As a consulting analyst to the global telecommunications industry, I watch with interest as healthy and well-executed wireless competition leads to strong economies, improved health care, increasingly transparent government and more effective education. As a consequence of that insight, I wonder what could possibly be Ottawa’s intent as it considers allowing Verizon to enter the Canadian wireless market armed with a regulatory gun, while incumbent players have been issued a regulatory pocket knife.
To be clear, I am not here to argue against Verizon’s entry into the Canadian wireless market. I’m arguing that if it’s allowed into the game, the game must be played by one set of rules.
Like any service delivered over a large geographic area, wireless is easier and more cost-effective to deploy when population densities are high, because the cost of infrastructure can be amortized across a large population of customers. Germany, for example, has, on average, 235 potential subscribers per square kilometre; Japan has 350. The United States has 34. Canada? About four. Yet Canada’s incumbent players manage to deliver service that’s competitive with the prices available in peer countries with higher population densities. Verizon’s entry would dilute that capability, particularly given the company’s intent to focus on major cities such as Toronto, not on rural areas that the incumbents are committed to serve.
And service levels? Only Denmark offers faster service. That’s important because the mix of traffic on wireless networks is shifting from voice to media-related data (think television on your mobile device), and since Canada’s smartphone penetration is already three times the global average, that bandwidth is paramount to the delivery of a superior customer experience.
The terms currently being discussed for Verizon’s entry into the Canadian wireless market fly in the faces of Canadian companies that have already invested billions of dollars in the service infrastructure that supports the country. For example, when new spectrum becomes available, such as the coveted 700 MHz assets that are soon to be auctioned by the government, Bell, Rogers and Telus are only permitted to purchase 25 per cent of the prime spectrum. As a “new entrant,” however, Verizon can acquire twice that – a move that, if executed, would result in an unfair advantage over incumbents and, in many cases, the inability of smaller players to acquire any prime spectrum at all.
Furthermore, Verizon has expressed interest in distressed wireless carriers Wind Mobile and Mobilicity, both of which would be easy for Verizon to acquire at a discount given the carrier’s strong cash position and the fact that incumbents are prohibited from acquiring them by government intervention.
As it currently stands, Verizon would also have the ability to avoid the build-out of a nationwide network by piggybacking their traffic on existing networks. This has been tried before, and it failed. During the late 1990s, “competitive local exchange carriers” were allowed to share pre-existing networks, a flawed regulatory strategy that privatized the risk of build-out while socializing the rewards. Companies failed and customers suffered.
Let’s be clear: Canada already has the most competitive national market in the G7 and is the only country with three established, successful wireless operators that already offer fourth-generation LTE service to nearly 80 per cent of the population. The addition of Verizon to the Canadian wireless game could be a good thing. Its addition to a playing field tipped heavily in Verizon’s favour, however, would not. Speculation on the possibility of the company’s entry into the market has already cost the three major incumbents almost $15-billion in value between May and June of this year. That loss has the potential to threaten Canadian pensions, jobs and infrastructure investments that are dependent on the sustained value of those companies.
It’s interesting to note that in a speech given at the Jefferies Global TMT Conference in May of this year, Verizon Wireless CEO Dan Mead observed, when speaking about the upcoming 600 MHz auction in the United States: “If you start eliminating companies that can pay for the spectrum, I don’t think that anyone will be pleased with how that is monetized. And at least I wouldn’t be pleased to not have a level playing field and having the opportunity to compete in a free-market environment.”
So what do I believe is the right outcome in Canada? It’s straightforward. Verizon should be allowed to enter the Canadian wireless market, but only if it’s held to the same rules and standards that govern the existing carriers. If Verizon enters the market, it should be required to build its own network. It should be limited to the same levels of access to auctioned spectrum as all other incumbent players. And its ability to acquire the “distressed assets” of troubled wireless carriers should not be allowed to happen with impunity, nor in the absence of a competitive process – and certainly not at the expense of existing carriers that already serve the market well.
It’s not the wireless carriers I worry about; it’s the ripple effect that a poorly thought-out and short-term strategy could create for customers, rural residents, pensioners and the Canadian investment community. The Canadian wireless industry is robust, cost-effective and driven to cover the country with service-oriented networks that will fulfill the population’s needs far into the future. Don’t dilute that work by establishing an unfair field of play.
Dr. Steven Shepard is resident director of leadership programs at the University of Southern California’s Institute for Communication Technology Management. He is president of the Shepard Communications Group, which has worked for Bell, Telus, Rogers and Verizon.