Competition in Telecom: Scholars Debate This Ongoing Issue
The year 2013 will long be remembered as the most explosive and contentious the telecom industry has ever witnessed, with new players in the business sector looking to make headway against the incumbents, namely Rogers, Bell and Telus. It was often called the Summer of Discontent within the industry. In 2014, the rhetoric has toned down considerably, but it’s still a very hot topic and one that can still quickly lead to heated arguments at the drop of a hat.
As noted in his keynote address at the Canadian Telecom Summit, WIND Mobile Chairman & CEO Tony Lacavera acknowledged the federal government’s legislative amendments in December of last year to prevent the large incumbents in the wireless market from charging smaller telecoms more than they charge their own customers for domestic roaming.
“Currently, high domestic roaming rates hold back many providers, especially new entrants, from offering more choice, lower prices and better service to Canadians,” Industry Minister James Moore said when the changes were implemented.
But the question that doesn’t seem to have the perfect answer is: how many telecom companies should there be? The new entrants often bemoan the fact that three is not enough and that an increased presence would create a more competitive landscape and therefore benefit consumers with lower prices. Those on the other side say it’s an expensive industry and they’ll just end up seeing the smaller companies either being bought out by one of the Big 3, or just fading away altogether.
Last year’s “bloodbath” as some over-dramatically called it, was completely avoided when large U.S. telecom Verizon announced it would not be entering the Canadian market, preferring instead to focus on other international opportunities that would reap a larger rate of return. However, that’s not to say Verizon won’t again cast an eye on the Canadian market some time down the road. But for now, the Big 3 – Rogers, Bell and Telus – can all breathe easy. Their fears, some rather vocal, have been allayed for the time being.
A distinct panel of scholarly experts from across North America debated this very topic at the recent Canadian Telecom Summit. Clearly, when you have some of the most accomplished economics scholars disagreeing on the proper course of action, suffice to say there’s no simple answer to this problem. But it’s always interesting hearing the various perspectives.
Competition policy and governance mechanisms are at the core of this issue and always have been. Most of us grew up with traditional telephones with wire lines and the biggest issue in previous years was whether or not the home was connected – that was it. It was 1983 when we were first commercially introduced to cell phones. Those phones from 31 years ago are now referred to as “brick phones” that weighed about 2lbs at a cost of more than $1,000 and a minute of air time was more than $1 per minute. Over the years phones have gotten smaller and much more complex to where we are right now with the current smartphones that are essentially a miniature computer. The costs have also dropped dramatically from those early years down to an average of about 12 cents per minute.
“It’s not just that the phones have gotten smaller, sleeker and cheaper,” says John Mayo, Professor, McDonough School of Business, Georgetown University. “It’s also led to the decline of many other products such as alarm clocks, Walkman’s and even books.”
“Very often we tend to view technology and technological change as a series of one-off events, which is not true. It’s an ongoing matter,” Mayo continues.
In other words, innovation is routine and normal at this juncture of our worldwide technological merry-go-round. Through it all, consumer demand is exploding.
“Based on user data from Cisco, the total number of users generate 3 trillion video Internet minutes a month between 2012 and 2017 or more than two years of video in every second,” Mayo states.
Over a 10-year period in the United States the share of households that have wire line service fell from 15% down to 8%. Since the iPhone was introduced in 2007, the number of households with wireless only telephone communication has skyrocketed and now sits at about 40% overall, with that number escalating each year, confirmed by dramatic changes in consumer preferences.
“For households headed by someone born after 1982, the percentage of homes that have only wire line is just 1%,” Mayo reveals.
Assessing competition in such an environment is extremely difficult, whether it be Canada, the United States or any other country in the world. Determining the right number of competitors that maximizes competition in the marketplace and provides the most benefit for consumers will likely provide differing answers depending on who’s being asked the question.
There are some experts who believe there will ultimately be just three tier-one media companies remaining in this business space in the future – namely Rogers, Bell and Telus. On the other side are the free market libertarians who will come to the opposite conclusion because of the Internet, which they claim makes it much easier to create wide open competition.
It may come as a surprise to many to learn that the largest owner of media in the world is the Chinese government – and by quite a wide margin. The largest private media owner in the world is one of State Street, Vanguard and Fidelity because of their control over a number of portfolios that range in the billions of dollars. The largest individual media owner is Mexican billionaire Carlos Slim and the largest media company is Google. Keep in mind this is an enterprise that only came into existence in 1998.
It’s hard to argue against increased competition because it lends itself to lower prices for consumers. According to the OECD, a review of the world’s leading 34 industrialized countries, Canadians pay some of the highest prices for some of the worst service in the industrialized world.
The incumbent telecoms still charge high rates, and according to that OECD report, Canadian carriers have the third-highest revenue-per-user in the G8, and the fourth-highest across the whole OECD. The argument that has yet to be soundly refuted is that there is a direct correlation between our high prices and the fact that 94% of our national wireless industry is controlled by three companies.
“Capital intensity is a strong factor explaining media concentration,” says Eli Noam, Professor of Finance & Economics at Columbia University. “The more capital intense an industry is, the higher the concentration happens to be.”
The implications of such observations affect our interpretation of how the Internet will help support media competition in the future.
“The Internet media is more concentrated than the 20th century broadcasts of cable media and traditional 19th century print and so on,” Noam says. “Google, Facebook, Amazon, YouTube, eBay and Netflix are examples of Internet companies that have created enormous market shares for themselves on a global scale.
“People had hoped the Internet would be part of the solution for media concentration, but not only is it not part of the solution, it is actually part of the problem and in the future it might actually be the main problem.”
If that is a fundamental truth – high fixed costs, low marginal costs and high globalization and economies of scale, we would have to predict a larger increasing media concentration environment of the future worldwide.
“My conclusion is that Canada is doing okay, but the trend is moving in the direction of concentration,” Noam remarks. “It is true for many other parts of the world and it’s hard to slow down that evolution to a diverse pluralistic medium which we need to start thinking about very seriously.”
Robert Crandall, Non-resident Senior Fellow, Economic Studies at Brookings Institution, agrees with Noam in that Canada shares many of the same scenarios as the United States in terms of competition in the telecom satellite, cable TV market but disagrees with most everything else.
“I don’t think we need to be concerned that much about the trend of the Internet taking us towards more concentrated markets,” he says.
Competition policy in the telecom sector must be broken down into static competition and dynamic competition. Dynamic competition involves extending the capabilities of existing networks to compete for business and the evolving market of delivering digital content which is increasing high-bandwidth video content.
“The policies which drive dynamic competition may be at odds with those who drive more static competition,” Crandall mentions.
In comparing North America to Europe and Asia, Crandall says we are definitely at the top end of the spectrum – no pun intended.
“We have much better rollout of high-speed wireless LTE capability than most other countries,” Crandall asserts. “This has generated a much better ability to download advanced video content through wireless devices which are now beginning to compete with the fixed wire.”
As expected, Noam challenged the assertion that convergence is not becoming a problem. Utilizing spectrum in the most efficient manner is what will ultimately develop the marketplace the best for consumers, and that is where focus needs to be.
“I have no problem with a four carrier model for a variety of reasons,” Noam counters. “The same arguments that say ‘let the market work itself out’ – well, what if it goes down from three, to two and then even one and a natural monopoly, the same arguments could still be made. So what is the limiting principle here? I haven’t heard an argument on when do we stop this or how do we handle it if in fact we move to a monopoly from an oligopoly.”
“I would stress making it a more hospitable place for foreign investors,” Noam says. “Big international companies would operate here too if they felt they were not going to be a second-class citizen.”
In a dynamic, complicated industry such as telecommunications it is difficult to pinpoint the exact number of companies that would best serve consumers most efficiently. It is also quite likely going to be a different number based on the region being served with some being more advanced than others.
“A small number of firms competing vigorously will generate consumer benefits,” argues Mayo. “Here you’ve got dramatic changes on the consumer side and a willingness to switch and over time you’ve seen a tremendous level of competition among small numbers of firms, which over time have led to dramatic decreases in prices. I suspect consumers are much more concerned with the level of their price than what the number of carriers in the marketplace really is. We can talk about the right number, but that’s really something we don’t know.”
What is known is that consumer demand is exploding exponentially. If, as part of a policy matter, the supply aspect is not addressed, there will be upward pressure on prices whether it comes from concentration or from just simple flat out competitive pressure. When demand is high and supply is scarce, prices will be driven up.
“The smartest thing to do as a policy matter is to focus on how to remove supply constraints in this marketplace,” Mayo offers. In the case of wireless, it means getting more spectrum online and letting players bid for that spectrum, encouraging and allowing consumers to keep their lack of consumer loyalty and move freely to another provider if they so desire. It also provides excellent incentive for companies to remain on the cutting edge of technologies that will best benefit their customer base. Mayo believes those are smarter strategies than simply having a myopic focus on the literal number of firms.
The strategy of awarding licences and wireless since 1995 there have been five new entrants, none of whom has had a great deal of success. In fact, WIND Mobile is the only survivor at this point. Leonard Waverman, Dean at the DeGroote School of Business at McMaster University, says a greater tolerance of foreign investment needs to be implemented.
Crandall chimed in to say the regulatory uncertainty in Canada is what really must be addressed first and foremost.
“I find it interesting coming from the United States where we had a very considerable ideological shift in our government in 2009,” he begins. “From then until the present, we’ve had little in the way of regulatory uncertainty in communications in the U.S. The Net neutrality issue is probably the most prominent one, but even at that, most carriers don’t take it all that seriously because they don’t think that the terms by which they interconnect are going to be regulated in any formal public utility sense.”
“Up here in Canada it strikes me that all of the issues now open with the CRTC involving video and wireless involving wholesaling and fixed-wire networks, you’ve created a lot of uncertainty which is likely to provide disincentives for investments.”
Network sharing has been allowed in many countries around the world, with most occurring in European nations. That premise is also taking place here in Canada with shared networking between companies such as Bell and Telus and also Rogers and Videotron. The message seems to be that you can share a network yet still remain largely independent, nimble and able to compete against other enterprises in this sector.
“I don’t think that network sharing or tower sharing is anti-competitive,” says Waverman. “Of concern is that the Competition Bureau says there seems to be a lack of competition in the retail wireless markets. I would like to see foreign entry. If you live in Manitoba or Saskatchewan you pay less – the facts are clear. You pay less when there are four carriers than you do with three.”
As Noam points out, facilities’ sharing makes a lot of economical and technological sense in rural areas but the reality is that if it becomes a situation where two companies exclude sharing by others it leads to policy debate.
“A problem with the spectrum auctions is that when you have just a small group of accepted potential bidders and who can buy. The oligopolists will be the highest bidders because in their bid they can factor in the impact of having less competition in the future. If you don’t put in some restrictions, the established companies will always be the highest bidder.”
There is little doubt that the debate on the number of competitors in this field could be debated for an eternity, with both sides making strong cases. However, as a general rule, it does seem that competition in other sectors most often results in better pricing for consumers. For that reason alone, it seems worth it to give the new players the opportunity – a real opportunity – to show what they can provide.