Search Results for: unintended

Last Thursday, I saw the CRTC mark the 7th anniversary of Canada’s anti-spam legislation (CASL) coming into force with a tweet:

I replied, noting that 7 years ago, I wrote: “CASL is indefensible”, in which I observed that the root of CASL’s problems were that “we strayed too far from trying to target fraud. In doing so, Canada is going to cause harm to the adoption of digital technologies and electronic commerce.”

The main problem with unwanted electronic messages (emails and texts) and calls is fraud: calls and messages that purport to be from someone or some company other than the real caller; or, misrepresenting the goods or services or purpose of the call; or, those continuing to call after being asked to stop.

Those are the communications that we should have been focusing on trying to stop. But those seem to be precisely the ones that are still getting through.

Instead, as predicted, we made life more difficult for legitimate businesses, and that translates into higher costs for Canadians. In December 2017, a Parliamentary Committee report repeatedly recognized the “unintended cost of compliance” in making recommendations for changes to the legislation. Those are unintended costs for Canadian businesses, which ultimately are borne by consumers.

For seven years, the legislative over-reach of CASL has impaired the efficient use of electronic commerce by Canadian businesses and failed to protect Canadians from malicious online threats.

It’s an anniversary that I’m not celebrating.

A new report by PwC (released by CWTA this morning) says mandating wholesale access to MVNOs may deliver some pricing benefits to Canadians but would also bring significant negative consequences. The report, “Understanding the likely impacts of MVNOs in Canada” [3.7MB, pdf], warns that the reductions in the industry’s financial capacity would result in delays or cancellation of investments in fibre and 5G networks, leading to a wider digital divide emerging between urban and rural Canadians. Ultimately, according to PwC, Canadian competitiveness on the global stage could be jeopardized.

during the unfolding of the COVID-19 crisis, Canadian telecoms were the connectivity backbone of the country. Policymakers, regulators, the business community, and consumers all have an interest in the future of Canada’s telecommunications infrastructure. And everyone will feel the impact if regulation mandating wholesale MVNO access is introduced.

The report cites OpenSignal’s recent study showing that Canada maintained some of the world’s fastest wireless speeds, with little to no decline in speeds compared to data before the pandemic crisis. “The curtailing of network investments that could result from mandating wholesale MVNO access would hamper the ability of network operators to support crisis response efforts in the future.”

PwC’s models show that EBITDA margins could fall from 42% (2019) to 38% by 2025. Recall, in the past I have lamented how some confuse EBITDA margin with profit, inappropriately ignoring the massive capital outlays that must be covered by the “ITDA” portion. PwC notes that average return on invested capital (ROIC) generated by Canadian mobile carriers is already below the US and Australia and PwC expects that carriers will be unable to absorb the decline in revenues expected from a mandated MVNO model. To date, the report says Canada’s facilities-based mobile service providers have invested more than $70 billion in building Canada’s wireless networks; the wireless industry contributed more than $48 billion to Canada’s GDP in 2018 alone.

In the short term, according to PwC, mandating MVNO entry will lead to cuts of $5B in annual operating costs and $3B in annual capital expenditures.

We are of the view that the Canadian telecom industry today is healthy, with high-quality services offered at affordable prices via world-class networks that drives Canadian competitiveness and contributes to Canadian GDP, employment, government tax revenue and shareholder returns. Based on our analysis, we conclude that if the CRTC were to adopt the regulatory intervention some have proposed, it would lead to significant negative consequences. Ultimately, it could lead to a deterioration in the health of the telecom industry and negative outcomes for Canadians.

Under the third revision to the original schedule for CRTC Notice of Consultation 2019-57, final submissions in the “Review of mobile wireless services” are due today (July 15).

Today’s report is Part 1, looking at impacts on the Canadian telecom industry and the economy. Part 2 of PwC’s study, examining how Canada’s transition to 5G could be affected, is slated to be released in the coming weeks.

Earlier this week, PwC released another report, “The importance of a healthy telecommunications industry to Canada’s high-tech success” [pdf, 2.4 MB] as a follow-up to the study titled “Understanding affordability of consumer mobile wireless services in Canada” released last December and discussed on my blog in January. This report confirmed:

• Canadian telecommunications providers (telcos) spend approximately 5.3 percentage points more on capital expenditures (CapEx) as a percentage of revenue than comparison countries, due to higher factors of production largely driven by geography, scale, and spectrum costs
• The higher factors of production for Canadian telcos require higher EBITDA levels than comparison countries to maintain investment levels while keeping healthy free cash flows
• Canadian telecom free cash flow yields, a measure of financial solvency (health), are 26% below the S&P 500 median, suggesting that Canadian telcos are not producing abnormal earnings

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[Update: July 27, 2020] The second half of PwC’s study has been released, “Understanding the likely impacts of MVNOs in Canada – Part 2: Impact on Canada’s transition to 5G” [pdf, 2.6MB]

This part is composed of 4 sections:

1. The importance of 5G to Canada
2. What can we learn from the global 3G and 4G transitions?
3. The opportunity cost of delayed 5G rollout in Canada
4. A 2030 lookback: What could delayed 5G rollout mean for Canadians?

PwC says “Our analysis in Part 2 of this study supports the conclusions made in Part 1, namely that mandating wholesale MVNO access in order to reduce consumer wireless prices will lead to an unhealthy Canadian telecom industry and result in unintended negative consequences for the Canadian economy.”

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.

In his remarks to the National White House Conference on Small Business in 1986, Ronald Reagan said “Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”

“Tax it, regulate it, subsidize it” comes to mind when I look at how we seem to be approaching too many elements of Canada’s digital economy.

Last Friday, I read an opinion piece in the Wall Street Journal written by former FCC Chief Economist (and current professor of Economics at Clemson) Thomas Hazlett, “A Lesson for Today’s Tech Trustbusters”. In it, he writes of the angst caused by the $183B acquisition of Time Warner by AOL in 2000.

Regulators feared AOL’s acquisition of Time Warner would stifle innovation. University of Michigan economist Jeffrey MacKie-Mason, who wrote the Federal Trade Commission’s report, said that the combination “will horizontally and vertically increase AOL’s power in the market for internet online services,” which would have anticompetitive effects and harm consumers.

As Hazlett notes, executive mismanagement and clashing corporate cultures are generally cited as reasons for the failure of the merged companies, “But the episode holds lessons for politicians and antitrust regulators, who too often view market rivalry too narrowly.” His article describes the regulatory measures to force AOL to open up its instant messaging platform and how it was quickly superseded by technology. “Texting, Skype, FaceTime, WhatsApp, Facebook Messenger, Twitter and Instagram displaced AOL’s chatting program. None of these new entrants connected with Instant Messenger, or one another, and it didn’t seem to matter.”

Hazlett also notes that this example was hardly isolated. “In 2005 the Bush administration prevented Blockbuster from acquiring Hollywood Video on antitrust grounds: The merger would threaten to monopolize video rentals.”

Consider what is happening in Canada. Recall the CRTC’s interventions into how streaming services Crave TV and Shomi should be offered to consumers? Was regulatory action required or couldn’t the marketplace figure it out?

Why is the CRTC continuing to interfere with service providers seeking to lower monthly device payments for consumers? As I have written before, some aspects of the Wireless Code raised the monthly cost of mobile and removed an important choice from consumers.

What purpose is actually served by limiting device amortization to 2 years?

Customers can still switch at will anytime during the contract period. They just have to pay off the balance owing. With higher device costs, people have hefty balances owing anyway, whether it is a two or three year contract.

Eliminating the regulatory restriction on longer contracts could lead to carriers offering direct consumer incentives to switch: “Come to us and we will pay up to $600 of your remaining balance.”

Once the Commission allowed consumers the right to leave a carrier by simply paying off the remaining balance, what purpose is served by the further regulation of how long the amortization period could be?

If the CRTC gets out of the way, surely the marketplace can solve the challenge of consumers wanting to switch service providers before their payments are complete. If new entrants find it tough to lure customers away, they can always pay off the device balance for the new customer and take over the loan. Was there sufficient evidence of a failure in the marketplace to develop a solution before the CRTC intervened so dramatically to remove the choice of a longer amortization period?

Last week, I wrote “Hindsight may be 20/20, but as so many investment prospectuses warn, past performance is no guarantee of future results.”

When we develop policies, we need to resist politically expedient routes and think 3 moves ahead, playing the game more like a chess master than a novice. Communications policy issues are complex and often benefit from looking at secondary and tertiary impacts, trying to contemplate unintended consequences.

As Hazlett has written, there are lessons to be learned from looking at market rivalry or defining the market too narrowly.

“Tax it, regulate it, subsidize it.”

You don’t need to look very hard to see how so many elements of Canada’s digital economy strategy fall into one or more of these categories.

Can we consider a better approach?

Twice before, I have written posts entitled “Getting out of the way” [July 9, 2012 | April 6, 2016]. I wrote another entitled “Keeping out of the way”.

I continue to think “the future will be brighter for Canadian innovation if the government would try harder to get out of the way.”

We have been told “hindsight is 20/20.” As a graying consultant, I like to think is helpful to have not just a rich knowledge of the past, but also a deeper understanding of that which has happened, to guide better decisions, like periodically glancing in the rear-view mirror as you drive forward.

Over the holidays, my friend Timo referred me to an interesting piece in the Financial Times, “Why the global telecoms dream turned sour”. There were a few parts of the article that resonated with me, including:

• The discussion of the devastating impact of European 3G spectrum auctions reminded me of a piece I wrote 11 years ago (“Telecom investment in 2009”), saying “We need to consider the extent that capital investment in spectrum auctions impacts the ability of operators to build out their networks.” Also, recall what I wrote this past September (“The cost of spectrum policy”)”: “As Canada moves forward with development of auction policy for the next wave of spectrum, it is critical to consider the potential for unintended consequences to have significant impact on consumers.”
• The article observes “Telecoms has been one of the worst performing sectors for investors over the past five years as global bets have failed to pay off. That has left companies with huge debts even as they are under intense pressure to invest in new 5G and full-fibre networks both in their home markets and across their still-sprawling networks.”

There are some pundits who have questioned the strategies of Canadian carriers to concentrate on domestic markets rather than globally. The FT article demonstrates that the seduction of global markets hasn’t produced the returns that many carriers sought. The article also recognizes the capital intensive nature of the business, historically and moving forward.

As an aside, I often find that many people look at carrier EBITDA margins and forget the need for that metric to service the “I” (interest) and “DA” (depreciation and amortization) portions of the financial statements.

There are also some industry commentators who don’t appear to understand that foreign investment restrictions have largely been removed, permitting foreign-owned companies the opportunity to purchase spectrum and build a competitive network in Canada. The only restriction that remains is one that prevents a foreign company from buying one of the existing major carriers (as defined in the Telecom Act §16(2) as a carrier with more than 10% of the annual Canadian telecommunications services revenues). One would think that if Canadian telecom profits were supra normal, there would be a better business case for market entry. But I digress.

We need to understand the extent to which Canada’s regulatory and policy framework contributes to the state of our current telecommunications marketplace. Is there a way to mitigate unintended consequences that have arisen from well-meaning regulatory and policy decisions of the past? How can Canada move forward to encourage investment in high quality networks, with a wide range of affordable service options? How do we expand our understanding of those factors that inhibit a more universal adoption of information and communications technologies and services?

Which policies and regulations are actually raising prices paid by consumers? Will the CRTC begin to treat consumers as adults, able to choose for themselves between longer or shorter amortization periods to pay for ever increasing device costs, as I have written numerous times before? How will the government make more spectrum available for mobile network expansion, (both capacity and reach)?

How broadly will the Minister interpret his mandate?

These are just some of the issues I look forward to following in the coming year. Hindsight may be 20/20, but as so many investment prospectuses warn, past performance is no guarantee of future results.

Looking in the rear view mirror, the path may appear to be clear, but it doesn’t provide enough information to enable the drive forward, starting with the vision for where we want to go.

What should be the vision for Canadian telecommunications policy for the year 2020?