Mark Goldberg

PwC weighs in on mandating MVNO

A new report by PwC (released by CWTA this morning) says mandating wholesale access to MVNOs may deliver some pricing benefits to Canadians but would also bring significant negative consequences. The report, “Understanding the likely impacts of MVNOs in Canada” [3.7MB, pdf], warns that the reductions in the industry’s financial capacity would result in delays or cancellation of investments in fibre and 5G networks, leading to a wider digital divide emerging between urban and rural Canadians. Ultimately, according to PwC, Canadian competitiveness on the global stage could be jeopardized.

during the unfolding of the COVID-19 crisis, Canadian telecoms were the connectivity backbone of the country. Policymakers, regulators, the business community, and consumers all have an interest in the future of Canada’s telecommunications infrastructure. And everyone will feel the impact if regulation mandating wholesale MVNO access is introduced.

The report cites OpenSignal’s recent study showing that Canada maintained some of the world’s fastest wireless speeds, with little to no decline in speeds compared to data before the pandemic crisis. “The curtailing of network investments that could result from mandating wholesale MVNO access would hamper the ability of network operators to support crisis response efforts in the future.”

PwC’s models show that EBITDA margins could fall from 42% (2019) to 38% by 2025. Recall, in the past I have lamented how some confuse EBITDA margin with profit, inappropriately ignoring the massive capital outlays that must be covered by the “ITDA” portion. PwC notes that average return on invested capital (ROIC) generated by Canadian mobile carriers is already below the US and Australia and PwC expects that carriers will be unable to absorb the decline in revenues expected from a mandated MVNO model. To date, the report says Canada’s facilities-based mobile service providers have invested more than $70 billion in building Canada’s wireless networks; the wireless industry contributed more than $48 billion to Canada’s GDP in 2018 alone.

In the short term, according to PwC, mandating MVNO entry will lead to cuts of $5B in annual operating costs and $3B in annual capital expenditures.

We are of the view that the Canadian telecom industry today is healthy, with high-quality services offered at affordable prices via world-class networks that drives Canadian competitiveness and contributes to Canadian GDP, employment, government tax revenue and shareholder returns. Based on our analysis, we conclude that if the CRTC were to adopt the regulatory intervention some have proposed, it would lead to significant negative consequences. Ultimately, it could lead to a deterioration in the health of the telecom industry and negative outcomes for Canadians.

Under the third revision to the original schedule for CRTC Notice of Consultation 2019-57, final submissions in the “Review of mobile wireless services” are due today (July 15).

Today’s report is Part 1, looking at impacts on the Canadian telecom industry and the economy. Part 2 of PwC’s study, examining how Canada’s transition to 5G could be affected, is slated to be released in the coming weeks.

Earlier this week, PwC released another report, “The importance of a healthy telecommunications industry to Canada’s high-tech success” [pdf, 2.4 MB] as a follow-up to the study titled “Understanding affordability of consumer mobile wireless services in Canada” released last December and discussed on my blog in January. This report confirmed:

  • Canadian telecommunications providers (telcos) spend approximately 5.3 percentage points more on capital expenditures (CapEx) as a percentage of revenue than comparison countries, due to higher factors of production largely driven by geography, scale, and spectrum costs
  • The higher factors of production for Canadian telcos require higher EBITDA levels than comparison countries to maintain investment levels while keeping healthy free cash flows
  • Canadian telecom free cash flow yields, a measure of financial solvency (health), are 26% below the S&P 500 median, suggesting that Canadian telcos are not producing abnormal earnings

[Update: July 27, 2020] The second half of PwC’s study has been released, “Understanding the likely impacts of MVNOs in Canada – Part 2: Impact on Canada’s transition to 5G” [pdf, 2.6MB]

This part is composed of 4 sections:

  1. The importance of 5G to Canada
  2. What can we learn from the global 3G and 4G transitions?
  3. The opportunity cost of delayed 5G rollout in Canada
  4. A 2030 lookback: What could delayed 5G rollout mean for Canadians?

PwC says “Our analysis in Part 2 of this study supports the conclusions made in Part 1, namely that mandating wholesale MVNO access in order to reduce consumer wireless prices will lead to an unhealthy Canadian telecom industry and result in unintended negative consequences for the Canadian economy.”

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