A big week ahead for telecom regulatory departments.

The revised schedule for the CRTC’s review of mobile wireless services (TNC 2019-57) are due on November 22, with the oral hearing phase scheduled to begin February 18, 2020. Final submissions in that regulatory proceeding are currently scheduled for March 23, 2020.

A week and a half ago, I wrote about the net new subscriber additions in the past quarter. A few days later, in a November 11 research report, Scotiabank argues that the recent quarter’s financial results released by Canadian mobile carriers are indicators that there isn’t a need for regulators to mandate the establishment of mobile virtual network operators (MVNOs).

According to the Scotiabank Converging Networks research note “the most important part of the proceeding revolves around the question: will the CRTC mandate Mobile Virtual Network Operators (MVNO) access?” Scotiabank believes the decision will be among the most important regulatory rulings since the new-entrant AWS-1 spectrum set-aside in 2008.

According to Scotiabank, the facilities-based competition that emerged from the 2008 decision, giving rise to mobile operators Quebecor (Videotron), Shaw (Freedom Mobile) and Eastlink, “looks sustainable.”

Quebecor has been a wireless facilities-based competitor in Quebec for a decade. Is that not sustainable enough? We estimate the company has now captured approximately 19% market share in the province, and, with its new Fizz brand, the momentum has actually accelerated. We estimate Freedom’s market share of covered population (POP) at just under 10%, and we see share gains continuing, driven by network quality improvement, and supported by network and spectrum investment.

Scotiabank’s research found that Shaw and Quebecor’s combined share of new subscribers has reached approximately 30%.

Wireless key performance indicators show that competition has been rising with a long runway. In particular, all three incumbents’ ARPUs are now in decline and postpaid churn is rising. We believe these trends have been indirectly driven by competition from Shaw and Quebecor. As we noted above, we do not foresee either slowing down until they have achieved their market share objectives, which we believe is in the 20%-30% range of covered POP. At their current market share (of POP covered) and our estimate of the pace of share gains, we believe Quebecor still has another five years before it reaches 25% share and Shaw has 10 years of market share gains ahead before it reaches 20% share.

According to the Scotiabank report, the “real sustainable competition” is expected to encourage Bell, TELUS and Rogers to push forward with investment in 5G as a differentiator. Conversely, Scotiabank warns that “heavy-handed regulation such as regulated MVNOs may drive prices down temporarily, it will likely deter the move to 5G” because of an increased uncertainty of returns on future investment and a higher cost of capital.

We believe the United States offers a good example. Competition driven by T-Mobile and Sprint Corp. has driven Verizon Communications Inc. (VZ-N) to accelerate 5G investments, and, in the case of AT&T Inc. (T-N), to invest in media. While both Verizon and AT&T pursued different strategies, their objectives were similar in that they both pursued investments in areas where they thought would help differentiate against T-Mobile. This was all driven by challengers making network investments to compete against Verizon and AT&T, particularly in the case of T-Mobile.

Scotiabank’s recognizes that regulators face a “delicate act of balancing competition and investment incentives. A wrong move could have years of unintended consequences.” The report discusses a number of these potential unintended consequences:

• Large companies with global scale that are not current telecom service providers could become MVNOs under mandated MVNO regulations.
• Large global companies entering the MVNO market selling wireless services as loss leaders would commoditize and cause a significant decline in prices in the short term, causing investments in next generation network investments to decline in the medium to long term and causing network quality to ultimately suffer
• Smaller facilities-based wireless operators like Freedom, Vidéotron and Eastlink (the same companies that have created the competition over the past decade) are more likely to be affected by MVNOs than the incumbents

But Scotiabank warns “Even if the regulators knew of these consequences, trying to establish further regulations to prevent them may just add further complexity with less regulatory certainty.” For more coverage of the Scotiabank report, see the write-up by Greg O’Brien in Cartt.ca: “Wireless results show mandated MVNO is the wrong way to go, says report“.

A few weeks ago, I discussed important data arising from Statistics Canada’s release of the Internet Use Survey. That study included important information about adoption rates of connectivity and for those who don’t have a smartphone, asking why. In the current CRTC proceeding, will affordability concerns be backed by data?

Submissions are due at the end of this week. Scotiabank believes the filing by the Competition Bureau will carry significant weight. The CRTC’s schedule set January 13, 2020 for parties to reply.

Earlier today, CWTA released a report developed by Accenture Strategy examining how the deployment of 5G wireless networks will benefit both cities and rural communities.

The report, “Accelerating 5G in Canada — Benefits for Cities and Rural Communities,” estimates the economic impact of 5G’s ultra-fast, ultra-reliable and higher-capacity wireless connectivity in Canada will reach $40 billion of annual GDP uplift by 2026, with 250,000 permanent jobs added to the economy.

5G is more than the next generation of mobile technology. It will bring entirely new ways of using mobile technology that do not exist today. Much as 4G’s speed and capacity propelled us into the app economy and expanded the use of mobile video, 5G will be a platform for entirely new innovations. Imagine what can be done with a 100x increase in traffic capacity and network efficiency, a 10x decrease in end-to-end latency, and speeds that are over 600 times faster than the typical 4G speeds on today’s mobile phones.

According to the report, many of these advancements won’t directly impact consumers in the near term. Instead, many of the initial deployments of 5G will advance technology adoption for specific industry and government use cases. For example:

• Transportation: Traffic management, autonomous vehicles, rail/transit maintenance
• Healthcare: Connected ambulance, remote care, wearables
• Agriculture: Crop and soil management, autonomous vehicles
• Energy Management: Smart grid, smart street lighting
• Water/Waste Management: Smart metering
• Municipal Services: Smart parking meters, garbage collection, snow removal
• Public Safety: Smart policing, disaster management
• Rural Connectivity: Fixed wireless access

The report explores four of these use cases in greater depth, solutions that are expected to be adopted in the next three to five years, as 5G becomes more widely deployed, examining the benefits estimated from adoption in Canadian cities and select rural settings: Transportation & Mobility; Precision Agriculture; Energy Management; and, Rural Connectivity.

The report argues that accelerating the deployment of 5G will rely on three key actions by government policy makers: encouraging innovation in advanced technologies, encouraging investments in wireless infrastructure, and enabling ecosystems to collaborate in deploying innovative use cases.

I am going to take a little vacation time over the next couple weeks, so while I am gone, I thought I would provide a collection of quotations that I think are relevant for a couple hot regulatory issues these days: the state of Canada’s mobile wireless industry and the appeals associated with wireline wholesale.

As noted by the 2006 Telecom Policy Review Panel, the CRTC originally encouraged competition via resale through various rulings that “established a general policy requiring an incumbent who chose to offer a retail telecommunications service to permit resale of that service, whether by competitors or others.” When the CRTC approved facilities-based competition in 1992, “it did so recognizing that the construction of network facilities by entrants was necessary for the full benefits of competitive entry to be realized.”

Have those fundamental principles changed?

From Telecom Decision CRTC 92-12:

The Commission considers that resale can provide many benefits, but it is not a substitute for facilities-based entry. Facilities-based entry permits sustainable and more broadly-based competition, thereby increasing the benefits to be derived from competition.
…
However, resellers can complement facilities-based competition by providing price discipline, ensuring greater responsiveness and serving niche markets.

Testimony of Marc Gaudrault, CRTC Notice of Consultation 2009-261, Transcript 31 May 2010, Line 926:

In order for the ladder of investment to work most effectively, the wholesale services provided by ILECs and cable carriers at each rung of the ladder should be constructed so as to facilitate the maximum amount of service differentiation downstream at the retail level and the ability of competitors to climb the ladder. This means differentiation of functional attributes such as speed, throughput, quality and types of service, geographic coverage and service bundling.

From the report of the Telecom Policy Review Panel:

The Proper Scope of Mandated Wholesale Access
As stated above, a fundamental objective of mandated wholesale access should be to maintain incentives for innovation, network efficiency and investment. In the Panel’s view, the most effective method for promoting these incentives is to ensure that competitive market forces apply to the broadest possible range of network and service components in as many locations as economically feasible.

To this end, new entrants should have both opportunities and incentives to build their own facilities. Since by definition retail market entry is not possible without competitor access to essential facilities, the regulatory framework should continue to require incumbents to make these available, on a mandatory basis if necessary.

However, the Panel concludes that, given the current state of competition in Canada, continuing to require that incumbents make non-essential facilities available to competitors undermines the incentives for the latter to build alternative facilities. This in turn undermines competitive market incentives for all service providers to be efficient, to innovate and to invest, for several reasons.

First, when designing their networks, entrants can either build non-essential facilities or lease them from the incumbent. Mandated wholesale access at regulated prices reduces the cost and especially the risks associated with leasing relative to building. It thus increases the likelihood that leasing will be more attractive than building. Mandated wholesale access therefore tends to discourage entrants from supplying their own facilities, even where doing so would otherwise be economical. The potential negative impact is much more limited if mandated wholesale access is limited to essential facilities.

Second, regulated wholesale pricing reduces the revenues that entrants who build facilities can generate in the wholesale market when they lease those facilities to other providers. This arises because regulatory constraints on ILEC wholesale prices also effectively place upper limits on the price that other service providers can charge for facilities in the wholesale market. This in turn affects investment decisions of both incumbents and new entrants in cases where the viability of constructing network facilities is dependent on their ability to profitably supply facilities on a wholesale basis to other service providers. The broader the scope of mandated access, the greater the negative impact on investment decisions.

Third, artificially low wholesale rates undermine the price levels and revenues that could otherwise be sustained in the retail market. The broader the scope of mandated access, the more significant the impact on retail prices. This compromises the ability of both entrants and incumbents to recover potential network investments.

The argument in support of mandating the availability of non-essential facilities is that it can actually facilitate, rather than hamper, construction of facilities by entrants by providing them with a “stepping-stone” until the day they can build their own facilities. The validity of this argument rests entirely on the assumption that the CRTC can set prices that are both:

• low enough to facilitate entrants’ ability to expand their networks and more quickly acquire the customer base that would justify construction of their own facilities
• high enough to provide entrants with sufficient incentives to build such facilities.

The Petition to the Governor in Council procedure: Canada’s wholesale broadband policies, the appeal mechanisms that challenge them, and broader regulatory trajectories
Daniel Mackwood, 2016 Paper
CRTC Prize for Excellence in Policy Research

CRTC decision hearing outcomes have regularly supported wholesale competition in the fixed access broadband market. The agency’s ongoing aim has been for its regulatory decisions to help usher new-entrant and competitor ISPs into an eventual transition from service- to facilities-based competition. Referred to as the “ladder of investment” (LOI) or the “stepping-stone” approach, this regulatory strategy encourages an evolution from ISPs existing as wholesale access customers relying on tariffed usage of incumbents’ networks, to eventually being able to invest in and maintain their own facilities and infrastructure.

The CRTC is in the midst of a proceeding reviewing mobile wireless services in Canada, focusing on three areas: Competition in the retail market; The current wholesale mobile wireless service regulatory framework, with a focus on wholesale MVNO access; and, The future of mobile wireless services in Canada, with a focus on reducing barriers to infrastructure deployment.

It isn’t yet clear there is a justification to mandate wholesale access services for the mobile wireless market. That is the first gate.

Missing from the historical documents (cited above) is a discussion of the need to preserve appropriate incentives for facilities-based service providers to invest in network expansion in terms of reach and capacity.

Should there be a third principle in setting wholesale prices? Perhaps wholesale rates need to be:

• low enough to facilitate entrants’ ability to expand their networks and more quickly acquire the customer base that would justify construction of their own facilities
• high enough to provide entrants with sufficient incentives to build such facilities
• structured in a manner that encourages incumbents to expand capacity and reach for their own network facilities.

I will have spotty internet access for the next 10 days or so, a reminder that not every country has coverage as good as Canada; I look forward to reading your comments.

The financial reports are in and it was an interesting quarter for Canada’s wireless providers.

Interestingly, you can see that the “new entrants”, Videotron and Freedom, were responsible for more than a quarter of the total new subscriptions, despite having something less than 10% total market share. And this doesn’t include results from privately held Eastlink. So, despite continued growth for all the industry participants, competitors are growing proportionately faster and gaining market share.

And despite election campaign concerns about affordability of mobile services, well over half a million new subscribers found mobile plans they felt they could afford.

This is not to say that there aren’t some Canadians in disadvantaged households who need assistance participating in the digital economy, just as they need help meeting their day-to-day needs. Since the introduction of broadband services for low income households, there is evidence that it isn’t only an issue with pricing. What other factors are inhibiting adoption?

As I wrote last week (echoing earlier posts), we need to develop a better understanding of how to target service delivery to help promote a more connected Canada.

Bernard Baruch is credited with the coining the statement “Every man has a right to an opinion but no man has a right to be wrong in his facts.”

Important phrase to keep in mind as I read competing opinion pieces: Timothy Denton in the Financial Post and Dr. Robert Crandall in Cartt.ca.

Tim is a former CRTC commissioner and his piece was authored to respond to an opinion piece by Gael Campan of The MEI in support of its recent research paper (the subject of last week’s blog post “Permissionless innovation: is regulation penalizing infrastructure investments?”. Mr. Denton’s clients include Tucows, the parent of Ting, a company that has been trying to get the CRTC to mandate MVNOs.

Dr. Robert Crandall is is a senior fellow at the Technology Policy Institute, a Washington-based think tank that focuses on the economics of innovation, technological change, and related regulation around the world. Dr. Crandall has taught economics at Northwestern University, MIT, the University of Maryland, George Washington University, and the Stanford in Washington program. His opinion piece is based on data in The Inclusive Internet Index 2019, a study by the Intelligence Unit of The Economist. He has prepared evidence for TELUS in the CRTC’s review of mobile wireless services.

Now in its third year, the index assesses the performance of 100 countries in four categories of inclusion: Accessibility, Affordability, Relevance and Readiness. Each category incorporates key indicators of internet inclusion, including quantitative measures such as network coverage and pricing, and qualitative measures such as the presence of e-inclusion policies and the availability of local-language content.

Mr. Denton’s piece is titled “Some truths about why Canada’s cellphone bills are higher and our adoption rate lower than most OECD countries” but it actually mixes up a lot of facts confusing European regulatory obligations for wireline services (that we also have in Canada) in his discussion of what he (or his clients) think should be imposed for wireless. Like the discredited consultant report from Rewheel, Mr. Denton tries to compare Canada’s mobile service to Finland (“with their vast regions as empty as Canada”), failing to consider that Finland’s population density is 5 times that of Canada. He also refers to wireless penetration using the familiar, but invalid metric “SIM cards per capita”, as though it is a good thing for people to have to carry multiple subscriptions (and forgetting to consider that also means people are paying multiple bills). When looking at unique subscribers, Canada’s figure of 78% is in line with the US (85%) and Europe (86%).

The fact is, Canadians enjoy superior quality network performance, thanks in part to carriers’ capital investment per connection that is nearly double the average of their European counterparts. As Dr. Crandall observes, “Canada has among the highest spectrum prices in the developed world because of these policies, thereby increasing wireless carrier costs and, thus, wireless prices.”

We are entitled to our own competing opinions. But those opinions should be informed by facts.