Lexus or Walk: Think tank fails to justify telecom pricing

Every year, the Montreal Economic Institute (MEI) publishes a report seeking to prove that Canada’s telecommunications industry compares favorably with other jurisdictions.

Throughout its analysis, the MEI simply places too great a premium on having the latest and greatest technology. Consumers care far more about getting a fair price and high usage allowance. Allowing telecommunications carriers to exercise their market power sacrifices what consumers care about most for luxury options they would happily do without.

At its core, the MEI argues that even though Canadians pay more for telecommunications services than most other countries’ consumers, we have no cause to complain because we have access to more affordable options through flanker brands and we enjoy higher speeds and investment. It argues that even though Canadian’s bills are going up, the prices for a given service basket is actually declining.

Canadians do pay more for telecommunications services than most other countries. The Nordicity International Price Comparison Report commissioned by Innovation Science and Economic Development Canada shows that Canadian consumers pay dramatically more than our international counterparts for wireless data at the 1GB, 2GB, and 5 GB price levels – around $40-$50/month more than in the UK or about double their prices.

Figure 1: Nordicity, 2017 Price Comparison Study of Telecommunications Services in Canada and Select Foreign Jurisdictions

Flanker brands and resellers do offer slightly lower prices for the services levels covered in the Nordicity Report. Virgin Mobile, for example, currently offers 1GB of data with unlimited minutes for $55/month for Bring-Your-Own-Device customers in Ontario, compared with the $70.70/month price used in the Nordicity report (the Virgin offer includes”bonus data” for a limited time but remains the lowest cost option for that data allowance). The price is still high compared internationally, and moreover it is not fair to compare the lowest-priced offers in Canada to the highest-priced offers internationally.  A customer on US MVNO Tello would pay $14 USD/month ($17 CAD/month) for 1 GB of data with unlimited calling and texting. Looking at resellers only further highlights the monopolistic rents being paid by Canadian consumers.

Figure 2: Offer from US Reseller Tello mobile

These price differences do not reflect differences in the cost of service. Based on the costs found in the CRTC’s wholesale roaming rate setting, Bell’s costs to deliver an additional 1 GB data are $9.71 ($0.013281/1.4*1024). Since Canadian wireless customers use an average of 57% of their data allowance, Bell’s capacity cost to offer a plan with a 1 GB data allowance are approximately $5.55/month. Furthermore comparing across provinces the lowest prices are found in Saskatchewan, which has the lowest price in Canada due to competition from SaskTel, despite also having one of the lowest population densities in Canada. Network costs associated with differences in population density and terrain simply do not account for a significant portion of the cost premium paid by Canadian consumers.

Figure 3: Nordicity, 2017 Price Comparison Study of Telecommunications Services in Canada and Select Foreign Jurisdictions

Canadians do not care very much about network speeds. For example, in Public Mobile’s build-your own plan tool, 1 GB of 3G speed data costs $35/month, compared with $42/month for 4G speed data (both options with no calling or texting and Public Mobile’s bargain-basement customer support). Assuming both plans are priced competitively, this suggests consumers are willing to pay about $7/month to move from 3G speeds (~6 Mbps) to 4G-LTE speeds (~30 Mbps), with that willingness to pay exhibiting diminishing returns to higher speeds. The difference between UK average speeds (~25 Mbps) and Canadian average speeds (~45 Mbps) is likely only worth a few dollars per month to consumers at best, and only to high-end consumers with sufficient data allowances to make use of those higher speeds on a regular basis. 5 Mbps is sufficient to stream HD Netflix and would consume 1.8 GB/h. Moreover, the higher speeds on Canadian networks are in part attributable to monopolistic pricing, which forces Canadians to subscribe to plans with lower data allowances, reducing network congestion.

Investment in wireless facilities is, without reference to any corresponding increase in network quality, of no value to consumers. Canada is pursuing a facilities-based competition strategy which is intended to allow competing facilities-based providers to over-build the national carriers’ networks. This necessarily involves redundant investments which do not provide any value to consumers beyond (potentially) contributing to lower prices in future. Average wireless revenues from 2012-2016 were $21.26 billion a year of which reinvestments in plants and facilities were just $2.2 billion, despite 40-45% operating profit margins (earnings before interest, taxes, depreciation and amortization).

Figure 5: Telecommunications revenues and EBITA margins as reported in the CRTC Communications Monitoring Report, showing huge operating profit margins

Wireless prices for a given service basket do appear to be decreasing. The average price of 1200 min and 1 GB of data fell from $69.27/month in 2013 to $58.00/month in 2015, a 16% decrease. Other price brackets have seen smaller decreases. This is to be expected at technological advances continue to decrease the costs of delivering additional data. In the UK, the price of a 5GB plan fell from £195/month in 2012 to £54/month in 2016. Decreasing prices do not demonstrate that existing rates are reasonable, or that those decreases are not due to government intervention. In particular, regional price comparisons suggest that the regional players supported by the CRTC’s facilities based competition policy drive regional price reductions.

The MEI goes on to attack the Commission’s wireline wholesale policies, claiming that mandating reseller access to fibre-to-the home networks will “slow down the deployment of fibre networks by reducing the incentives of telecom providers to invest and preventing them from fully recovering the capital costs associated with their investments.” The CRTC sets wholesale rates which allow telecom providers to recover their costs – and a healthy profit margin beyond them. While different, higher rates or a cross-subsidy regime may be needed to ensure that investments are recovered in higher-cost areas, the CRTC’s wholesale access policy should theoretically have no impact on investment. The MEI entirely overlooks the massive savings and enhanced choice offered to consumers by resellers.

Unlike the MEI, which does not appear to have ever set foot before the CRTC, PIAC fights before the CRTC every day and sees the rationale for every decision it provides. The CRTC has massively deregulated the telecommunications sector – 95% of telecommunications revenues are generated by services which are not subject to retail rate regulation. The CRTC’s remaining wholesale and retail obligations address particular market failures which impact the interests of consumers. The point of wholesale policies is not just to stimulate facilities-based competition. The real value of those policies is that they prevent the exercise of wholesale market power, reducing rates for consumers and giving Canadians a greater choice of retail providers.

The MEI cites the December 2017 bring-your-own-device price war as evidence that competition is sufficient to protect the interests of users. The MEI entirely overlooks the implementation of the Revised Wireless Code on 1 December 2017, which allowed customer to have their devices unlocked for free, suddenly increasing the flexibility with which consumers could switch providers to take advantage of BYOD offers. That competition is attributable to the Commission’s Wireless Code, not a sign that it is unnecessary.

Figure 5: A rather over-enthusiastic CRTC graphic promoting the Revised Wireless Code which made phone unlocking free to facilitate BYOD competition effective December 2017 , immediately prior to the BYOD competition MEI cites as evidence the Code was unnecessary

The CRTC remains a necessary actor in Canada’s telecommunications landscape. Limited spectrum and high fixed costs mean that telecommunications markets will always be characterized by market power. There is a substantial gap between a reasonable return on the first-movers’ investment, and the prices they can get away with charging restrained only by the threat of entry by another facilities’ based provider.

But in discussing the role of general competition authorities, it is worthwhile to note the views of the Competition Bureau regarding Canada’s wireless markets:

  • The Commissioner submits that the incumbents possess market power in retail mobile wireless services markets in Canada. […] The evidence put forward in the Brattle Report demonstrates that Canadian retail mobile wireless services markets are characterized by above‑normal profits and comparatively low service penetration levels. These are both indicators of market power. In addition, Canadian retail mobile wireless services markets are characterized by high concentration and very high barriers to entry and expansion.  Furthermore, such markets are characterized by other factors that, when combined with high concentration and high barriers to entry and expansion, create a risk of coordinated conduct in these markets. (Source)
  • [A]s a result of coordinated behaviour among Bell, TELUS and Rogers, mobile wireless prices in Canada are higher in regions where Bell, TELUS and Rogers do not face competition from a strong regional competitor. Conversely, the Bureau concluded that where Bell, TELUS and Rogers face competition from a strong regional competitor, prices are substantially lower. The Bureau concluded that the lower prices are caused by the presence of a strong regional competitor who can disrupt the effects of coordination among Bell, TELUS and Rogers. (Source)

The difference between the CRTC and Competition Bureau, and the real reason for the MEI’s preference for a general competition authority, is that the Competition Bureau does not have all the tools it needs to effectively control telecommunications carriers’ exercises of market power, nor to fully protect the interests of consumers, rather than just responding to anti-competitive behavior in very specific ways.

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