In a 173 page decision [pdf] issued last week, Judge Victor Marrero of New York’s Southern District of the US District Court rejected an appeal of the merger of T-Mobile with Sprint, clearing the way for the deal to go through, subject to just two final gates: approval by California’s utility board; and, a federal judicial sign-off on the Justice Department’s settlement.

Judge Marrero described the challenge of ruling in a case such as this as recognizing that “In the final analysis, at the point of sharpest focus and highest clarity and reliability, the adversaries’ toil and trouble reduces to imprecise and somewhat suspect aids: competing crystal balls.”

Like the CRTC’s Wireless Review proceeding (with its oral hearing opening this week) Judge Marrero said “This is a case about competition in the retail market for mobile wireless telecommunications services.” So, I thought it might be especially relevant to take a look at what the Court said about a number of issues that are currently before the CRTC.

I suspect that a number of witnesses at the CRTC’s hearing will raise at least some of these issues during their testimony [agenda for the CRTC hearing can be found here].

• MVNOs should not be considered competitors of the carriers: “the Court is persuaded that MVNOs should not be considered independent competitors in the RMWTS [retail mobile wireless telecommunications services] Market, and it adopts Plaintiff States’ position that MVNO shares should thus be attributed to the MNOs from which the MVNOs lease network access. The weight of the evidence at trial suggested that MVNOs could not restrain the pricing behavior of MNOs to any truly significant degree. MVNOs have a miniscule share of the RMWTS Market overall; for example, even though defendants cite Comcast as one of the fastest growing MVNOs in the market, it nevertheless has only two million customers (measured by connected lines) in a market of over 300 million lines… Comcast’s Chief Business Development Officer… testified that he had seen no evidence of MNOs altering their pricing or service plans in response to Comcast’s actions in the market, and he did not believe Comcast’s Xfinity Mobile brand served as a competitive constraint… That MVNOs necessarily rely on MNOs for use of the MNOs’ mobile wireless networks further demonstrates their further limited ability to constrain the MNOs’ market power.”
• Market Concentration: “depending on the affirmative practices and actions taken by market participants, highly concentrated markets can nevertheless be quite competitive. And, as observed, the HHI [Herfindahl-Hirschman Index] thresholds prescribed by the Merger Guidelines are generic as to the markets being evaluated. This fact is particularly relevant because antitrust analysis must always be attuned to the particular structure and circumstances of the industry at issue. HHI measures may not be as informative as they might first appear in light of complexities particular to the RMWTS Markets”
• Coordinated Behaviour: “the RMWTS industry is not particularly vulnerable to coordination. As both sides acknowledge, price is not the only dimension on which competition occurs. The non-price factors listed above demonstrate the various strategies that competitors in the market might pursue, drawing also into question whether the firms’ pricing is truly so transparent. For example, while T-Mobile might try to compete primarily on the basis of its capacity advantages, AT&T might try to leverage the entertainment content provided by its merger with Time Warner, and a cable MVNO like Comcast might advertise the convenience of bundling mobile wireless services with fixed in-home broadband and cable services.”
  …
  “in complex and dynamic markets, pricing strategies tend to be less transparent and more dependent on a multitude of pushes and pulls, internal and external. In particular, prices are more likely grounded on combinations of different product and service features varying by capacity, speed, quality, and content. For this reason, in complex and dynamic markets, anticompetitive behaviors pricing strategies creating coordinated or unilateral effects are likely more risky, impractical, or unrealistic for reasonable corporate executives to implement.”

The Court also found “there are local RMWTS markets which should be considered in determining the relevant geographic market”, which is relevant because Canada has seen regional pricing in certain cases, reflective of local market conditions. “As a practical matter, it seems highly unlikely that a consumer in a locality like New York City could simply turn to anywhere else in the nation, such as California, to obtain wireless services. On the contrary, consumers likely rely primarily on local services in the area in which they live and/or work.”

Without any intent to be patronizing, I found this statement by Judge Marrero provides important counsel for consideration by the CRTC, the Competition Bureau and policy makers on the other side of the river at the Department and in the Prime Minister’s Office:

Most significant about the preceding contrast between relatively simple versus complex product markets, and the static as opposed to the dynamic, is how the distinction bears upon individual and corporate behavior in a business context. The differences raise a basic question: whether or not commercial practices and decision-making norms generally prevailing in one type of market may be transferable, and thereby likely to inform and guide the kinds of practices and decisions that govern another type, thus aiding predictions about the business choices company executives are likely to make under particular market conditions.

From this Court’s review, the record of this litigation informs a response to the preceding question. Projections of likely conduct in one type of market and analysis and predictions of competitive effects should take account of the unique features of the particular market and not be gauged by economic standards and practices that characterize another. Effects on competition in the market for cinder blocks, for instance, should not be assessed by the rules and practices prevalent in the market for computers. On this view, the extreme complexity and dynamism characterizing the wireless telecommunications markets would justify treating the industry as unusual for the purposes of antitrust analysis, and hence not be examined solely according to traditional economic models or based narrowly on the simpler business calculus that may be more fitting in evaluating competitive effects in relatively simpler and more stable product markets.

Are Canadian mobile prices higher than in other countries? Certainly. Are the prices too high? That cannot be answered without considering factors that contribute to higher costs for operators.

A recent article on National Newswatch wrote about “The High Cost of Providing Wireless Service in Canada”.

The article, by economists Mark Meitzen and Nick Crowley, was based on a study conducted for TELUS by Christensen Associates [pdf, 272KB].

The key conclusion of the study was that “Canadian wireless providers face significantly greater cost pressures than carriers in other countries on key network inputs and factors like climate and size of coverage area that impact costs. These cost pressures contribute to price disparities between Canada and other countries.”

Among factors examined in the study:

• Capital expenditures: Canadian wireless network capital expenditures per subscriber are 50 percent higher than the Benchmark Country average.
• Labour costs: Across all industries, Canadian companies face over 10 percent higher labor costs than Benchmark Countries.
• Spectrum costs: Canadian spectrum prices are significantly higher than the average of the Benchmark Countries as well. In general, lower frequencies (the “coverage” band) provide extended coverage at lower cost as fewer base stations are required to achieve greater geographic coverage, whereas higher frequencies (the “capacity” band) are primarily used by mobile operators to cover urban and suburban areas where data traffic is dense and substantial network capacity is required. Canada has the most expensive spectrum among countries in the study. The capacity band is twice as expensive in Canada, while coverage spectrum is four times more expensive than the Benchmark Countries.
• Operating environment: including geography, population density, and climate contribute to costs due to characteristics of the service provider’s service territory that are outside the control of the service provider but affect the magnitude of primary cost drivers described above.

As the authors conclude, “Simple comparisons of wireless prices across countries that fail to account for the cost differences in providing wireless service offer a distorted picture of the competitive landscape. This makes for bad economics and even worse public policy.”

Last week, I wrote about “Regulatory arbitrage” and tried to draw a parallel between “today’s proposed MVNOs and the long distance resellers of 30 years ago.”

A long time Canadian telecommunications regulatory colleague commented on that post and suggested that a better analogy might be local competition.

George Hariton wrote:

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.

Let me point out that I don’t think anyone in the CRTC Wireless Review proceeding is saying MVNOs are evil and should be banned. The issue relates to whether MVNO access should be mandated, or if the decision should be left up to the operators (both virtual and facilities-based) to develop a mutually beneficial business case.

There is a long history that can provide guidance in telecommunications competition in Canada.

Will we need to learn the lessons again?

A few weeks ago, I wrote a piece called “How long is a piece of string?”, discussing the challenge of defining the price of a mobile service plan. Year over year comparisons are difficult because data usage increases so dramatically and service providers try to design new packages to meet the demand.

So, a question arose on how to measure achievement of a key element in the Minister’s new mandate, requiring him to “Use all available instruments, including the advancement of the 2019 Telecom Policy Directive, to reduce the average cost of cellular phone bills in Canada by 25 per cent.”

As it turns out, there was clarity to be found in the Liberal party’s platform, that set out 2 specific plans and promised a 25% savings within 2 years:

• 2 unlimited nationwide talk and text phone plans, more than two optional features, and 5 GB of data usage per month; and,
• 2 unlimited nationwide talk and text phone plans, more than two optional features, and 2 GB of data usage per month.

The platform priced these out and promised specific savings. The two plans with 5GB per month were said to cost $2,095.68 at the time, and the platform promised to reduce the bill to $1,571.76 for savings of $523.92 per year. The two plans with 2GB were said to cost $1,810.56, promised to drop to $1,357.92 for savings of $452.64. All told, this hypothetical family of 4 would have their annual $3900 phone bill drop by just under $1000 for a total of about $2930.

TELUS decided to test its plans and found that it now offers plans that already meet what it is calling a “True North Affordability” standard.

According to TELUS, the Platform scenario could be delivered with all 4 hypothetical customers each subscribing to TELUS 10 GB Peace of Mind plans, for a total of $2880. The family would save about $50 more than promised, and would receive 2 to 5 times the amount data specified in the Liberal party’s platform promise.

It is clear that Canada’s mobile marketplace has moved faster than anyone in Ottawa could have anticipated. But that doesn’t mean the goal posts should continually be moved.

At a time when service providers are beginning to make the massive capital investments associated with the next generation of technology, regulators and policy makers alike need to be concerned about the unintended consequences of intervening in the market. As the Competition Bureau noted in its conclusion to its November CRTC submission, “competition has not yet reached its full potential and a mandated MVNO policy applied broadly risks undermining the steps taken by wireless disruptors, without much certainty that the MVNO policy will significantly decrease pricing.”

The Competition Bureau is concerned that the regional mobile competitors, the “disruptors” that have acted as catalysts in the marketplace, will be disproportionately harmed by regulatory intervention.

As I wrote earlier this week, we should be talking more seriously about providing direct assistance to those disadvantaged households who really need help accessing affordable wireless technology and services.

Let me be very clear: Just because local prices may be higher than in other places, doesn’t mean a particular good or service is unaffordable at home. There are lots of things for which Canadians pay more than our peers to the south, or other countries. An awful lot of things. Some are basic needs, like milk, eggs and poultry. Some are everyday items like fuel or alcohol or electronics. We gripe about paying more, but the vast majority of us can afford to pay the price.

For most Canadians, mobile services are affordable.

There. I said it.

The affordability of mobile service is measurable. Every quarter, more Canadians are subscribing than ever before, meaning more Canadians are finding a mobile plan they feel they can afford. Quarterly financial results are showing increasing numbers of Canadians are upgrading their service plans, increasing their monthly bills because the new data packages deliver more affordable value. I know. It sounds like an oxymoron to say people are increasing their monthly spending because they are getting more value.

As I wrote a couple weeks ago, PwC recently produced a couple reports showing that “Canadian mobile services top G7 affordability ranking”. It is a headline that must have made many heads explode since it is completely contrary to the popular narrative. Looking at the data, PwC examined the affordability of wireless services for Canadians in proportion to income and compared that to other jurisdictions. In addition, PwC considered discretionary spending by Canadians, testing whether household budgets were being strained by spending on mobile plans. It turns out that household discretionary spending increased in every income quintile; at every level of income, year over year people had more money left over to spend on fun stuff, even after paying for their communications bills.

So, while we all might want our monthly bills to come down (and who wouldn’t want to pay less for everything we pay for?), the vast majority of Canadians are paying for mobile service that they felt they could afford when they signed up, and they continue to pay their bills each month.

And indeed, last week the CRTC released the results of its own survey and found that 83% of Canadians were satisfied with their current service provider, with 35% saying they are very satisfied.

So, can we please stop the empty rhetoric about “too much pressure” on the average Canadian’s household budget? It is distracting from the real question of affordability for that segment of Canadians who truly can’t afford a smart phone and can’t handle the price of a mobile voice and data plan. There is a real problem for a number of low income households. Their calls for help are getting lost amid the populist noise calling for across the board price reductions. Lowering prices or increasing data volumes for the same price doesn’t change the calculus for a household at the margins trying to choose between the luxury of President’s Choice macaroni and cheese or the yellow box No Frills version once again.

Those are the Canadians for whom we need to talk about affordability. That conversation just isn’t happening.

In the CRTC’s upcoming Review of Mobile Services, the Coalition for Cheaper Wireless Service has proposed that carriers be mandated to offer an income-tested mobile services plan with unlimited Canada-wide voice and texting, and 4GB per month of data at LTE speeds for $25-30 per month. The coalition was silent on the subject of how the low income household gets a hold of an affordable LTE compatible device. There is a lot of merit to a targeted affordability program. I am not crazy about having just one plan available for these households; I would prefer to see a portable direct subsidy for those who need the social assistance and allow them to select the best plan to meet their specific needs. It is also my view that no specific plan should be prescribed in a regulatory decision because of the potential for the market to make any plan obsolete.

Funding such a plan could be the subject of many more blog posts: should it be funded by a general tax on telecom revenues, like the Broadband Fund; or, perhaps it should be funded by social service government programs? By way of example, Ontario’s Electricity Support Program may be a useful model to examine.

In any case, we also need to work out a solution to get affordable devices into the hands of lower income households. That is a non-trivial challenge.

For many, we still need to show them the basics. There are too many who don’t see the value of a mobile broadband service at any price.

Our national digital strategies have to consider gaps in service adoption with the same focus as programs that target service availability. There are far more people who have access to service but haven’t subscribed, than there are people living in unserved territories.

Canada needs to talk more seriously about increasing adoption of digital technologies and services in lower income households. So far, there has been too much noise to hear about the real problems, let alone develop real solutions. We need to change that.

We need to talk seriously about affordable wireless.