Part of the Datamonitor Group The Benefit of the Wireless Telecommunications Industry to the Canadian Economy April 2010 A Report prepared for the Canadian Wireless Telecommunications Association WWW.OVUM.COM Table of contents 1 Executive summary ......................................................................... 1 2 Introduction .................................................................................... 3 2.1 Scope of the study ............................................................................ 3 2.2 Canadian wireless sector overview ...................................................... 4 2.3 The economic contribution of wireless telecoms services......................... 7 2.4 The structure of the report ................................................................. 8 3 Supply side impacts of the Canadian wireless industry.................. 10 3.1 Supply side impacts: our methodological framework .............................10 3.2 Canada’s wireless value chain............................................................12 3.3 Total value add generated by the Canadian wireless sector ....................15 3.4 Geographic distribution of value add ...................................................17 3.5 Wireless services compared with other sectors .....................................18 3.6 Employment Effects .........................................................................19 3.7 Employee value add .........................................................................22 4 Productivity gains from wireless telecom services ........................ 24 4.1 Introduction ....................................................................................24 4.2 Labour productivity growth and use of ICT in Canada ............................24 4.3 The role of wireless services in increasing productivity growth ................26 5 The consumer surplus from wireless services ............................... 30 5.1 Summary .......................................................................................30 5.2 Consumer surplus as a measure of economic welfare ............................30 5.3 Estimate of the current consumer surplus............................................31 6 Conclusions ................................................................................... 34 Annex A: Value chain categories .................................................................. 36 Annex B: Cellular licensees .......................................................................... 38 © Ovum Consulting 2010. Unauthorised reproduction prohibited. The Benefit of the Wireless Telecommunications Industry to the Canadian Economy 1 OVUM REPORT 1 Executive summary This study assesses the impact of the wireless industry in Canada on the Canadian economy. We are grateful to the members of the CWTA for the data that they have provided. The mobile industry provides economic value to the wider economy in Canada well beyond the revenues which flow to the network operators and service providers, and excluding the value generated to the government through taxes and spectrum licence fees. The CWTA believes that the Canadian wireless industry has made significant contributions to the public benefit through licence fees - the AWS and PCS auctions have generated $4.26 billion and $1.481 billion respectively. Spectrum is a key resource which enables the wireless industry to provide its services to the benefit of its customers, shareholders and the economy. When seeking to value spectrum licences, with the objective of ensuring a fair return for the Canadian public, due account should be taken of the value and benefits that the Canadian public already receives from these services through the stimulation of the economy as a whole. We have concluded that the wireless communications industry generates significant value for the Canadian economy. The total value of direct GDP contribution, output multiplier and consumer surplus is a significant economic value of $39 billion1. This value is much more than the revenues earned by the operators, dealers and service providers resident in Canada. The direct economic impact of the Canadian wireless telecom services industry in 2008 included the following: the mobile network operators generated $15.94 billion in revenues and the wireless communications services industry directly contributed $16.3 billion to Canadian GDP. The greatest contribution to the national GDP from the wireless communications services industry comes from the mobile operators and the support services sector when this direct contribution to GDP is complemented by the Statistics Canada output multiplier2 of 0.87 this leads to a total economic benefit from the supply of services of $30 billion the use and availability of wireless telecom services and products created a consumer surplus of at least $8.8 billion. This is the difference between what end-users are willing to pay for a service and what they are actually having to pay and is an additional economic value to Canada the Canadian wireless telecommunications industry creates 274,500 direct, support, and indirect jobs. 1 Note: unless otherwise stated, all financial figures in this report are expressed in Canadian dollars 2 The ‘output multiplier’ is a statistical tool which enables the economic impact of demand on contributing suppliers in the supply chain to be assessed, based on the demand for end-user services. Statistics Canada provides a multiplier of 0.87 for the integrated telecommunications industry. This has been applied to the wireless sector in this study. © Ovum Consulting 2010. Unauthorised reproduction prohibited. The Benefit of the Wireless Telecommunications Industry to the Canadian Economy 2 OVUM REPORT the wireless sector offers high value employment – it has an average salary level of $59,000. This compares to a Canadian average salary of $42,640 the $16.3 billion value of the Canadian wireless industry compares favourably with other major Canadian industries - automotive manufacturing ($20.6 billion), food manufacturing ($18.2 billion) and agricultural crop production ($16.6 billion). It is also comparable to the 2008 GDP of Newfoundland and Labrador, which was $20 billion within this total value: the rapidly emerging service area of mobile broadband generated $2.4 billion in 20083 and we forecast this to grow at 22% CAGR through to 2014 the mobile content sector generated around $176m in 2008. Although currently of modest value, this is a sector which is expected to grow strongly as users adopt mobile broadband. The wireless industry in Canada has made substantial investments over many years. Both incumbent and new entrant operators continue to invest heavily, despite challenging economic conditions, to meet the increasing demand for services and to provide the significant additional capacity that will be demanded for mobile broadband. This investment is in the form of additional network nodes, fibre and microwave backhaul and new core network infrastructure. 3 Ovum analysis © Ovum Consulting 2010. Unauthorised reproduction prohibited. The Benefit of the Wireless Telecommunications Industry to the Canadian Economy 3 OVUM REPORT 2 Introduction 2.1 Scope of the study This study was commissioned by the Canadian Wireless Telecommunications Association (CWTA) and reports on the beneficial impact that the Canadian wireless industry has had, and will continue to have, on the Canadian economy. CWTA is the authority on wireless issues, developments and trends in Canada. It represents cellular, PCS, messaging, mobile radio, fixed wireless and mobile satellite carriers as well as companies that develop and produce products and services for the industry. This independent report has been prepared to demonstrate that the mobile industry provides economic value to the wider economy in Canada well beyond the revenues which flow to the network operators and service providers. This wider value must be considered when the changes to the Canadian spectrum pricing policy framework are under review. The focus of the report is to quantify the economic impact of the industry in terms of the GDP, jobs and productivity gains for both the supply side and demand side of the economy. Figure 1: Principal economic impacts of the Canadian wireless industry on the Canadian Economy Supply SideThe Canadian Wireless Demand Side Communications Industry…… … increases Canadian …improves the GDP, employment and productivity of Canadian government revenues businesses through… … wireless … wireless …wireless … content and voice services data services broadband applications Source: Ovum © Ovum Consulting 2010. Unauthorised reproduction prohibited. The Benefit of the Wireless Telecommunications Industry to the Canadian Economy 4 OVUM REPORT The key objectives of the study are: to identify and demonstrate the supply side economic benefits of mobile services in Canada in terms of contribution to gross domestic product (GDP) and employment to identify the productivity gains that accrue from wireless services to assess the consumer surplus - the welfare and social benefits that mobile services provide for consumers, from a quantitative and qualitative perspective. Our approach is based on an economic model that was previously developed in other studies undertaken by Ovum, including several studies for the GSM Association and studies for the CTIA in the USA. The approach has been successfully applied to the German, UK, Indian, Bangladesh, USA and European Union