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Op-Ed: A proposal to resolve Canada's wireless competition problem

By Monty Spivak     Aug 25, 2013 in Business
We have a problem. Canadian consumers are fed up with high wireless prices; the government is listening and trying to introduce competition. Bell, Telus, and Rogers, are attempting to prevent Verizon from entering the market. Is there a win-win solution?
Let's start with the underlying problem. Canadians pay a lot for wireless services — whether it is the highest or not is questionable, but it is high.
"Right now, we pay some of the highest prices in the industrialized world for some really horrible service, and that one way or the other needs to change," said Steve Anderson of Open Media.
The telephone companies openly debate this statement, but consumers — particularly those who visit the U.S. — perceive otherwise.
The challenge is that the three large players — Bell, Telus, and Rogers — have an oligopoly with the vast majority of the market. They have built a network of communication towers, and have bought almost all of the wireless spectrum and some of the few small competitors.
The cost to service the Canadian market is high, as it is difficult to gain scale. There is a relatively small, under 35 million population, spread east to west over 5,000 kilometers.
Wireless communications requires spectrum (frequency in the air waves to carry the signal) and towers (to send the signals). Both of these are expensive. In Canada, one acquires the air wave rights through spectrum auctions (they purchase air wave bands from the government) and then incur a high-cost requirement to build communication towers. A recent article proposed that it would cost Verizon $3 billion to compete in Canada. Moreover, the next wireless auction, scheduled for January 2014, is the 700MHz frequency range, and this could disrupt the industry:
“We are right now witnessing the greatest upheaval in the industry since the demise of the Bell monopolies in the 1980s. This is really a key moment,” Greg Taylor, principal investigator of the Canadian Spectrum Policy Research at Ryerson University, said in an interview.
“We’re not just talking about phones anymore. We’re talking about the wider communication system. So there really is a lot at stake right here.”
The real estate up for grabs in the January auction is prime beachfront property — blocks of bandwidth in the 700MHz spectrum, a frequency range that travels farther and penetrates buildings more easily. That means companies don’t need to build as many costly towers to carry their signals. Ottawa could pocket as much as $6 billion over 10 years from the winning bidders, analysts estimate.
In other words, the barriers to entry are very high. Bell, Telus, and Rogers, have an enormous amount of their capital tied-up in their mobile businesses, and large organizations to build and maintain their mobile network. This is the low-return aspect of their business, but a necessity to provide the service.
The federal government is pursuing various means to reduce consumer wireless costs. The CRTC is slowly improving consumer rights; they recently eliminated 3-year contracts, and capped out-of-country fees. In order to create more competition, the federal government is trying to entice non-domestic service providers to start-up in Canada. The Industry Minister - representing the position of the federal government — stated this concisely.
In the midst of the furor over Verizon, Industry Minister James Moore has stood resolute on the issue: "Our view has been clear, we want effective competition across Canada.
Just the threat of competition is benefiting consumers:
"Since news broke that Verizon is considering expansion to this country, Canada’s largest carriers have rolled out new plans to attract business, family, and high-volume data usage customers."
The "big three" have also started public communication campaigns to quash the Verizon initiative, including television spots and two-page newspaper advertisements. The telephone companies make an excellent point that the government should not favour Verizon — unfortunately, they have not addressed the underlying problem of an uncompetitive wireless market. There is a credibility gap; Canadians who use the wireless telecommunications services tend to be unsympathetic towards their giant service providers who have locked them into contracts and charged them high fees for out-of-contract services. To summarize, everybody is working hard to impair their public image. The status is lose-lose; the question is: How do we get to win-win?
If the telephone companies can reduce costs, and the barriers to entry can be lowered to enhance price competition, everyone wins. It is possible to achieve this, as it is the norm for other industries. Let's look at automobiles. Consumers have a broad choice of price-points, brands, and features, with global competition. Regardless of one's choice of car (the equivalent of the cell phone), everyone travels on the same road system (the equivalent of the communication towers and air waves). Ford, Toyota, and their distribution networks, do not need to pay to build and maintain the city roads and highways. Why are we asking telcos to build the towers and buy spectrum? Why do they need to own the infrastructure?
The solution is to have all of the mobile telcos place their mobile service infrastructure assets, spectrum rights, and build/maintenance organizations in a single, new company. As well, the federal government would place all of the available and unallocated spectrum inventory in that same company — no more multi-billion dollar spectrum auctions. With this in place, the new company would own all of the cell towers, spectrum, and teams to build and maintain the infrastructure.
This is not a proposal to nationalize the wireless infrastructure or create a Crown Corporation (a company owned by the government). Rather, we need a publicly-traded, regulated monopoly. Each participant should be issued shares (to be traded on the Toronto Stock Exchange) for their relative contribution. We should also leverage the same model as the banking sector, where no one controls more than 10% of this new monopoly. After Bell, Telus, Rogers, the other small competitors, and the government, each get the appropriate shares for their contributions, they should be obligated to liquidate their positions down to 9.9 percent or less. We could choose to use the CRTC — a public board — to regulate the monopoly, as this company would control Canada's entire mobile communications infrastructure.
With this in place, the telcos would unburden their capital requirements, and have access to the entire Canadian infrastructure — there does not need to be a demarcation of Telus strong in the west and Bell in the east. New entrants would require very little capital — one would pay for the infrastructure as part of the network access fee.
Almost any organization would be enabled to start a wireless telco, and could negotiate for local or national access. For example, if Ontario Power Generation would want to create a mobile telephone company, they could conceivably pay the infrastructure provider to have mobile service in Ontario only. As with any business, high-volume clients get better pricing, so the incumbent telephone companies would have an initial advantage. The regulators will need to determine access, transaction, and volume fees, to help level the playing field, and keep access costs low, in order to meet public and telephone company needs.
The telcos would be freed of their low-return assets and business, and enabled to focus on marketing, services, and content distribution. The barriers to entry would be removed, and we should expect much more competition. This is what the telephone companies want:
"We welcome wireless competition on a level playing field", as stated by Bell Canada.
Consumers will have more choice, and should enjoy lower prices. The government can regulate the new monopoly through the CRTC.
The current model pits the consumers and our government representatives against the large telephone companies. The wireless services and competitive landscape demands a new industry paradigm — we require public and telco leadership to ensure that the needs of Canadian mobile users are met.
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of DigitalJournal.com
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