The state of wireless competition

The University of Calgary School of Public Policy released an important paper today, providing what it calls the first study that assesses the state of competition in wireless services in Canada. Based on the authors’ analysis, “there is no evidence that there is a competition problem in wireless services in Canada.”

The paper takes aim at simplistic analysis that has led various critics to have accused the industry of being “woefully uncompetitive” and “dysfunctional and in desperate need of an overhaul.”

This paper establishes that there is not a competition problem in mobile wireless services in Canada. The government need not, and should not, intervene to promote competition on the basis that increased competition will lower prices; efforts to do so will likely be unsuccessful and inefficient.

The paper warns that in the long run, the effects of government intervention are likely to lead to “reduced investment, misallocated spectrum, lower quality, and perhaps even higher prices.”

Today’s report was authored by Jeffrey Church, a professor in the Department of Economics and the Director of the Digital Economy Program in The School of Public Policy at University of Calgary, together with Andrew Wilkins, a Research Associate in the School. Dr. Church has testified on behalf of the Competition Bureau in the 2006 CRTC hearing looking into Essential Services. Today’s report documents the results of a long standing research program in telecommunications markets and regulation in Canada. An OpEd that appeared in the Globe and Mail in early July provided a preview of some of the points that are expanded upon in today’s report.

Although it is 50 pages, the report is quite readable and it is an important scholarly contribution to the wireless policy debate. It directly targets naive claims that high ARPU and low penetration rates are evidence of an uncompetitive sector, saying “the facts are not consistent with this simplistic analysis.”

Those who single out high ARPU as an indicator that something is wrong with prices — and therefore competition — are fundamentally misinformed about the meaning of ARPU and why it is high in Canada.

The authors say that it is ill-advised for the government to try to enhance competition by committing to four competitors in every region, saying the policy is based on “unsophisticated and misinformed textbook economics — that more competitors are better — which is simply inappropriate for services where there are important economies of network size, including economies of scale and scope.”

Similar to ideas in a blog post I wrote a few weeks ago, the paper warns that low prices can lead to networks that are not funded sufficiently to support future generations of devices and services.

Efforts to create competition in the short run, that increase the number of carriers, will simply squeeze margins in the short run and likely will not be sustained in the long run, as carriers exit and consolidate to reduce competition and restore margins consistent with profitability and the natural limit. And, while consumers might gain in the short run from lower prices, everyone is likely made worse off in the long run from the misallocation of spectrum, reduction in scale of carriers, and reduction in incentives to invest from such intervention.

The authors recommend that the government should reverse course on policies that reduce or restrict incentives for investment by the incumbent carriers and their access to spectrum. Instead, the focus should be on measures that foster competition in investment and network characteristics, such as speed, reliability, and capacity.

The conclusion is that Canada does not have a problem with competition in Wireless, and steps being taken to artificially incent new competitors may provide short term pricing benefits but likely brings deleterious long term impacts.

Perhaps the Industry Minister could refer the question to the Competition Bureau for an assessment. That is Canada’s independent agency charged with ensuring “that Canadian businesses and consumers prosper in a competitive and innovative marketplace.”

With auction stakes measured in billions of dollars – as well as the possible negative impact on investment in digital infrastructure – should we be asking whether the Competition Bureau agrees with the presumption that policy measures to incent competition are appropriate?

The University of Calgary School of Public Policy report concluded there is no evidence of a competition problem in Canada’s mobile wireless industry. On such an important issue of sector competitiveness, will the Competition Bureau be engaged to confirm or reject this finding?

4 thoughts on “The state of wireless competition”

  1. Hi Mark. Like junk science on GMOs or vaccines, am I the only one fatigued by this parade of conflicting “expert” reports/analyses on whether the Canadian market is (adequately) competitive? It is nothing if not repetitive, exhausting and ultimately self-defeating in the noise it creates, in my humble opinion. Not to mention, isn’t it a bit boring at this stage? For every Church there is a Geist, and while the academic debate (challenging methods, premises, arguments and conclusions) no doubt has merit, is any impact being made from a policy or regulatory perspective? It convinces no-one, in my view. People (and the vast majority of Canadians I know) simply do not accept that the market is competitive enough. They truly believe they are getting hosed by the Big Three. (And I happen to honestly think they are right, but more on that below.)

    Will this report (or the Big Three’s crazy PR campaign against Verizon) convince Canadian consumers otherwise. And will Geist’s blog and papers convince Jeffrey Church. Or you?

    To be perfectly above-board and cynical, I would be interested to know who is directly or indirectly funding this report. Granted, like Bell, Rogers and TELUS, my company has an interest in the extent to which Gov’t takes pro-competitive measures, so perhaps my view that the vast majority of Canadians are right about the level of competition should be regarded by others with equal cynicism. That is OK, I don’t mind.

    But even if no part of the staggering amounts of cash the Big Three are throwing around in their astonishing PR campaign ended up somehow producing this report, when you have independent commentators like Geist and Nowak (see, e.g., presenting at least as compelling and intelligent and well-articulated a view that is completely inconsistent, who is being convinced…I don’t know, but I think like a lot of people I have reached a point of fatigue. Apologies if that fatigue comes across as frustration.

  2. You don’t need a doctorate to figure out if companies are competing vigorously or not, you just need a set of eyes.

    It doesn’t matter if companies are large or small they are all driven to reduce costs. Advertising is a real (often significant) cost for companies that have to compete hard to attract customers. You can’t walk down the street without seeing an ad from a cell phone company on a bus, billboard, or building. You can’t surf the web or flip on a TV without seeing a cute commercial for Telus, Rogers or Wind. My local mall has at least 9 kiosks from different companies – if they didn’t have to compete their stores would be as scarce as passport offices!

    If the cell companies didn’t have to compete for customers they would slash their advertising expenses in a heartbeat and all that stuff would simply disappear. Judging by the volume of advertising, it appears the competition is pretty intense.

  3. Wait a sec. This is 2013. Not 1913. Amazing that the authors conveniently forgot about the lessons learned in the 1980s-90s and even over the past 10-15 years of consolidation and relative remonopolization that horizontal competitive networks and service providers indeed price to reflect marginal cost a priori and not average cost ex poste the way the vertically integrated monopolies do. There is no such thing as average demand in the information stack, and that, particularly in a 2-way communications world, is where all this economic theory gets debunked.

  4. I really don’t care about ‘another report’. When Canadians get surveyed they tell you how they feel about The Big Three and their operating style. They aren’t happy. Why’s that not in the picture here. Are we dumb? Whose pressing us to complain? The need seems to come from somewhere.

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