the answer, and diversifying into adjacent businesses is another part. Long distance, local phone service, home internet. Adding one business to the next, relying on regulated access to facilities based carriers’ lines.

Regulated rates for resale arbitrage has meant a continuous cycle of rate-setting procedings and shifts in technology has also driven more regulatory burden. If the regulator sets rates too high, there isn’t enough margin left for to arbitrage; if rates are too low, the facilities-based carrier has insufficient margin to expand its network coverage or invest in technology upgrades. It is a delicate balance, virtually impossible for the regulator to get “bang on”.

I can’t help feeling these companies are playing like the old video game Frogger, hopping to safety by jumping onto the next passing log. For some of the proposed MVNOs, mobile is apparently just a jump onto the next business adjacency, the next log coming down the stream to provide temporary safety to avoid drowning.

We’ve been down that river before.

I’d like to think there is a better way. I have some ideas for more forward-looking value-added services that don’t have such regulatory dependencies, looking ahead to the next generation of services, instead of arbitraged resale of yesterday’s success story.

Will any service innovations be discussed when the CRTC opens its hearing on Feb 18? Or are we setting up another round in the regulatory arbitrage game of Frogger?

1 comment to Regulatory arbitrage

  • George Hariton

    Hi Mark.

    The parallel with long distance is interesting. But the more relevant analogy is the 1997 decision mandating incumbents to give new entrants access to their networks for local voice (POTS) competition. In particular, unbundled local loops are functionally similar to what some MVNOs are asking for (some MVNOs are asking for a lot more, of course). Back then, mandated access was justified by the “stepping-stone” or “ladder-of-investment” theories. In practice, local competition became a reality when cable companies used their own facilities to provide that competition, and when mobile services became enough of a substitute.

    I guess we will have to learn that lesson all over again.