What Critics of Canada’s Wireless Need to Know: Condemnation Misses Mark, Threatens Future Investment

Commentary, Disruption, Daniel Duarte

There is a pervasive belief in Canada that wireless phone-service prices are a rip-off. To suggest otherwise is heresy.

Countless commentaries provide fodder for this belief, and every few years a politician takes on the purported problem. In the mid-2010s, for example, Industry Minister James Moore supported the entry of Verizon, although the prospective US-based competitor backed away.

Prime Minister Justin Trudeau promised in his 2019 campaign to lower wireless prices. The Big Three telecom firms—Rogers, Bell, and Telus—now have two years to lower mid-tier prices by 25 percent or face regulatory action.

What Sticker Prices Do Not Tell

The Big Three do have dominance over the Canadian wireless market and a 90 percent revenue share. However, the notion that Canada’s prices are an outlier relative to peer nations is not only false; it serves the overbearing regulatory arm of the federal government. Price controls undermine investment, disincentivize innovation, and backfire for consumers.

The perennial problem with headline-grabbing price comparisons is that they are superficial and overlook relevant considerations such as quality, consumer preferences, geography, and investment for technological advances. It may surprise Canadians to know that from 2008 to 2017, the prices for different wireless phone-service packages, adjusted for inflation, have decreased between 6 and 45 percent. Why then have service bills increased? 

The State of Competition in Canada’s Telecommunications Industry,” authored by Martin Masse of the Montreal Economic Institute, explains that Canadians are simply choosing to purchase more and better services. These are, of course, pricier. For instance, if basic and unlimited phone plans are both getting cheaper over time but more people are buying the unlimited one, then the average bill can still increase. Canada ranks sixth in tablet and smartphone usage, meaning we are among the largest data consumers in the world. 

Canada’s geography also presents a challenge. Wireless providers must invest in massive infrastructure and incur high fixed costs to serve our large and sparse population. Tiny Luxembourg, for example, boasts some of the best wireless rates, but with 998 square miles, its infrastructure costs are nothing like Canada’s, which cover a landmass of 3.8 million square miles.

In fact, Canada ranks third in private telecom reinvestment as a percentage of revenue with an average of 22.7 percent between 2005 and 2015 (far higher than the 15 percent average for the 35 OECD countries). According to Bank of America Merrill Lynch data, Canadian telcos’ capital expenditure per wireless subscriber is $67.48, the highest among G7 countries.

New gadgets and devices that connect to the internet mean an ever-increasing demand for faster connections. Over the next couple of years, Canada’s wireless operators will invest some $26 billion in 5G infrastructure to accompany technological change.

Free Riding: A Cure Worse than the Disease

Navdeep Bains, Canada’s minister of innovation, science, and economic development, has been pushing for mandatory access to telco infrastructure for mobile virtual network operators (MVNOs). 

These MVNOs do not own their networks but rather rent and resell existing telco networks. The federal government claims that forcing telcos to share their infrastructure with MVNOs will increase consumer choice, lower prices, and increase competition.

Not surprisingly, telcos are resisting MVNO free riders. Telus, for example, has said such a policy would lead it to cut $1 billion in spending as well as 5,000 jobs. 

Mandating MVNO access to private infrastructure at artificially low prices would almost certainly reduce consumers’ service bills in the short run. However, the unintended consequence of reducing the incentive to invest would be the hindering of 5G deployment across Canada and, in the long term, keep wireless prices higher than they otherwise would have been.

Talking points tend to pass unchallenged when they feed into a narrative the public wants to believe. The Globe and Mail echoes that narrative: “Report after report, year after year, has confirmed that cell phone services cost more in Canada than almost anywhere in the world.” A parallel can be drawn to the blaming of the patriarchy for the infamous “gender-pay gap,” which fails to stand up to multivariate analysis.

Our telecommunications industry is one of the few areas in Canada that appears healthy and functioning. Looking to the federal government to impose lower prices without consequences defies logic. Given the telecom industry’s vital role in preparing Canada for the new digital economy and the post-pandemic recovery, an ill-conceived, albeit popular, intervention could have devastating ramifications for the country’s competitiveness.

As Martin Masse wrote in his MEI report, “sustainably lower prices are the result of technological innovation, investment, and entrepreneurship, not of regulatory intervention.”

 

Daniel Duarte is a research associate with the Frontier Centre for Public Policy. Caitlin Rose Morgante, a Boston University economics student, contributed to this article.

Photo by Mael BALLAND on Unsplash