Search Results for: incentives to invest

Let’s continue with a theme I raised on Friday.

Last week, as Videotron expanded the reach of its DOCSIS 3.0 ultra-high speed broadband [ pdf, 32KB], it also increased the download caps for its users of 30 and 50 Mbps internet services. It adds pressure to Canadian telephone companies to consider the massive investments (such as a Verizon-like FTTH approach) to compete with cable internet speeds.

In the past, I have called for all levels of government to create more favourable environments for increased broadband investment by all service providers. The most basic incentives would be for the public sector to liberalize access to public rights of way, support structures and vertical real estate such as towers.

Last week, Portugal went even further, setting up an €800M line of credit for operators to roll-out next-generation broadband networks. Governments have many levers that can help stimulate investment in next generation network equipment, including accelerated depreciation for certain classes of capital and matching funds for rural service improvements. Telecom service providers have a track record of being to move quickly to implement their infrastructure projects – much faster than roads, public transit, sewers and bridges.

As governments look for ways to stimulate various sectors of the economy, incentives for investment in digital infrastructure may be among the lowest cost, while delivering the highest returns and most sustainable benefits.

Jeffrey Fan, telecom analyst at UBS, has released a report that looks at the impact of new entrants on the Canadian wireless industry. The report is certain to generate substantial discussions, if not heated arguments in the countdown to Industry Canada’s release of the AWS spectrum auction rules.

Among the most significant findings in the report are:

• Videotron and Shaw have positive business cases for wireless, substantial opportunities for Videotron, even without any incentives from the government. In the case of Videotron, UBS estimates that it can afford to pay 3 times the cost of spectrum in the 2001 auction. Shaw could afford to pay almost double the 2001 price.
• MTS Allstream does not have a business case if it has to pay the average price for spectrum from the last auction. It has a negative NPV and very low IRR. “We fail to find the economic rationale for MTS Allstream to expand its wireless operations nationally.” The UBS model shows a negative NPV of $684M for MTS Allstream – which seems to indicate that the present value of new entrant concessions would need to be that high, just to make the business case break even.
• UBS believes foreign carriers will not find Canada’s AWS auction being sufficiently attractive for invest at a minority position.

What would it take to make the MTS Allstream business case go positive?

To make it viable, we believe MTS would want: 1) little cost incurred for the spectrum licences; and, 2) to build out less than two-thirds of the sites that would typically be required.

UBS raised its target for MTS Allstream last Wednesday, however the new paper discusses a number of factors that could impair MTS Allstream’s success. Among them:

• the company’s ideal customers are seen as a challenge for a wireless business plan since the business services market is already mature;
• business clients would be most demanding on roaming capabilities which would be costly until the national network is largely built;
• the success in developing domestic and international partnerships is not likely; and,
• external capital will be required, given the current dividend stream.

We can expect considerable discussion of this paper, which also quantifies changes in stock market valuations taking into account the potential impact of additional wireless players.

What is the right amount of competition in the telecom market place? Is it possible to have too much?

Those are some of the questions being assessed by Cabinet and the CRTC right now in the context of mandated wholesale access to fibre to the premises (FTTP) facilities.

Long time readers will know that I don’t think such mandates are appropriate in a competitive environment. A fundamental issue is getting the wholesale pricing right in order to maintain appropriate incentives to invest.

However, if a wholesale FTTP mandate is going to exist, I am having trouble understanding the justification for limiting the kinds of service providers who can make use of those facilities.

TELUS wants to be able to bundle residential internet and TV with its mobile services in Eastern Canada. Bell, Rogers and the association of independent internet providers (CNOC) are arguing against it. They want mandated wholesale access to be limited to just smaller service providers. CNOC said:

TELUS would like the CRTC to give it regulated access to networks of large and small providers instead of building its own networks.

If the CRTC does not close this loophole, the future of smaller players, and of competition, will be in jeopardy.

TELUS isn’t telling the whole story. Regulated wholesale access is meant to remove barriers for local and regional carriers so they can bring additional competition to Canada’s broadband market. It was not intended to help Canada’s Big Three dominant telecom companies from growing even larger.

CNOC itself isn’t really telling the whole story. For residential internet, Bell and TELUS are really no different from Sasktel; they are regional service providers. These so-called “dominant” companies may have been former incumbents in their home regions, but they have no residential broadband customers, and virtually no residential last mile facilities, outside those geographies. Keep in mind that Teksavvy Solutions told Cabinet, “wireline communications networks are natural monopoly facilities — precisely the challenge that wholesale was introduced to address”. So which is it? Are wireline networks natural monopolies, or should competitors be building their own networks? This contradiction strikes me as a fundamental breakdown in logic.

Rogers, Bell and TELUS are national mobile service providers, but CRTC data shows that TELUS enjoys more than double the market share in BC and Alberta compared to what it has in Ontario. The CRTC shows TELUS as the market leader in its home territory, but it is a distant third in Ontario where, at 21.3%, it has less than half the share of Rogers (45.4%). In BC, CRTC figures show Bell with just 17.6% share, compared to TELUS and Rogers with over 40% each. In Alberta, Bell has just 23.3% share compared to TELUS with 50%.

Why are there such significant regional fluctuations in market share? These kinds of figures seem to point to customers choosing to bundle.

The point is, it is misleading to view Canada’s telecom market as being dominated by a monolithic “Big Three”. In most areas, bundling is available from two, not three.

In each region, there are two large competitors: one was the incumbent phone company; the other was the incumbent cable TV provider. Each has transformed to be integrated communications service providers. [I would argue that for internet, no industry participant should be considered to be the “incumbent”, but that discussion is for another day.] There are a lot of other competitors operating, some facilities-based and some based on wholesale access, some using wireline and some using wireless (fixed, mobile, and satellite).

The arguments against regional phone companies having access to wholesale FTTP seem to come down to saying “we don’t mind a little bit of wholesale-based competition, but we don’t want too much of it.” The seems to be that wholesale-based internet is good (that’s why it is mandated), as long as it doesn’t take a serious amount of customers. That was the argument put forward to Cabinet by a coalition or smaller regional companies in their appeal last December [pdf, 221KB]. The petitioners complained that large service providers could use wholesale access to fibre to sell bundles of internet, TV and wireless services, leveraging their brand recognition and existing wireless services.

“This would create immediate challenges to the long-term sustainability of regional and independent providers.” The petitioners are actually arguing that since they aren’t able to offer bundles to consumers – and they don’t have brand recognition – a third choice for consumers could wipe them out.

As I wrote in November 2023, it is a mistake to measure competitive intensity by simply counting the number of smaller wholesale service resellers. Isn’t pricing an important measure of competitive intensity? Despite rampant inflation, prices for internet services declined nearly 8% in 2023 and a further 4% last year according to data from Statistics Canada’s Consumer Price Index. Internet speeds have increased dramatically For wireless services, prices have fallen nearly 60% since 2019, while the overall CPI has risen nearly 20% in that time period.

What about levels of investment as a measure of competitive intensity? A PwC report found “the Canadian telecom sector has invested an annual average of $12.1 billion in capital on network infrastructure. This represents approximately 18.6% of average revenues, which is higher than the 14.2% average across the peer telecoms in the U.S.A., Japan, Australia, and Europe.” CRTC data shows availability of gigabit speeds to nearly 90% of Canadian households by year-end 2023, up from 65% in 2019.

Falling prices and high levels of capital investment strike me as inconsistent with declining levels of competitive intensity. For more than 10 years, I have been writing about the impact on investment created by mandated wholesale access, such as this piece. Still, we have already made the decision that wholesale access is going to be mandated, and that the CRTC would set wholesale rates that appropriately consider the incentives to invest.

So, what is the right amount of competition? It seems to be a confusing message for the government or for the independent regulator to say that wholesale access is good, as long as those wholesale-based service providers aren’t too successful.

Consumers want more choice. If consumers want more options, including integrated services bundles, why would we preclude access to out-of-region integrated service providers? Wouldn’t these service providers significantly increase the level of competitive intensity?

Governments should be concerned about protecting competition, not protecting competitors. What should be the right amount of competition? Is there really such a thing as too much? Should regulators or policy makers be imposing limits on who can compete?

A couple of weeks ago, I saw two articles by academics writing in the Hill Times, each looking at rural broadband solutions. Each presented a different perspective.

In “Tackling the ‘wicked’ rural broadband gap”, by Professor Gregory Taylor of University of Calgary, the subtitle says: “Policymakers must resist the temptation to throw up their arms in frustration, or—worse—leave the entire problem to the whims of Elon Musk.”

“Towards a new Canadian broadband future?” was written by Professor Erik Bohlin, the Ivey Chair in Telecommunication Economics, Policy, and Regulation at Ivey Business School at Western University. The subtitle on his article reads “We will need to face the reality that the fundamental competition now is not primarily between the telecom carriers, but with other value systems.”

Professor Bohlin writes about “Canada’s lagging productivity and weak investment climate, especially around broadband infrastructure, which provides a foundation for a thriving digital economy… Long-standing gaps with the United States in both labour productivity, and information and communications technology investments have been identified by the Organisation for Economic Co-operation and Development”

In the past two months, we have seen two major corporate transactions among Canadian telecom operators. Bell announced a $5B acquisition of US-based Ziply Fiber. adding 1.3M addresses to its fibre footprint. Rogers invested $4.7B to take majority control of Maple Leaf Sports and Entertainment. Each deal represents investment in businesses that are independent of Canada’s telecom policy framework.

Earlier this month, the UK moved closer to approving the merger of mobile operators, Three and Vodafone. The Competition and Markets Authority set out a remedy package that would permit the deal to go through, taking the UK down to 3 carriers in a market with 93 million mobile subscribers in a land area a quarter the size of Ontario.

My immediate reaction to the Bell transaction was that this is another indictment of Canada’s telecom regulatory and policy framework. I wasn’t alone with this line of thinking. TD Securities wrote “Having some diversification into the U.S. could be useful if Canadian market conditions do not improve, and we like the flexibility to allocate less capex to Canada and more to the U.S. if future government/regulatory policies do not reward investment in Canada.”

Professor Bohlin points to the CRTC’s mandated wholesale access to fibre networks as “pivotal for investment incentives.” He notes that for 25 years, the European Union “followed a primary emphasis on mandated access in telecoms, and has lower rates.” The EU identified a telecom investment gap in the order of 200-billion euros required to achieve connectivity targets for 2030. An EU white paper [pdf, 555KB] calls for an increased focus on investment incentives for advanced communications infrastructure.

Incentives to invest is a common theme on this blog. Professor Bohlin calls for “increased dialogue between industry and government about the fundamental objectives for developing a strong, viable Canada, and the enabling role that telecom infrastructure may play in achieving that vision”.

I read the Taylor piece with a more critical eye, given that he erroneously states “most telephone service of the 20th century was provided by public provincial, and, in some cases, municipal services — MTS, SaskTel, Alberta Government Telephones, Edmonton Telephone, and BC Tel — which had to step in when the private sector came up short.” (One of those companies – BC Tel – is not like the others.)

Professor Taylor’s article complains about the number of rural Canadians who still lack access to broadband services that meet the CRTC’s national objective.

It has been eight years since the CRTC made the bold 2016 objective that “Canadians in urban, rural, and remote areas can access affordable, high-quality telecommunications services,” and set 50 megabits per second (Mbps) download and 10 Mbps upload as the ambitious targets to qualify as the required speeds. That audacious goal doubled the 2015 Federal Communications Commission (FCC) target when the American regulator set benchmark speeds at 25/3 Mbps. However, this once-bold policy stand is starting to look increasingly timid in 2024. In its recent 2024 Broadband Deployment Report, the FCC raised its fixed speed benchmark for broadband to 100 Mbps download and 20 Mbps upload.

I have written before that when some Canadians are wanting for any kind of affordable broadband, it takes a measure of arrogance to proclaim that 50 Mbps isn’t good enough.

The latest CRTC’s data is nearly two years old. At year-end 2022, 93.1% of Canadians had access to broadband exceeding the objective. That blended average is composed of 99.4% urban and 67.4% rural. So the focus on rural connectivity is understandable. Still, it is unclear why Professor Taylor used even older 2021 data in his article, saying that only 62% of rural households had access to the broadband objective. We can see a significant improvement was made between 2021 and 2022, growing from 62% to 67.4%. More work needs to be done, but 5.4% represents more than 350,000 people, a substantial achievement.

In the coming weeks, I am working on a post that takes an in-depth look at technology adoption and affordability. Watch for it on these pages

Professor Taylor’s article concludes with a reference to wholesale access to fibre networks, somehow seeing increased competition as a regulatory initiative promoting investment. The CRTC itself recognizes the deleterious impact of mandated access on investment incentives and its decisions attempt to mitigate those concerns.

A few years ago, I wrote “Isn’t some broadband better than nothing?”. For people without access, the best rural broadband solutions are the ones that can be delivered now. Three years ago, I wrote, “Le mieux est le mortel ennemi du bien.”

In developing rural broadband expansion, it is impractical to restrict solutions to universal fibre access. It is better to get some broadband service to unserved areas rather than wait for so-called future-proof connectivity.

We can’t wait for a perfect solution for broadband for all Canadians. But we can strive to do a lot more, a lot better, and a lot sooner.

That means improving the conditions that promote investment in advanced digital infrastructure.

The Canadian Telecommunications Association released a new report from PwC, “Driving Canada’s productivity: The impact of the telecom sector and its role in improving productivity” [pdf, 5.6MB]. The report is the latest edition of a regular series examining the economic impact of the telecom sector in Canada.

As we have been reading in the news over the past year, Canada’s gross domestic product (GDP) per capita lags other advanced economies and this is part of a decades-long trend. For example, per capita GDP cumulatively grew just 6.8% between 2007 and 2023, compared with 21.4% in the US, 19.6% in Australia and 11.8% in Europe.

Last week, the former governor of the Bank of Canada, David Dodge said “The overriding objective of federal and provincial governments going forward has got to be to raise the productivity of workers.”

Against this backdrop, PwC’s new report predicts that Canada’s telecom sector will play an important role to enable productivity improvements in the economy, increasing Canada’s global competitiveness.

The telecommunications sector is an important part of the Canadian economy; in 2023, the sector contributed almost $81B in direct GDP and supported up to 782K jobs across industries. As the digital transformation of the Canadian economy progresses, the sector’s delivery of enhanced connectivity has the potential to contribute an additional $112B to Canada’s overall GDP by 2035.

In 2023, the Canadian telecom sector invested $11.4B in infrastructure. Capital intensity measures the proportion of revenues reinvested in capital spending. The Canadian telecom sector’s capital intensity (17.9%) is more than 20% higher than the United States average (14.6%), and 70% higher than Australia (11.7%).

PwC notes that the investments by Canada’s facilities-based service providers has led to 99.7% mobile wireless network coverage and 93.5% high-speed internet coverage.

A Bank of Canada discussion paper [pdf, 0.8MB] refers to a positive correlation between increased investment in digital infrastructure, the adoption of information and communications technologies, and productivity growth. As a corollary, PwC says “To realize productivity gains through increased digital infrastructure investment, Canada needs its telecom sector to continue investing capital.”

The report notes that the telecom sector is facing declining prices, high costs of borrowing, increased competition from foreign players (multinationals), increased operating costs and growing risks related to climate change. These challenges are not unique to Canada. PwC observed that worldwide telecom capital expenditures declined in 2023, for the first time since 2017.

Despite these headwinds, the telecom sector remains a key contributor to Canada’s prosperity through its impact on GDP, job creation and investments in digital infrastructure that drive productivity improvement. To sustain these contributions, Canada needs to maintain a regulatory environment that is predictable, transparent and equitable, with sufficient incentives to encourage investment in innovation, technology and infrastructure. This will ensure that network operators can continue to make the investments necessary for deploying advanced connectivity in digital infrastructure to support Canadian productivity and prosperity.

Maintaining incentives to invest is a common refrain on these pages.

Canada’s per capita GDP will benefit from continued investment in digital infrastructure. But, a healthy Canadian telecom industry is necessary in order to continue making those network investments, to provide connectivity through deployment of advanced digital infrastructure.

Investment in infrastructure will be key to driving Canada’s productivity gains, providing a catalyst for the economic recovery Canada so desperately needs.