Phone-y competition in Canada's wireless sector

Nobody should be surprised to have learned in recent days that three of Canada’s small wireless companies – Wind Mobile, Mobilicity and Public Mobile – are now for sale and may soon disappear as independent players. The federal government’s attempts at artificially creating more competition in this market were never based on a realistic assessment of the Canadian market, or on sound economic theory.

It all started in 2008, when Ottawa set aside for new wireless players part of the spectrum being auctioned off that year, and forced existing carriers to open their networks and share their transmission towers with the new entrants. I wrote at the time in this page that this amounted to a subsidy to new entrants and would distort the allocation of resources in this market.

We simply don’t know the optimal number of wireless networks in a market like Canada’s. Market forces (including an unbiased spectrum auction that reproduces market rules as much as possible) are supposed to determine this.

In theory, more competition is a good thing. It forces players to lower their prices and to offer better services to attract clients. But how many more players should we have, in addition to the big three? Would we be better off with one more wireless network, three, five?

Such networks cost billions of dollars to set up from coast to coast. Obviously, at some point, it becomes wasteful to add another one and it’s better for society if these resources are spent elsewhere.

We had seen earlier in the decade how difficult it was for smaller players to remain viable. Clearnet was bought out by Telus in 2000 and, after seeking bankruptcy protection in 2003, Microcell was taken over by Rogers in 2004.

It is true that among the recent new entrants, Videotron in Quebec and EastLink in Atlantic Canada have been able to establish a foothold. They have a loyal local customer base in their regional markets and they can offer packages of cable telephone services, broadband Internet access, and digital television in addition to wireless telephone services. In the West however, Shaw decided that it could not make a decent return on invested funds and has been sitting on its spectrum ever since.
 

“We find it ridiculous nowadays when we think that the federal government tried for years to keep mines open by subsidizing the coal mining industry on Cape Breton Island. Didn't it realize back then that you could not ignore markets and prevent economic transformation?”

I was working on the telecom file as a policy advisor to then Industry Minister Maxime Bernier in 2007. The consensus view in the minister's office was to open the sector entirely to foreign investors and set up the coming spectrum auction so as to have a level-playing field, without a set-aside for new entrants. With no more barriers to the entry of foreign players with deep pockets, but also no advantages given to potential new entrants, we could then have seen if the market was ready to support a fourth national carrier.

Opening the market meant amending the Telecommunications Act. Since the government was then in a minority, it needed the support of one of the opposition parties. The minister had been talking to some of his counterparts and believed he could make a deal on this issue.

However, Industry Canada's senior bureaucrats opposed the plan. There was also strong lobbying against one or the other of these policies by some influential industry players. When Bernier was shifted to Foreign Affairs in August and replaced by Jim Prentice, it was clear that the supporters of more government meddling in the industry had won. Prentice announced the 2008 auction rules with a set-aside a few months later.

So, instead of real competition, what we've had since then is constant attempts by Industry Canada to artificially foster a phony type of competition with repeated interventions.

The market was belatedly opened to foreign investment in 2012, but only for companies that have less than 10% market share. Current Industry Minister Christian Paradis also announced last year that the government would cap the amount of spectrum any one party will be able to purchase in another spectrum auction to be held this autumn, again explicitly in order to favour new competitors.

And now, we hear that the minister is considering taking more measures to block Rogers, Bell and Telus from acquiring spectrum from the small players or the unused spectrum from Shaw.

Hundreds of millions of dollars will have been wasted in this futile attempt to create, foster, and then reanimate the clinically dead new entrants. The major carriers will have had roadblocks put in front of them as they try to improve their services and answer their customers' demand for more bandwidth, thus actually reducing real competition and achieving the opposite of what was intended.

And let's not forget that all these policies could become obsolete in a couple of years if a new technological breakthrough radically alters the industry. What a waste of resources!

We find it ridiculous nowadays when we think that the federal government tried for years to keep mines open by subsidizing the coal mining industry on Cape Breton Island. Didn't it realize back then that you could not ignore markets and prevent economic transformation?

The industries, policies and the buzzwords may have changed somewhat. But this government's telecom policy shows that wasteful and pigheaded interventionism is as popular as ever in Ottawa.

*Op-ed first published in the National Post on April 22, 2013.