Wireless Competition in Canada: An Assessment
Creators: name: Church, Jeffrey
name: Wilkins, Andrew
Publisher: name: The School of Public Policy Publications
Year: 2013

description: If there’s one thing Canadians agree on, it’s that Canada’s wireless industry can and should be more competitive. The federal government is on side with the policy objective of having four carriers in every region and has responded with policies that provide commercial advantages to entrants. But, the rub is that there has not been a study that actually assesses the state of competition in wireless services in Canada, until now. Those in favour of policies that will promote and sustain entry point to Canada’s high average revenue per user and low wireless penetration rate (mobile connections per capita) as evidence that there is insufficient competition. The difficulty is that the facts are not consistent with this simplistic analysis. Measurements of wireless penetration are skewed toward countries that maintain the Calling Party Pays Protocol and favour pay-as-you-go plans, both of which encourage inflated user counts. Canada’s participation per capita on monthly plans and minutes of voice per capita are not outliers. Moreover, in terms of smartphone adoption and smartphone data usage, Canada is a global leader, contributing to high average revenue per user. Consistent with being world leaders in the rollout of high speed wireless networks, Canada lead its peer group in capital expenditures per subscriber in 2012: the competition of importance to Canadians is not just over price, but also over the quality of wireless networks. In any event, none of the measures typically used in international comparisons are relevant to assessing the competitiveness of Canadian wireless services. The appropriate competitive analysis recognizes two relevant features of the technology of wireless services: (i) high fixed and sunk capital costs; and (ii) economies of scale and scope. The implications of these are that profitability requires mark ups over short run measures of cost — high gross margins — and that there will be a natural, upper limit on the number of wireless carriers. The key issue in terms of competition is whether prices track long run average costs, namely, whether wireless providers make monopoly profits. An examination of the leading firm’s cash flow over the life cycle of the wireless industry suggests internal rates of return well below the likely ex ante, pre-tax, cost of capital that reflects the risk of its investments. This is not consistent with either the inefficient exercise of market power or monopoly profits. Moreover, international comparisons of structural indicators of competition indicate that, if anything, wireless services in Canada are more competitive than in many of its peers. There is no evidence that there is a competition problem in wireless services in Canada. Efforts to create competition in the short run, that increase the number of carriers, will simply squeeze margins in the short run and likely will not be sustained in the long run, as carriers exit and consolidate to reduce competition and restore margins consistent with profitability and the natural limit. And, while consumers might gain in the short run from lower prices, everyone is likely made worse off in the long run from the misallocation of spectrum, reduction in scale of carriers, and reduction in incentives to invest from such intervention. The AWS set asides allocated spectrum to carriers whose focus was on talk and text, not carriers whose focus is on data, resulting in an inefficient mix of networks and a suboptimal allocation of spectrum.
description: The School of Public Policy Publications, Vol 6 (2013)