ISED arm twists itself into knots trying to give MVNO its stamp of approval, but this could be a good compromise
IF I’M RUNNING ONE of Canada’s existing wireless companies, I’m relieved after reading the Competition Bureau’s most recent submission to the CRTC’s Wireless Policy Review.
However, if I’m hoping to launch a new mobile virtual network operator once the CRTC updates said policy, I might be crying into my beer a little.
After a summer of regulatory back-and-forth where the Bureau successfully fought hard for access to confidential information that only the companies themselves and CRTC staff would normally ever see, executives with Canadian wireless companies have since been sweating what the Bureau might deduce, and slammed the very idea of mandated MVNO access every chance they got.
After having a five days now to digest the Bureau’s 88-page report and read the 104-page economic analysis submitted by Matrix Economics’ Dr. Tasneem Chipty, it would seem most of that worry was for naught.
THE VERY GOOD REASON Canadian carriers were so nervous about what the Bureau was going to say to the CRTC, is that while the Commission is an arm’s-length agency which sets policy, the Competition Bureau is directly a part of the federal government under Industry Canada (currently called Innovation, Science and Economic Development but it’s apparently being renamed again. Sheesh).
Carriers, and others, have come to believe the now rather proactive Bureau speaks directly for the Liberal government. Some think this activism by the Bureau is unnecessary, unwanted and beyond its purview – that it should stick to adjudicating competition problems brought before it and not acting out in the regulatory marketplace by suggesting policy outcomes to the Commission.
We say, bring on an active Bureau. It has econometric expertise that can help and if it really does speak for the politicians and bureaucracy, better to have it out in the open in public submissions to the CRTC than hidden in Ottawa-Gatineau backchannels where Regulators are left to decode couched public statements or listen for cocktail party whispers.
SPEAKING OF THAT SUBMISSION, it’s clear from reading it the Bureau desperately wants to see more and better competition in the Canadian wireless market. It declares that with 90% of the market nationally, the Big Three of Rogers, Bell and Telus have market power which needs to be curbed.
In certain regions of the country, says the submission, competition is strong. It’s mostly in urban areas, but competitors are forcing the Big Three to react in ways which are benefiting Canadian wireless customers. It would seem the government’s policy of a fourth facilities-based carrier in each region of the country is lowering many monthly bills (the Matrix report uses average revenue per user [ARPU] in its analysis and not retail pricing), inducing better data plans and spurring more data consumption.
In short, the Bureau finds having regional rivals competing hard and building their own networks, especially Freedom and Vidéotron, has been positive for Canadians. It also says upsetting that applecart now by mandating access for anybody who comes along proposing to be MVNO would be a bad idea for those regional players and Canadians in general.
In shorter, the Bureau seems to be saying: “Give us more Freedom and Videotron.”
Earlier this week, we broke down the its official submission and set aside the Matrix report, since it was so heavily redacted anyway (see an example at right).
Now, after reading what is a thorough report featuring a few things we had to look up (like the word heteroskedasticity, for example), what Chipty seems to be proposing is for regional operators like Freedom, Videotron, Eastlink and others to gain mandated MVNO access – but not likely anyone else.
Her report mirrors in some ways what Rogers, for example, said it could live with in its own most recent submission, if the CRTC decided to go that way. Rogers said any mandated MVNO would have to be time-limited. The Matrix report says the same (five years). Rogers said any MVNO would have build out its own networks. The Matrix report says that, too.
In fact, Chipty even said there should be significant fines for any company which gains MVNO access and then doesn’t build out its own facilities as promised.
So, why did her analysis go this way? It’s in the numbers, none of which we can see of course, but the Matrix report also says just what both Shaw, Videotron and Eastlink insist in their own CRTC submissions. To paraphrase: “We’ve invested billions in our networks, competition is taking hold and any mandated MVNO access for newcomers will just hurt us and the competition we’re bringing.”
“Increasing regional competitor penetration to 5.5 percent, in all areas of Canada where it was below 5.5 percent at the end of 2018, would generate annual consumer benefits of about $526 million for customers of the Big 3 who live in these areas.” – Competition Bureau Matrix Report
Dr. Chipty writes any regional competitor which has captured from 5.5% to 20% of a given market – and she measured based on Census Metropolitan Areas (CMAs) and not provinces, which are too big to measure properly – brings prices down, boosts data buckets and promotes wireless data usage by Canadians with no impact on network quality.
In the regions where there is no strong regional competitor with at least 5.5% of the market? “Rogers and Bell, and by extension Telus, tend to charge supracompetitive prices,” she says. Meaning – much higher. Chipty had to repeatedly say “by extension Telus” in the report because the company did not provide enough of the confidential data requested.
“Where the regional provider has achieved penetration above 5.5 percent, this competition places significant downward pressure on Rogers’ and Bell’s plan limit-adjusted prices,” reads the Matrix report. In areas where there is a regional provider – and for this report Chipty examined Timmins, Ont., and Eastlink – doesn’t yet have 5.5% of the market, there was no effect on pricing among the national operators.
The benefits of continuing with facilities-based competition and mandating MVNOs based on that principle so regional providers gain strength and grow beyond their current footprints can bring hundreds of millions of dollars of savings, he estimates.
“There could be greater benefits still for wireless service customers in the rest of Canada, outside of the CMAs and… Timmins. Increasing regional competitor penetration to 5.5 percent, in all areas of Canada where it was below 5.5 percent at the end of 2018, would generate annual consumer benefits of about $526 million for customers of the Big 3 who live in these areas. Actual benefits could be greater still because the increased competition would extend to consumers other than those of the Big 3.”
Fully mandating MVNOs for companies with no facilities would have the opposite effect the federal government says it’s looking for, continues the Matrix report, since such a move would surely cause the likes of Shaw Communications-owned Freedom to pull back on investments. Shaw CEO Brad Shaw has said his company has already pared back spending on wireless because of the uncertainty.
“If a policy were to slow Freedom’s anticipated subscriber growth by 25 percent, that policy might generate annual consumer harm of about $234 million.” – Matrix
“A simple welfare calculation shows that if an MVNO policy were to cause a regional competitor like Freedom to engage in less investment and thus slow its expansion, the policy could generate consumer harm. For example, if a policy were to slow Freedom’s anticipated subscriber growth by 25 percent, that policy might generate annual consumer harm of about $234 million.”
Any MVNO mandate, continues the Matrix report, must be “viewed as a mechanism to help promote facilities-based entry and expansion.”
Which means the Competition Bureau’s expert report says yes, mandate MVNOs, but only to those companies who already run networks so they can expand and bring competition to areas beside where they operate. For example, Freedom could use a mandated MVNO order to provide service in Ontario between London and Windsor, two cities where it has its own network, but nothing on Highway 401 in between, and then over five years build out its facilities in that corridor, assuming it purchased spectrum there.
“This kind of policy would lower the barriers for regional providers to enter and expand into new geographies, including those directly adjacent to their core market. For example… an existing regional wireless service provider that has historically focused on urban markets may be incented to invest in infrastructure in areas adjacent to where it already operates,” reads the Matrix report.
“At the same time, this kind of policy would protect incumbents’ investment incentives because: (a) the mandated access would be limited in duration; and (b) the incumbent would be competitively disadvantaged if it does not invest in infrastructure itself by the end of the finite access period because it would likely face increased competition from the newly created or expanded facilities-based regional competitor.”
CHIPTY POINTED TO FREEDOM’S INTRODUCTION of its Big Gig (10 GB of data for $50/month) in the fall of 2017 as the major turning point for the wireless industry in Canada. It actually forced the Big Three to respond. “This promotional price was in stark contrast to the Big 3’s non-promotional price at the time… in Ontario, the Big 3 were charging $110/month for a 9 GB data plan,” he writes.
The data, again which we can’t see, “shows that Freedom was successful in acquiring subscribers from each of the Big 3 following the introduction of its Big Gig plan,” and “each of the Big 3 lost increasing percentages of subscribers beginning in 2017,” reads the report.
No wonder the Big Three finally reset retail pricing, with unlimited data, this summer.
If Eastlink’s penetration level in Timmins were to rise, to a level which was redacted, the Big Three would have to respond there with lower prices and better data offerings in the city of 41,000, which would “amount to an aggregate savings of about $195 thousand per month,” reads the report.
“An MVNO mandate should be viewed as a mechanism to help promote facilities-based entry.” – Matrix
All of this analysis, writes Chipty, “demonstrate that to achieve meaningful economic benefits, the new mandate would have to promote the creation of competitors that achieve the scale of the current mid-sized facilities-based providers. As such to succeed, an MVNO mandate should be viewed as a mechanism to help promote facilities-based entry. Thus, the new mandate would have to be strong enough either to create a new facilities-based provider with sufficient scale (e.g., penetration of about 5.5 percent or more) or to help an existing facilities-based provider grow to that scale in areas it currently does not serve.”
Oh, by the way, he added, be aware that 5G and the investment needed there is coming fast. Mandating MVNO access could reduce the network owner-operators’ incentive to invest in infrastructure “by reducing the net expected returns of its prospective infrastructure investments. This kind of erosion of investment incentives would be particularly harmful on the eve of 5G, where incumbents are poised to make significant infrastructure investments.”
THE CRUCIAL WILD CARD in all of this of course is, what will “facilities” mean going forward? ISED Minister Navdeep Bains offered up a much looser definition of how facilities could be defined when we interviewed him back in June and a new definition could well be the axis upon which the February public hearing spins.
BUT…
But what if one of the major carriers, along with one of the regional providers finally decide to read the blatant writing on the wall and to accept the fact this government wants to at least be seen to be delivering more wireless competition and lower prices for Canadians. What if they took that to heart and completely flipped the narrative, coming to an MVNO agreement before the hearing.
What if Rogers and Freedom, for example, signed an MVNO deal to expand Freedom’s network down the 401 in Southwestern Ontario, or Rogers could do the same with Vidéotron’s at the other end of the 401 to Cornwall and Kingston, with a contract saying the smaller carrier will build their own network in those regions sometime within five years?
Then, they’d even get to set their own rates in a commercial negotiation, something everyone (including the Bureau) says is more desirable than having the CRTC set them.
If that happened, maybe we wouldn’t have to trek to Gatineau in February at all.
CORRECTION: In a spectacular bit of stupidity, in the first iteration of this column we mistakenly assumed Dr. Chipty was a man. She is not. We apologize to her and Matrix and the Competiion Bureau for that error and will strive to never make such a dumb mistake again. We thank one of our eagle-eyed readers for pointing this out to us.
