Search Results for: incentives to invest

Back in June 2009, the presidents of DAVE Wireless, Public Mobile and Globalive Communications were on a panel together at The Canadian Telecom Summit talking about how they planned to address an “underserved market” for mobile services.

Each company believed there was a sustainable business case for a carrier that focused on value-conscious mobile service clients, not needing the same levels of investment in the latest technologies, or the spectrum to support high throughput. In some cases, the initial networks were built without LTE, or used non-standard ranges of spectrum.

A variety of issues arose, but each of the carriers learned that value-conscious consumers still wanted to be able to access the latest devices, or bring their devices from their previous service provider. At least one service provider found that it was unable to get a hold of the hottest devices until its network was upgraded to LTE.

And that brings us to today, where most service providers are in the midst of massive levels of capital upgrades, some CEOs have termed it “generational levels of investment”, to implement 5G services.

What are the 5G apps that will capture our imaginations? From a consumer perspective, if I knew, I certainly wouldn’t share my ideas in a public forum.

But we know that 5G enables far higher density of connected devices, with far greater data speeds and throughput capacity, and significantly reduced latency. At the time mobile networks were being upgraded to LTE, we didn’t know which apps would be enabled. This next generation is no different.

For service providers that choose not to invest in 5G, there may be a small window of opportunity to simply go after a budget conscious consumer. The challenge will be in retaining the majority of customers who want to be able to access the newest apps and capabilities, and don’t understand why those don’t work on their legacy devices.

Some of those apps won’t be on their hand-held devices, but may be embedded in their car. Or, home appliances. Or, store shelves.

So, what will happen to service providers that are unable (or unwilling) to keep up with the investment required to upgrade networks to 5G? The transition to 5G can be a factor to drive consolidation in the marketplace, as service providers look at the need for more pervasive backhaul facilities to support the increased density of antennas. Recall, Brad Shaw told Canada’s Industry Committee in March that “it is clear that Shaw cannot build what Canada needs on our own.”

Reducing the number of competitors does not necessarily translate to a lessening in competitive intensity in the marketplace. For example, take a look at Manitoba and Saskatchewan, where Shaw currently operates as a cable TV provider, but not as a wireless service provider. Rogers offers mobile services in both provinces. What happens to the competitive intensity for consumer services in those two provinces when Rogers and Shaw combine forces?

The best way to encourage sustainable competition – not just in telecom but for the benefit of the economy at large – is by maintaining incentives to invest, enabling and encouraging the massive levels of investment necessary to upgrade networks to 5G.

As Dr. Christian Dippon of NERA has said “Quite simply, a market cannot both be noncompetitive and offer some of the best mobile wireless services in the world.”

Much has been written about the proposed Policy Direction released last week by ISED Minister Bains to the CRTC, and the Commission’s subsequent Mobile Wireless Services Notice of Consultation.

My regular readers know that I like to cover these kinds of things from paths that are less traveled, trying to bring a fresh perspective. As such, I’d like to examine last week’s releases from the perspective of incentives to invest.

The term “investment” appears 13 times in the CRTC’s notice of consultation; it appears just once in the proposed Policy Direction, and that instance is in relation to “stimulate investment in research and development and in other intangible assets that support the offer and provision of telecommunications services.” However, the proposed Policy Direction also speaks about “innovation in telecommunications services, including new technologies and differentiated service offerings” and ensuring “affordable access to high quality telecommunications services is available.”

That kind of language needs to be contrasted with the CRTC’s consultation that speaks in terms of the need “to make significant investments in network infrastructure” for 5G. The Commission’s concern about maintaining incentives for continued capital investment is set out in the core of the proclamation for this proceeding:

21. The Commission is hereby initiating a proceeding to review mobile wireless services in Canada. This proceeding will focus on three key areas:
    • Competition in the retail market
    • The current wholesale mobile wireless service regulatory framework, with a focus on wholesale MVNO access
    • The future of mobile wireless services in Canada, with a focus on reducing barriers to infrastructure deployment
22. The scope of each of these issues is described in detail below. In addition, parties may raise other matters, issues, or proposals that are relevant to and appropriate for a broad policy review of mobile wireless services. The Commission’s focus in this proceeding is to ensure that its mobile wireless service regulatory framework facilitates sustainable competition that provides reasonable prices and innovative services, as well as continued investment in high-quality mobile wireless networks in all regions of the country.

I observed on Twitter last week that network investment frequently falls into 1 or more of the 3 C’s: Coverage, Capacity, or Capability.

Many carriers have focused their investments on coverage and capacity enhancements, adding reach to the networks to previously under-served regions and adding capacity to increase data connection speeds and relieve congestion. Most carriers have upgraded capabilities for most regions to enjoy access to advanced fourth generation technology and are readying to deploy 5G.

Mandated wholesale access has the potential to impact the business case for investment. Of course, in core urban areas, there are strong incentives to invest driven by competitive behaviour, where carriers will ensure that their networks are able to offer top speeds as part of their bragging rights. However, it is clear that the business case for such investments is not limitless, otherwise we would see 5 bars of LTE-Advanced everywhere in Canada.

So, we know that there are already certain areas with lower population densities that already cannot support a business case for some carriers to invest. Now, imagine that that the carrier will no longer be able assume the same level of retail revenues. What happens to the business case for those marginal areas? If potential revenues decrease, one would expect that fewer areas will be able to support a business case for enhanced levels of investment. People in under-served areas today should carefully consider whether mandated MVNO and lower retail prices will help or hinder their cause.

Recall that when the current CRTC Chair was welcomed to his job, he received a letter from the Ministers of Heritage and of Innovation, Science and Economic Development, saying, “All Canadians and Canadian businesses deserve high quality telecommunications services at affordable prices.” At the time, I wrote “It is a delicate balance. Quality and coverage require significant levels of capital investment, especially in a country like Canada.”

The proposed Policy Direction echoes that language in the clause suggesting that the CRTC should consider the extent its regulatory measures “ensure affordable access to high quality telecommunications services is available.”

The CRTC consultative process will most likely be informed by engineering economic analysis, assessing the potential impact on investment in marginal areas for coverage, capacity and enhanced capabilities.

Maintaining incentives for investment requires a delicate balance.

In 2022, Canadian carriers were investing in telecom infrastructure at an accelerated pace.

That is one of the findings of a new report prepared by PwC. “Connecting Canadians through resilient networks: The impact of the telecom sector in 2022 and beyond” [pdf, 4.5MB] found that Canada’s six largest telecom companies invested $13.3 billion in capital expenditures in 2022. Over the past five years, the Canadian telecom sector has invested an annual average of $12.1 billion in capital on network infrastructure, expanding, enhancing, and strengthening Canada’s wireless and broadband networks. This represents approximately 18.6% of average revenues, which is 30% higher than the 14.2% average across peer telecom carriers in the US, Japan, Australia, and Europe. Canada’s elevated capital intensity is similar to what was found in another recent study.

As I have reported in my monthly analysis of Statistics Canada data, PwC confirmed that for the year ending September 2023, cellular and internet access service prices declined by 17.2% and 7.8%, respectively, while the Consumer Price Index for All-Items increased by 3.8% over the same period.

PwC says the telecom sector contributed nearly $77B to Canada’s GDP, and supported nearly three quarters of a million Canadian jobs in 2022. It estimates that by 2035, the telecom sector’s delivery of enhanced connectivity, including 5G, has the potential to contribute an additional $112B to Canada’s GDP.

Key findings:

• Direct GDP contribution and jobs supported by the telecommunications sector in 2022 is estimated to be $76.7 billion and 724,000 jobs (versus $74.9 billion (+2.4%) and 650,000 jobs in 2021 (+11.3%)*);
• Enhanced connectivity, including 5G, has the potential to contribute an additional $112 billion to Canada’s GDP by 2035
• Telecom’s direct GDP contribution includes $24.7 billion from the sector’s value chain and up to $52 billion in direct impact from increased sales and other outputs from other Canadian industries through the incremental addition of additional wireless and broadband connections;
• The six largest Canadian telecommunications operators invested $13.3 billion in capital expenditures in 2022 to continue expanding and enhancing their wireless and broadband internet networks;
• Over the past five years, Canada’s telecom sector has invested an average of $12.1 billion annually on network expansion and enhancements. This represents a capital intensity that is approximately 18.6% of average revenues. That is higher than the 14.2% average across peer telecom operators in the US, Japan, Australia and Europe;
• Continued investments in Canada’s telecom sector connect more Canadians to advanced wireless and broadband internet networks, supporting increased data consumption, powering the digital economy, and providing a range of other social and environmental benefits:
  • 99.7% of Canadians had access to mobile network coverage where they lived or conducted business in 2021, including 87.8% who had access to 5G connectivity;
  • 93.5% of households had access to high-speed internet with speeds meeting the CRTC’s 50/10 Mbps targets in 2022. The CRTC estimates that services providers are on track to meet its broadband targets for 98% of households to have access to 50/10 Mbps unlimited services in 2026, and 100% by 2030;
• The price of telecommunications in Canada has fallen over the past year, with cellular service prices down 17.2% and internet access service prices down 7.8% between September 2022 and September 2023, while the all-items Consumer Price Index increased by 3.8%;
• The telecommunications sector has already suffered millions of dollars in damages to Canadian network infrastructure as a result of severe weather events and other natural disasters. Canadian service providers are investing in building resilient networks to manage future risks.

The bottom line? Maintaining incentives for investing in telecom infrastructure is key to Canadian economic growth.

This decision helps to promote access to affordable telecommunications services for Canadians and to foster sustainable competition and continued investment.

That was how the CRTC summarized its decision last night on final offer arbitration between Bell Mobility and Quebecor for wholesale mobile virtual network operator (MVNO) access rates.

The decision was notable for a few reasons:

• A focus on creating and maintaining incentives for investment;
• Fostering “sustainable competition”, which has historically been CRTC and Competition Bureau language for “facilities-based competition”;
• Clarifying that the wholesale framework is not intended to guarantee profitability for wholesale-based service providers;
• The CRTC explicitly discounted the usefulness of comparisons to European rates;
• Recognition that average network costs don’t support investment in suburban and rural infrastructure.

The Bell – Quebecor decision should be read in the context of a similar arbitration between Rogers and Quebecor released by the CRTC nearly two months ago. In the earlier instance, the CRTC required Rogers to offer a wholesale service at rates acknowledged to be below Rogers’ costs. The CRTC said Rogers’ shortfall could be made up “through other telecommunications services”. The Rogers decision has been appealed to the courts because of the precedent-setting nature of wholesale rates being set below costs.

This week, the CRTC selected Bell Mobility’s offer.

The Commission clearly accepted the concern that wholesale rates impact the incentives for investment by both parties.

49. Nevertheless, the Commission considers that Bell Mobility has raised a valid concern regarding the long-term impact of artificially low wholesale rates on the policy objective of fostering network investments, which is particularly relevant in suburban and rural areas. While lower retail prices backed by lower wholesale rates are desirable, as discussed earlier, these different interests must be balanced with the wholesale MVNO access provider’s incentives for continued network investment. Accordingly, the Commission is of the view that Bell Mobility’s offer best strikes the balance of maintaining both parties’ incentives to invest.

The CRTC said “the MVNO access framework is not intended to guarantee a risk-free profit margin for [Quebecor’s] MVNO operations, and QMI’s ability to compete should not be assessed by looking at only the profitability of specific plans, but rather by looking at all of the wireless plans it offers.” While the CRTC wants to see lower-priced plans, it also needed to consider the potential negative consequences of lower rates on sustainable competition, and incentives for investment.

The Commission referred to the controversial cross subsidization aspect of the Rogers – Quebecor arbitration decision in this Bell – Quebecor determination, saying “that it does not necessarily have to ensure that costs are recouped over the short term for a rate to be considered just and reasonable, fair compensation for the wholesale MVNO access provider is still an important consideration in evaluating offers”.

Quebecor had asked the CRTC to compare Canadian wholesale rates to those found in Europe. The CRTC clearly stated European wholesale roaming rate structures “have very limited comparative value given the different contexts in which European and Canadian carriers operate, resulting in different cost structures.” Many Canadians have fixated on international comparisons that have such “limited comparative value” precisely because of the “different contexts in which European and Canadian carriers operate”. It was somewhat encouraging to see the CRTC explicitly discount such comparisons.

Finally, the CRTC seems to have given weight to the argument that wholesale-based service providers have uneconomic arbitrage opportunities when average rates are applied for urban, rural and suburban traffic. Such rate structures create incentives to build urban facilities but create a disincentive for investment in suburban and rural areas. “Bell Mobility submitted that, on average, a rural cell site costs more to build, while serving less data volume, than an urban one, resulting in higher costs per GB.” As Scotiabank observed in a research note this morning, Quebecor’s favourable MVNO deal with Rogers will result in Bell’s network being used only in areas where Rogers isn’t as strong. This would result in a disproportionate level of wholesale traffic running on rural and suburban while leading to disincentives for either party to invest.

Fostering sustainable competition and continued incentives for investment are clear themes of this wholesale wireless rate decision. To what extent does it provide clues for the way the CRTC will approach revisions to the wireline wholesale framework?

Canada’s policy environment is leading to the wrong climate for investment.

That is one of the key take-aways from a recent survey of leading business leaders published by the Globe and Mail. The survey [pdf, 5.2MB] included chief executives from a wide range of companies and business sectors, representing businesses with annual revenues ranging from $10M to more than $10B. Two thirds of the respondents represented companies with annual revenues over $1B.

The survey’s headline highlights nine out of ten participating CEOs in Canada see cybersecurity as a threat for their business; 70% say it’s a major threat. Still, Canada being on the wrong track for investment is one of the 4 key findings. “Over six in ten participating CEOs in Canada see Canada as being on the wrong track when it comes to being a place for businesses to invest (62%). When asked the reason for their views, participating CEOs most often said taxes and high costs (22%), poor leadership, regulators, and red tape or lack of clarity (22%), and incentives for business being weaker than other countries which does not create appealing environment for investment (17%).”

Further, when asked an open ended question “What are the biggest threats, if any, when it comes to your company conducting business in Canada in 2023”, 38% replied poor policy / regulation. It was the number one threat identified, by a nine point margin.

The regulatory and policy impact on the climate for investment is a key theme in the CRTC’s review of mandated wholesale access to fibre facilities. In its notice of consultation, the CRTC appears to trivialize the risk to further fibre investment by carriers, since fibre access networks “now cover most of their serving territories”. That stands in stark contrast to a recent statement by Bell Canada’s CEO that “There are still 4-5 million locations within our footprint without access to fibre.”

The regulator should know that broadband expansion business cases are examined on a project-by-project basis. After all, the CRTC administers its own subsidy fund to top up the shortfall in a limited number of rural broadband expansion projects. Policy makers must recognize that existing fibre is somewhat irrelevant to the millions of Canadian households that currently don’t have fibre access.

The economics associated with fibre expansion projects should be pretty simple to understand. I have written about broadband business cases numerous times. The incremental cashflows over time have to offset the upfront and ongoing costs associated with the project. If there is a shortfall, the project doesn’t get approved. If the economics don’t work, the private sector won’t invest in the project.

Cutting investment and cutting jobs aren’t threats; these are logical (and predictable) consequences of regulatory and government policy.

This week, we have seen stories about such consequences at TELUS and at Bell.

Will CRTC’s continued intervention in the marketplace drive an increased requirement for government funding for fibre in areas that would have otherwise had a business case for private sector investment?