Ottawa has had every good reason to seek to inject competition into Canada’s wireless sector. Our trio of telecommunications conglomerates have behaved as any loosely regulated oligopoly would, effectively eliminating consumer choice with identical pricing and straitjacketed product offerings. They have deftly split the Canadian market equally among themselves, ensuring heady profit margins. As far as Rogers, Bell and Telus are concerned, the status quo is heaven.
It’s been a lucrative setup for Bay Street, too. The Big Three’s dominance of the country’s cable, telephone, Internet and broadcasting industries have made the companies cash cows for both investors and investment banks. Bay Street doesn’t care that it’s all come at the expense of consumers. This clique wraps itself in the flag all the way to the bank.
Populist or not, Prime Minister Stephen Harper’s government had the right idea when it reserved for new entrants more than 40 per cent of the advanced wireless spectrum – the airwaves that carry cellphone signals – that was auctioned off in 2008. Governments around the world, including in the United States and Britain, had successfully used such set-asides to “disrupt” incumbent players and boost competition. The policy was sound in principle.
Unfortunately, outside Quebec, the new wireless players have been like mice taking on elephants. They’ve had neither the financial wherewithal nor the experience to challenge the big players in the most lucrative wireless niches. Unlike Quebec’s Vidéotron, newcomers Wind, Mobilicity and Public Mobile don’t own fixed wires to transmit data and can’t bundle their products with other services such as cable television. They started out with disadvantages they could not overcome.
Ottawa was understandably keen to avoid a repetition of this scenario when it set out to design the rules for the next spectrum auction – by far the most important one yet. The lower-frequency spectrum set to be sold off in 2014 is the most coveted by wireless providers because it can carry signals farther and penetrate buildings more easily than the higher-frequency spectrum currently used. Hence, incumbents would bid top dollar to get their hands on these low-frequency airwaves.
“Unfortunately, an auction that awards the spectrum to bidders with the highest values may not assure economic efficiency because the bidders’ private values for the spectrum may differ from social values,” University of Maryland economist Peter Cramton and three others argued in a 2011 paper in The Journal of Law and Economics. “An incumbent will include in its private value not only its use value of the spectrum, but also the value of keeping the spectrum from a competitor.”
Hence, Ottawa planned to block Rogers, Bell and Telus from bidding on two of four blocks of low-frequency spectrum and pave the way for a foreign takeover of Wind, Mobilicity and Public. But in its desire to avoid a repeat of 2008, the Harper government was too obvious in courting U.S. giant Verizon to come to Canada.
The Prime Minister’s Office figured that a deep-pocketed player with plenty of experience was just the ticket to shaking up the Canadian wireless sector. It was a reasonable assumption, even if Verizon is hardly a “maverick” on its American home turf. (Though as a former customer, it sure beats any of Canada’s incumbents in service, pricing and choice.) But Ottawa’s apparent solicitousness toward Verizon may have scared off other potential entrants, particularly foreign ones with a record of challenging incumbents.
No one in Ottawa connected to this file believed Verizon CEO Lowell McAdam when he insisted last week that the U.S. behemoth, now immersed in its $130-billion (U.S.) deal to buy out partner Vodafone, “never seriously considered” entering Canada’s relatively puny $19-billion wireless market. But Mr. McAdam’s bombshell set off panic in the PMO. Suddenly, it’s 2008 all over again.
Sadly, Canada is left to take lessons in wireless competition from France. There, the cozy cellphone business had for years been divied up by a well-connected trio of companies: Orange (formerly France Telecom), SFR (owned by Vivendi) and Bouygues Telecom (whose billionaire controlling shareholder was described by Nicolas Sarkozy as his “best friend”). Last year’s launch of Free Mobile by Internet services provider Iliad S.A. has sent mobile prices plunging by 40 per cent in some cases. Free has already captured 10 per cent of the market, but its biggest impact has been in forcing the three incumbent players to act like competitors, not cartelists.
Pity Mr. Harper. He has nothing to show for five years of attempts to spur competition in Canada’s wireless sector except the ire of corporate Canada and thousands of Rogers, Bell and Telus employees. Consumers, a diffuse constituency, were never going to reward the Conservatives for lower cellular prices. (As if they’d let that determine their vote.) But you can bet employees of the Big Three will remember the summer of ’13 when they next go to the ballot box.