Statistics Canada recently released data from its Canadian Internet Use Survey, 2022. In late June, I wrote about “Trusted sources for telecom data” and pointed to its “Telecommunications: Connecting Canadians” page, a subset of its “Digital economy and society statistics” portal.

The 2022 Canadian Internet Use Survey was actually conducted between December 2022 and April 2023. Although Statistics Canada has been conducting its Canadian Internet Use Survey for many years, the agency cautions against comparing data prior to 2018 because of changes in design.

While the Canadian Internet Use Survey covers just the 10 provinces, a companion article was issued last year, “Canada’s Far North less remote than meets the eye”. According to that article, “in 2021, 88% of those living in the Northern Territories said they had used the Internet over the past three months and 90% over the past 12 months. By way of comparison, in 2020, 92% of Canadians living in the provinces said they had used the Internet over the previous three months. The overwhelming majority (97%) of non-Indigenous Northerners used the Internet over the past year, compared with just over three-quarters of Indigenous people living in the North.

There were a number of notable observations in last week’s release of the Canadian Internet Use Survey:

• Internet use among Canadians aged 15 years and older rose to 95%, an increase from 92% in 2020; the biggest increase was among Canadians aged 75 years and older, increasing to 72% in 2022, up from 62% in 2020;
• The proportion of Canadians with home Internet access “remained stable in 2022 compared with 2020, at 94%, but the proportion of Canadians who reported having a download speed of 50 megabits per second (Mbps) or more increased”: 87% had a download speed of 50 Mbps or more, compared with 72% in 2020;
• 84% of Canadians had a personal mobile internet data plan in 2022;
• 2% reported having only a mobile data plan with no home Internet connection.

In addition to the infographic reproduced here, Statistics Canada provided a number of tidbits regarding Online Safety.

In 2022, 8% of Canadians felt victimized by an incident online, such as incidents related to bullying, harassment and discrimination, or related to the misuse of personal pictures, videos or other content. Among various age groups, younger Canadians aged 15 to 24 years (11%) had the highest proportion of people who felt victimized online.

About half (51%) of Canadians said that they had seen content online that may incite hate or violence, and three-quarters (73%) of Canadians reported that they had seen content online that they suspected to be false or inaccurate, such as misinformation.

As I said last month, for reliable facts and statistics I start with government agencies, especially the data produced by Statistics Canada.

Falling prices for telecommunications services highlighted yesterday’s Statistics Canada release of the June 2023 Consumer Price Index (CPI).

While Canada’s overall CPI rose 2.8% year over year, the cellular sub-component fell 14.74% and internet access prices fell as well.

As a result, prices for telecommunications services merited a special mention in Statistics Canada’s CPI summary in The Daily:

Prices for telecommunications fall

Consumers paid 14.7% less for cellular services year over year in June, following an 8.2% decline in May. This was a result of both lower prices for cellular data plans and promotional pricing.

Prices for Internet access services fell 3.2% in June on a year-over-year basis after increasing 1.0% in May. On a month-over-month basis, prices declined 5.0%, the largest 1-month decline since February 2019. This was mostly due to promotions in Ontario and lower prices in Quebec.

Since January 2021, the cellular component of the price index has fallen nearly 30% while the overall CPI has risen nearly 15%. If prices for cellular service had tracked at the average for Canadian prices, plans would be 60% higher than they are today.

The latest report on falling prices provides more evidence supporting my post from last month, where I asked, “Is it time for government telecom policy makers to say, “Mission accomplished”?”

Measuring price without consideration of variances in quality produces meaningless results. “Value” seems to be a much more relevant metric.

Policy makers need to look at factors beyond price as a measure of competitiveness. The marketplace is working. As I told the Canadian Press a couple weeks ago, price reductions we are seeing in the mobile market are “well beyond any of the expectations that were set by Ottawa”.

So, are authorities in Ottawa preparing to declare “mission accomplished”? That would be unlikely. However, with the recent substantive changes in the structure of the sector, it might be appropriate to ask if regulators should stand aside and let marketplace dynamics work.

The following opinion piece, by Canadian Telecommunications Association President and CEO Robert Ghiz, first appeared on July 14 in Wire Report, as “OPINION: Declining prices and record levels of investment show competition is increasing in Canada’s telecom market”.

With the dust having settled on Rogers Communications’ acquisition of Shaw Communications and Quebecor’s related acquisition of Freedom Mobile, now is a good time to take an early look at the impact the acquisitions have had on Canada’s telecommunications market.

When the transactions were first announced, some questioned whether it would result in a lessening of competition in Canada’s telecommunications market and if Canadians would end up paying more. Based on what Canadians have seen so far, the answer to both questions is a resounding “no”.

Just weeks after these transactions closed, prices for entry-level 5G wireless plans offered by Canada’s three largest wireless providers dropped by as much as 35 per cent and the price per gigabyte (GB) of data fell by as much as 50 per cent.

Other brands introduced new plans that offer more data at lower prices than their previous plans. Under its new ownership, Freedom introduced its first truly national wireless plan – with data that can be used in both Canada and the United States.

Simply put, since the Rogers-Shaw-Quebecor transactions were completed, Canadian mobile wireless users are getting more for less.

These recent price reductions are just the latest in a multi-year trend of declining prices in Canada’s wireless market. In fact, while Statistics Canada’s All-items Price Index has increased by 15 per cent during the last four years, its Cellular Services Price Index declined by over 36 per cent during the same period. And according to the government’s own price study, Canadians pay less per month for wireless services than customers in the United States.

Price declines of this magnitude are a clear sign of the vigorous competition that is occurring in Canada’s wireless market. And it should come as no surprise. According to Bank of America, the Canadian wireless market has long been one of the least concentrated in the world. With Videotron’s acquisition of Freedom, Canada now has four national service providers, along with strong regional providers that have brought additional competition to the regions they serve.

But assessing the performance of a telecom market is not one-dimensional. While price is usually top-of-mind, quality and coverage are also important factors. Canada’s mobile wireless networks cover more than 99 per cent of the population, and, according to PwC, are the best-quality networks of all G20 countries. This is truly remarkable when you consider the distances that our networks must cover compared to those in other countries.

This level of performance and coverage extends beyond the mobile wireless market. Canada also has among the best performing and farthest reaching high-speed fixed internet networks in the world with median download speeds that are more than 60 per cent faster than the G20 average, according to Ookla’s Speedtest Global Index.

Canadian networks provide access to speeds of one gigabit per second to a greater percentage of households than those in countries like Australia, the U.K., Italy, France, and Germany, based on a comparison of Australia’s Broadband Performance report, the CRTC’s Communications Market Report, and the European Commission broadband coverage report.

Meanwhile, internet service prices have remained relatively flat, defying the overall inflationary pressures that have resulted in significant increases in the price of most other goods and services.

These positive outcomes did not happen by chance. They occurred only because successive federal governments and the CRTC, have long recognized that facilities-based competition – or competition among network operators – is the preferred form of competition, as it determines Canada’s network quality, coverage, and reliability.

In its 2019 study of competition in Canada’s broadband industry, the Competition Bureau observed that while wholesale-based (or resellers) and facilities-based competitors compete against each other every day, “facilities-based competitors engage in a dynamic form of competition to successfully introduce better networks over time through investments in new technologies.”

The Competition Bureau further described the benefits of facilities-based competition as follows:

This type of dynamic competition benefits competition in at least two ways. First, it is logical that better networks provide better results for consumers: faster, less congested connections that grow and change more or less in tune with consumer demand. Second, once the investment in new networking equipment and physical lines has been made, companies have a strong incentive to compete hard and win customers in order to generate revenues sufficient to recoup those investments.

This race to provide the most robust networks is an important source of dynamic competition. It results in consumers having access to the fastest speeds and best connections while, at the same time, driving substantial investment in the Canadian economy. And, at least over the past 20 years, it has been a self-sustaining form of competition, as both telephone and cable companies jockey to establish themselves as market leaders.

In recent years, Canada’s national and regional facilities-based providers have combined to invest an average of more than $9.2 billion per year in capital expenditures to expand and enhance wireline broadband networks in Canada. Facilities-based providers have also invested close to $3 billion per year over the same period in wireless infrastructure, and more than $12 billion in acquiring additional spectrum licenses.

The benefits of facilities-based competition cannot be matched by mandated service-based competition, which relies on providing reseller companies with access to the networks built by facilities-based network operators at mandated wholesale rates. Because they do not invest in building their own networks, resellers do not contribute to Canada’s network quality, coverage, and reliability. They do not contribute to closing the rural/urban digital divide, nor do they help Canada keep pace with the technical advances that are crucial to Canadian businesses remaining competitive with their international peers.

It is within this context that the CRTC is currently reviewing its wholesale framework that provides resellers with mandated wholesale access to high-speed internet services. The potential negative impact of wholesale regulation on investment is well-established. As the Competition Bureau stated in its 2019 broadband study:

…wholesale access regulation diminishes the expected profits of the investment, as some of the profits from the investments are instead earned by wholesale-based competitors using that network to serve consumers.

In other words, mandated wholesale access can lessen a network operator’s incentive and capacity to invest in expanding and enhancing its network facilities. Without such incentives and investment capacity, Canada risks falling short of the investments necessary to bridge the digital divide, stimulate research and innovation, maintain network security and resiliency, and provide the connectivity needed for Canada to remain competitive in an increasingly digital economy.

As the evidence shows, following the Rogers-Shaw and Freedom-Quebecor transactions, facilities-based competition is not only continuing to deliver ever-improving quality, coverage, and resiliency, it is also delivering lower prices and more value for money. To the extent the CRTC keeps mandated wholesale internet access as part of its telecom policy framework, it is crucial that it balances its wholesale objectives with the need to maintain the benefits of facilities-based competition and the incentives for private sector investment in high quality and resilient infrastructure and innovative services. Specifically, wholesale prices must be set at levels that ensure that investment incentives are maintained.

As I wrote last week, “Canadian carriers have spent billions of dollars investing in telecom infrastructure, but the job is not yet complete. This is not the right time for regulation to discourage carriers from investing in telecom infrastructure.”

Is there ever a right time?

Canadian carriers have spent billions of dollars investing in telecom infrastructure.

Indeed, Statistics Canada data shows that the year 2022 represented the greatest level of investment in communications networks on record ($9.674B). More than a third of that ($3.332B) was invested in Optical Fibre.

A few weeks ago, I highlighted an excerpt from the CRTC’s wholesale broadband notice of consultation. At paragraph 70, we read:

the Commission considers that a number of incumbent carriers have made fibre the focus of the retail Internet service market, resulting in a seven-year head start in establishing and securing a broad customer base by building out and deploying their fibre access networks, which now cover most of their serving territories. Therefore, the Commission expects that there would be minimal risk regarding the future investment of fibre deployment by accelerating the competitive introduction of FTTP facilities.

As I noted last month, Bell Canada’s CEO has stated “There are still 4-5 million locations within our footprint without access to fibre.” And, that is just within Bell’s footprint.

In 2016, when the CRTC set an aspirational target for all Canadians to have access to 50/10 unlimited broadband, it was viewed as an aggressive, but achievable goal. Seven years later, the FCC is considering a target of 100/20 for its rural broadband programs.

CRTC figures show that, at the end of 2021, 91.4% of Canadian households have access to 50/10 unlimited broadband. But barely over three quarters (77.4%) have access to gigabit speeds (a proxy for fibre or equivalent technology). In rural Canada, nearly two thirds (62%) of Canadians have access to the 50/10 unlimited service, but just over half of those (36.9% of total rural households) could get gigabit services.

The Commission’s own data demonstrates that the CRTC is just plain wrong to conclude “there would be minimal risk regarding the future investment of fibre deployment”.

In its recent submission to the CRTC’s wholesale consultation, the Competition Bureau explicitly warns the Commission about wholesale regulation creating a risk to investment.

Wholesale access regulation can increase competition in the short-term, including through offering increased choice and lower prices to consumers. However, it is worth noting that wholesale access regulation can also have a negative effect on investment decisions, potentially impacting long-term or dynamic competition.

Wholesale regulation can have a material impact on the business case for rural and suburban fibre deployment, as recognized by the Competition Bureau. The CRTC should be playing the long game, continuing to focus on a dynamic marketplace for the long term.

In the coming weeks, I expect to be writing more about the CRTC’s recent determinations in its “Review of the approach to rate setting for wholesale telecommunications services”.

Canadian carriers have spent billions of dollars investing in telecom infrastructure, but the job is not yet complete. This is not the right time for regulation to discourage carriers from investing in telecom infrastructure.

Indeed, there is never a “right time” for governments to discourage private sector investment.

I thought it might be helpful for understanding EBITDA to look at why margins are higher in certain capital intensive industries.

EBITDA is short for Earnings Before Interest, Taxes, Depreciation and Amortization. It is considered to be a proxy for cash flow due to adding back Depreciation and Amortization, but it does not represent net profit, since the business has to pay for its own investments somehow. In capital-intensive businesses, interest, depreciation and amortization can be pretty substantial amounts.

The CRTC’s recent CMR summary included a chart that compared capital intensity across various industrial sectors. Notice that capital intensity (the ratio of capital expenditures to revenues) in telecommunications ranks near the top of all of Canada’s industries. Around 25 cents out of every dollar in revenue is invested by Canada’s telecommunications carriers.

Warren Buffet of Berkshire Hathaway has a well known disdain for EBITDA as a measure of corporate performance. Those who cite EBITDA margins as evidence of excessive profits fall into what Buffet has phrased as thinking “The tooth fairy pays for capital expenditures”. Understanding EBITDA margins, and why this figure varies between capital intensive businesses and those that are less investment intensive, is key to analysing the telecom sector.

Wholesale-based service providers, companies that are reselling carrier infrastructure, have a higher proportion of their network facilities paid for in monthly leases, an expense that is recorded above the line. Carriers, the companies that invest in major telecom infrastructure, need bigger operating margins in order to pay for their investments – those payments recorded below the line resulting in interest, depreciation and amortization. Facilities-based service providers invest in connectivity and long-haul facilities and pay billions of dollars for spectrum, the radio frequencies that power wireless communications.

Those investments require real cash, funds that are not paid for by the tooth fairy.

Keep that in mind the next time you look at EBITDA margins in the telecom sector. Understanding EBITDA means understanding that capital intensive businesses necessarily have higher EBITDA margins.