RESEARCH PAPERS MAY 2015 THE STATE OF COMPETITION IN CANADA’S TELECOMMUNICATIONS INDUSTRY – 2015 By Martin Masse and Paul Beaudry The Montreal Economic Institute is an independent, non-partisan, not-for-profi t research and educational organization. Through its publications, media appearances and conferences, the MEI stimu- lates debate on public policies in Quebec and across Canada by pro- posing wealth-creating reforms based on market mechanisms. It does 910 Peel Street, Suite 600 not accept any government funding. Montreal (Quebec) H3C 2H8 Canada The opinions expressed in this study do not necessarily represent those of the Montreal Economic Institute or of the members of its Phone: 514-273-0969 board of directors. The publication of this study in no way implies Fax: 514-273-2581 that the Montreal Economic Institute or the members of its board of Website: www.iedm.org directors are in favour of or oppose the passage of any bill. Reproduction is authorized for non-commercial educational purposes provided the source is mentioned. ©2015 Montreal Economic Institute ISBN 978-2-922687-59-0 Legal deposit: 2nd quarter 2015 Bibliothèque et Archives nationales du Québec Library and Archives Canada Printed in Canada Martin Masse Paul Beaudry The State of Competition in Canada’s Telecommunications Industry – 2015 Montreal Economic Institute • May 2015 TABLE OF CONTENTS HIGHLIGHTS .......................................................................................5 INTRODUCTION .................................................................................7 CHAPTER 1 – HOW DOES CANADA MEASURE UP? .........................9 CHAPTER 2 – AN UPDATE ON WIRELESS COMPETITION IN CANADA ......................................................................................23 CHAPTER 3 – MANDATORY SHARING OF BROADBAND NETWORKS: FOSTERING OR HINDERING INNOVATION? .............31 CHAPTER 4 – THE IMPACT OF TECHNOLOGICAL CHANGES ON COMPETITION IN THE TELECOMMUNICATIONS SECTOR ............39 CONCLUSION – ENDANGERED BENEFITS .....................................45 ABOUT THE AUTHORS ................................................................... 49 The State of Competition in Canada’s Telecommunications Industry – 2015 HIGHLIGHTS The 2014 edition of this report attempted to dispel the notion that Canadians pay uncompetitive prices for low quality telecommunications services, and argued that interventions aiming to increase the number of players through subsidies and mandated access were not likely to have the intended effects and might instead jeopard- ize investments and innovation. Here are some high- lights from this year’s edition. Chapter 1 How Does Canada Measure Up? • Canadians continue to be among the biggest consum- ers of telecommunications services in the world, an indi- cation that we enjoy competitive, quality services. Only • Since last year’s edition of this report, Germany and broadband Internet services leave something to be de- Ireland have been added to the list of countries with sired compared to other countries. only three national players, and ongoing transactions in Italy, the UK and Denmark may lead to more mergers in • The penetration rates of the latest wireless technol- the coming months. ogies in Canada are among the highest for industrial- ized countries. • WIND Mobile is the only pure-play new entrant whose fortunes have brightened since last year, acquiring addi- • Canadians actually benefi t from one of the most ad- tional spectrum in the March 2015 auction, although it vanced and effi cient wireless networks in the world. now has to invest signifi cant sums to deploy that spec- trum, and it is still uncertain whether it can secure the • As for the prices Canadians pay for wireless services, funding to do so. they remain generally higher than in Europe (where low prices have been correlated with falling capital expendi- • Investments in wireless infrastructure in Europe have tures and a lagging deployment of new technologies) declined by 3% between 2007 and 2013, whereas they but lower than in the United States or Japan. grew by 74% in the United States and by 21% in Canada. Chapter 2 An Update on Wireless Competition • The government and the CRTC should stop emulating in Canada the failed policies of Europe and revive Canada’s histor- ically less interventionist wireless regulation, which has • Despite implementing policies aimed at increasing the served consumers well. number of competitors in the wireless market since Chapter 3 2007, Bell, Telus and Rogers still dominate the Canadian wireless market, and the provinces of Ontario, Alberta Mandatory Sharing of Broadband Networks: and British Columbia still lack a solidly established Fostering or Hindering Innovation? fourth wireless player. • The CRTC is expected to issue a decision shortly on • Since the federal government eased foreign owner- whether there is a need for mandatory wholesale access ship restrictions in 2012, no well-established foreign with respect to fi bre-to-the-premises facilities (FTTP), player has entered the Canadian market, despite the which are replacing copper technology with optical fi bre federal government’s courting of two American wireless that runs directly to the homes and businesses of providers in 2013. customers. • Over the past year, the government has reiterated its • Proponents of mandatory network sharing contend support for preferential spectrum auctions, and has that it is necessary because certain elements of telecom- passed legislation aimed at capping the roaming fees munications networks are diffi cult to replicate, or cannot that large wireless carriers can charge small ones. be replicated economically. Montreal Economic Institute 5 The State of Competition in Canada’s Telecommunications Industry – 2015 • Small, independent Internet service providers (ISPs), cable providers, and then through the substitution of whose business model relies solely on the use of the wireless telephone services for traditional wireline large providers’ infrastructure at below-market rates, services. have fared well under the current regulatory environment. • In 2013, cable providers accounted for 33% of all rev- enues from local residential telephony services. • However, the presence of these additional competi- tors is artifi cially supported by the CRTC, not by actors • Households are increasingly deciding to abandon their in the marketplace. In attempting to strike a balance be- residential telephones and keep just their wireless sub- tween the interests of the large companies and those of scriptions: In 2013, 21% of Canadian households had small ISPs, the CRTC has interfered with all market par- decided to “cut the cord”—including 60% of young ticipants’ incentives to innovate and invest in advanced households. networks and equipment. • The potential competitors of today—which have no • The proportion of Canadians subscribing to mobile market share and which consequently are not con- broadband in 2013 was 50.2%, as opposed to 32.8% for sidered relevant according to the static approach—are fi xed broadband, due to the growing popularity of the ones that might revolutionize the industry of smartphones and tablets. This provides an additional tomorrow. and much more potent source of competition in the broadband sector. • The stark contrast between the U.S. and European ap- proaches regarding mandatory access should give pause to proponents of generous mandated access policies. Chapter 4 The Impact of Technological Changes on Competition in the Telecommunications Sector • There are two visions of competition: the “static” vi- sion of perfect competition, which continues to infl u- ence decision makers and the general public even though it has fallen out of favour in the fi eld of econom- ics; and the “dynamic” vision that takes into account the rapid evolution of markets, and in particular the poten- tial impact of new, disruptive technologies. • Those who favour the static vision generally advocate government intervention to increase competition, either by regulating prices or by promoting and subsidizing the entry of additional players, but the static model is of limited relevance to the analysis of an industry like tele- communications, which has undergone substantial and rapid changes thanks to technology. • In contrast, a good illustration of the relevance of the dynamic model is that over the past quarter of a cen- tury, new technologies have gradually eroded the for- mer telephone monopolies’ dominant market positions: fi rst, through the provision of telephony services by 6 Montreal Economic Institute The State of Competition in Canada’s Telecommunications Industry – 2015 INTRODUCTION Last year, the fi rst edition of The State of Competition in Canada’s Telecommunications Industry assessed how Canada measured up with other jurisdictions regarding the quality and pricing of its telecommunications servi- ces. The report also evaluated how competition was faring in key areas of the Canadian telecommunications market, and provided a critical assessment of Canada’s legislative and regulatory framework for this industry. One of the primary motivations for the publication of this report was that many Canadians were, in our opin- ion, under the mistaken impression that Canada’s tele- communications industry compared poorly with that of other jurisdictions. The report attempted to dispel the notion that Canadians pay uncompetitive prices for low quality services. It also argued that the federal govern- ment’s and the CRTC’s interventions in