There are some writers in the blogosphere who aim to defend Canadians from the telecom bogeymen. Some of the most popular blog posts get retweeted regularly with endorsements from consumer groups and academics, spreading their influence further.

A few of these writers have created the common misconception that Canada’s high average revenue per user (ARPU) is evidence of high prices. That is not true, no matter how many times the lie is repeated.

Today, we saw an attempt to dispel a claim that Canada’s wireless capital spending per capita is among the world’s highest.

We have previously seen claims that Canadian carriers don’t spend that much on capital [see point 5 of this link], using an argument like “if it was really that expensive to build and maintain those networks, Canadian carriers wouldn’t be sitting near the top of the profit list.”

So it wasn’t surprising that today, we saw a post called “Canadian wireless investment: nothing special“.

In it, the thesis apparently is that if the capital intensity of Canada’s wireless carriers is middle of the road, then “what they’re actually spending is nothing special from an international perspective.” The conclusion is wrong, and not only because the arithmetic calculations underlying the blog post were flawed.

When I first read the piece, my initial reaction expressed surprise that the author was promoting a metric that confirms Canadian wireless revenues are appropriate for the level of capital spending.

After all, capital intensity is measured as capital spending divided by revenues. It is a ratio that aids certain kinds of financial analyses. If two companies have the same capital intensity, but one company has double the revenues per user, then mathematics says that this same company must have double the capital per user. Investors use capital intensity, together with other metrics, to compare past and possible future performance of the companies being analyzed.

Canada’s wireless industry has among the world’s highest levels of revenue per user. It should therefore be expected, that if its capital intensity is comparable to other countries, then Canada’s capital spending per user is among the world’s highest. As it turns out, that is is true.

The author wrote:

I sat down this past weekend and crunched the numbers from 71 of the biggest cellphone companies in the developed world, spanning 23 countries, and here’s what I found: despite the talking point, Canada’s wireless investment is in fact nothing special. It’s actually thoroughly mediocre.

He should have spent more time looking at the numbers he crunched [his spreadsheet – pdf]. The calculations are just plain incorrect. It appears that he may have inverted the ratio, and calculated revenue dollars per capital dollar spent.

The inverted ratio can still be meaningful, but it effectively confirms that Canada’s industry revenues are not out of line when considering the level of capital investment being undertaken.

But that clearly wasn’t what the author set out to do.

He intended to provide a number that could be compared to what the carriers report quarterly. For example, the post says:

For example, according to Telus’s 2012 annual report (links to PDF), wireless capital intensity was 12 per cent, up from 9 per cent the previous two years (the company does indeed typically spend more than its two rivals).

One would think that this quote would have made him pause when looking at the numbers he presented for 2012 in his calculations: TELUS 7%, Bell 8%, Rogers 5%. Wouldn’t you want to reconcile how TELUS reported 12% and your calculations show 7%?

The correct calculations would still show Canada’s capital intensity being middle of the pack. Unfortunately, the writer doesn’t appear to understand that this calculation doesn’t disprove the claim that capital investment is exceptionally high; in fact it proves the point. That is basic mathematics. If the denominator is high but the result is average, it means the numerator must be high.

It was disappointing to see academics and lobbyists re-tweet the “findings”, without pausing to think about what was actually being examined, or the validity of the test of hypothesis. There is a real imbalance in the information being presented. It was perhaps another missed teaching moment.

One of the challenges in engaging with some industry commentators is the need to prepare for a nearly immediate volley of ad hominem attacks. I have been called shill, lobbyist (as though this is a pejorative), sophist, propagandist, consultant. And that is just today’s collection.

I am proud to acknowledge being a consultant, although I am not (nor have I been for a number of years) engaged by any parties involved in the current wireless policy debates. And although I am able to be found in Canada’s registry of lobbyists, I have not yet engaged in lobbying activities. My client is a smaller Canadian wireless services provider, with policy interests often at odds with the so-called Big Three.

I write from the perspective of a Canadian with 33 years invested in launching competitive telecommunications services in Canada and the US. My views are mine.

I welcome your comments and perspectives. Feel free to disagree with my views, but don’t call me names.

Here are two new reports that make for important reading.

First, Scotiabank Equity Research has released an update of its March report, called “Canadian Wireless Myths and Facts 2.0”.

Here are some of the highlights.

Myth 2.1: VZW will bring cheaper wireless prices to Canada.
Fact: VZW’s prices in the United States for data share plans are on par to 10% more expensive than the new equivalent Canadian two-year shareable data plans

Myth 2.2: The Canadian regulators are helping consumers by lowering prices and increasing choices.
Fact: By introducing the Wireless Code, the CRTC has caused carriers to raise monthly smartphone prices by 9%-19% over the past few weeks and have caused the carriers to remove the three-year contract option.

Myth 2.3: Industry Canada is pro-fourth operator in every region.
Fact: The “old” fourth operators are not going to get any help from Industry Canada.

Myth 2.4: Canadian regulator and consumer advocacy groups believe Verizon will bring sustainable competition to the Canadian wireless market.
Fact: Even VZ does not believe the current Canadian wireless policy will bring sustainable competition.

Contact Scotiabank for a copy of the full report.

In Scotia’s support for its myth 2.4, there was a link to a report (“Spectrum Auctions Around the World” – Full report [pdf]) from US lobby group Mobile Future. The release for that report says:

In Canada and several European countries, restrictive and preferential policies intended to encourage market entry distorted the auction process and were unsuccessful in expanding the number of sustainable competitors in the marketplace. Initial changes in the competitive landscape were proved fleeting as market forces drove a return to pre-auction market structure with the same number of, or fewer, national competitors.

What makes the report especially newsworthy is that the membership of Mobile Future includes global heavyweights such as Cisco, Ericsson and Qualcomm as well as AT&T and Verizon.

Both of these reports are important contributions to the current wireless policy discussions in Canada.

When talking about Canada’s wireless policy, almost everyone agrees that it is broken. The government has been making continual changes to the rules and regulations, a pattern that I have called Calvinball, seemingly indicating that even Cabinet isn’t happy with how things are working out.

I thought it might be worth looking at how we got here, in order to contribute to the discussion of figuring out how best to move forward.

Our tale goes back to 2007, when the government held its consultation on the AWS spectrum.

Under pressure from various players, the government chose to set-aside spectrum for what it called “new entrants”, which has been a euphemism for anyone other than Bell, TELUS and Rogers. At the time, we found it bizarre that SaskTel and MTS, each with an overwhelming dominance of their local markets, were to be defined as “new entrants” for the purposes of that auction. Quebecor, parent of Videotron, was particularly effective [see comments, pdf] in making the case for a new entrant spectrum set-aside, and for creating opportunities on a regional basis.

How different the market would have been if the government had instead auctioned a single, national 40 MHz new entrant license. However, the minority government also felt unable to liberalize the foreign ownership regulations, leading to the type of uncertainty and corporate structure surrounding Wind Mobile’s corporate structure.

Again, had the government liberalized foreign ownership in advance of the AWS auction, a completely different market might have emerged. Foreign ownership was finally liberalized last year, but there continues to be considerable confusion among lay people about what is allowed.

To be clear, the remaining restrictions are only relevant for companies that have broadcasting licenses (and unfortunately, that includes all cable companies and telephone companies that offer such TV distribution services), and restrictions remain in place for the acquisition of telecom companies with more than 10% share of total telecom revenues. From a practical perspective, it means that companies with telecom revenues of less than about $4.2B are up for grabs – the CRTC says Canada’s telecom market is $42.7B.

Which firms are bigger than the 10% threshold? You guessed it: Bell, TELUS and Rogers.

The new entrant set-aside included transfer restrictions that were intended to limit consolidation for a period of 5 years. In 2008, five years must have seemed to be an eternity. Five years was supposed to have been enough time to allow the market to shake itself out. The new entrants must have been expected to consolidate among themselves. After all, access to foreign capital was restricted and there was the next huge capital draw required for 700 MHz.

Keep in mind that the industry was told by then Industry Minister Prentice to expect the auction for 700 MHz to take place in late 2009. After all, the US held its 700 MHz auction in 2008; Canada was supposed to lag by just 18 months.

And here we are 5 years later with the auction still at least 6 months away. In 2007, as the seeds for our wireless policy were being planted, it was all supposed to happen so much faster.

It is a very different market today to what might have been part of the master plan in 2007 and 2008.

For that matter, thanks to CRTC and Ministerial intervention, the wireless market operates under a very different set of rules from 2010 when the 700 MHz policy consultation took place.

The policy that was released a year and a half ago satisfied no one. At the time, I called it a case of Solomon cutting the baby. The structure of the auction is such that regional new entrant wireless carriers may be locked out of contention. The very players that were created under the AWS policy are being prevented from getting spectrum to grow in the new auction. Even Open Media said at the time that it was disappointed with the “half-measured approach”.

As I wrote last week:

There have been a lot of forces acting on the wireless sector in the past year and a half; forces acting without the guidance of a stated national digital strategy. As we have pointed out in opening remarks at The Canadian Telecom Summit for many of the past events, nothing can change the profitability of the telecommunications sector faster than a pen stroke in Ottawa.

… Maybe it is time to take a deep breath and examine all of the changes that have already been imposed on the wireless industry, many of which have not yet come into force. Perhaps the Minister of Industry could ask the Competition Bureau to review its submission to the CRTC’s Wireless Code proceeding, examine the state of the regulatory measures that are now in place for the wireless sector, and make recommendations for moving forward.

… [W]e need thoughtful, evidence-based decision making to guide the ongoing development of a sector that is so critical for Canada’s success in a global digital economy.

The past couple of weeks have not provided sufficient thoughtful guidance, with polarization leading many to favour soundbites over insights.

There is a new Industry Minister, able to apply fresh energy to the release of a national digital economy strategy, perhaps starting with a fresh review of the 700 MHz file. Even without a new consultation, a review of the decisions should be reasonable.

I am sure it seemed to be a good idea at the time; surely the sector is worth a brief review to be certain the policy still makes the most sense today.

Industry Minister James Moore issued a statement yesterday, indicating that the government intends to stay the course on Canada’s wireless policy.

Our Government’s telecommunications policy was not created overnight. It is the result of a vigorous consultation that started in 2008 [sic] and continues today. All players – industry, consumer groups and everyday Canadians – contributed to this policy.

The consultation for the wireless sector policy that introduced a new entrant set-aside for AWS was launched in 2007. For more than 6 years, we have seen measures introduced, intervening in the marketplace.

Let’s look at the recent history of regulatory actions imposed on the wireless market in Canada. Remember, Canada has multiple agencies that regulate the sector; both Industry Canada and the CRTC have been active in introducing measures. [The Telecom Policy Review Panel made recommendations regarding a restructuring of the sector’s regulatory institutions in its 2006 report – pdf]

When Canada’s 700 MHz policy was released in March 2012, it sought to enhance measures to encourage competition in the wireless sector. The policy framework decision was released nearly a year and a half ago, 15 months before the CRTC’s Wireless Code of Conduct decision. The Wireless Code consultation was launched in October 2012, following an investigation by the CRTC “to consider whether the conditions in the Canadian wireless market have changed sufficiently to warrant Commission intervention with respect to retail wireless services”.

In its decision, released in October 2012, the CRTC determined:

that the conditions for forbearance have not changed sufficiently to require the Commission to regulate rates or interfere in the competitiveness of the retail mobile wireless voice and data services market.

Rate regulation was not required, nor was the CRTC moved to “interfere in the competitiveness” of the retail mobile wireless voice and data business. The consultation that led to this decision was launched in April 2012.

In the meantime, on the other side of the river, Industry Canada, made some additional pronouncements in March and June of 2013.

There have been a lot of forces acting on the wireless sector in the past year and a half; forces acting without the guidance of a stated national digital strategy. As we have pointed out in opening remarks at The Canadian Telecom Summit for many of the past events, nothing can change the profitability of the telecommunications sector faster than a pen stroke in Ottawa.

I pointed to a CNBC clip yesterday where analysts describe how European networks have lagged in deploying advanced technologies because of their perceived regulatory deterrents.

Maybe it is time to take a deep breath and examine all of the changes that have already been imposed on the wireless industry, many of which have not yet come into force. Perhaps the Minister of Industry could ask the Competition Bureau to review its submission to the CRTC’s Wireless Code proceeding, examine the state of the regulatory measures that are now in place for the wireless sector, and make recommendations for moving forward.

As I wrote yesterday, we need thoughtful, evidence-based decision making to guide the ongoing development of a sector that is so critical for Canada’s success in a global digital economy.

Maybe it is time to present the long overdue national digital strategy.

A thoughtful piece appeared in today’s Globe and Mail by Steven Shepard, the resident director of leadership programs at the University of Southern California’s Institute for Communication Technology Management. His concerns are similar to mine when he states:

It’s not the wireless carriers I worry about; it’s the ripple effect that a poorly thought-out and short-term strategy could create for customers, rural residents, pensioners and the Canadian investment community.

Since it was released early last year, I have had concerns about the 700 MHz policy, describing the compromises and lack of leadership as “700 MHz: Solomon cuts the baby“. The failure of this government to produce an overall national digital strategy leads me to the concern that there are potential ripple effects that could have a long term deleterious impact on Canada’s communications infrastructure, resulting in reduced opportunities for Canadian leadership in a global digital economy.

Just last week, there was an interesting discussion on CNBC of the dismal state of telecommunications carriers in Europe. The discussion talks about the trade-off between low prices and investment in improved services. Robin Bienenstock, Senior Analyst, European Telecoms at Sanford C. Bernstein said:

It’s the fault of the regulators, it’s no question. But what they got was really, really cheap services. The problem is that the services are now a lot worse than the services in the rest of the world and that’s what people care about. If you want better services, these companies have to make money and they have to have money to invest.

You should watch the entire video clip – it is only three and a half minutes. The end of the video takes a hard swipe at “legacy” regulatory environments that encouraged wholesale structures facilitating “free-riding” returns of 16-17% but “if you owned the infrastructure yourself, you made the cost of capital at best.”

Although some want to see Canadian wireless prices race to the bottom, there is merit to considering the impact on the investment climate that has enabled the deployment of world leading technologies in Canada’s networks.

Where is the thoughtful, evidenced-based leadership to drive Canada’s digital economy policy? With heavy intervention in the wireless sector coming from both Industry Canada and the CRTC, has there been sufficient analysis of the potential consequences?