Canadian Wireless Reality Check: Why Our Wireless Market is Still Woefully Uncompetitive
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Sunday March 10, 2013
In the aftermath of the CRTC's hearing on a consumer wireless code and
the government's announcement of its plan for future spectrum auctions, a
debate has raged over the competitiveness and health of the Canadian
wireless market. Scotia Capital released a report last week titled "Canadian wireless myths and facts"
that argued the Canadian market is healthy and that "it is time for the
regulators to declare victory on the policies they adopted five years
ago". Meanwhile, Open Media issued a report titled Time for an Upgrade: Demanding Choice in Canada's Cell Phone Market
that places on the spotlight on many of the ongoing problems in the
market, with a particular focus on consumer complaints. The report
includes many recommendations for regulatory and policy reform.
certain impediments continue to diminish the effect of competitive forces in this industry. First, certain industry practices have tended to impose costs on consumers who wish to avail themselves of competitive alternatives. Second, consumers are not always provided with sufficient information in an adequately clear manner to make informed purchase decisions.
This post seeks to extend the debate and respond to some of Scotia Capital's claims. It identifies ten reasons why there is ample evidence that the Canadian wireless market remains woefully uncompetitive when compared with peer countries around the world with higher costs, price gouging, and restrictive terms.
While there many ways to calculate the competitiveness of a wireless market, the one that matters most to the carriers and business analysts is ARPU, the average revenue per user. By that standard, Canada is the most carrier-friendly market in the world as the carriers extract higher revenues from their users than any other country. The Scotia Capital report points to declining voice ARPU in Canada, claiming "this was largely due to competition and data/text substitution." The reality is that competition has little to do with declining voice ARPU as it is dropping around the world (Europe, U.S.) with changing usage patterns.
Moreover, it is total ARPU that matters, not voice ARPU. On that front, Scotia Capital notes that ARPU for Bell, Rogers, and Telus has been largely unchanged since the entry of the new wireless competitors (Bell is up slightly, Rogers and Telus down slightly). When compared to other countries, Canadian ARPU stacks up as the highest in the world. The CRTC's Communications Monitoring Report 2012 shows Canadian ARPU as tied with Japan as the highest among eight leading economies (Canada, US, UK, France, Germany, Italy, Japan, and Australia) (Figure 6.1.9). In other words, despite new entrants designed to spur greater competition, the incumbent providers are still enjoying world-leading ARPU, which is indicative of a market sorely lacking in strong competition.
2. Higher Consumer Prices than Peer Countries
Scotia Capital trumpets Canadian pricing, noting that a comparison of plans reveals that they are cheaper than those found in the U.S. Yet the comparison with the U.S. ignores the many other peer countries where Canadian consumer prices remain higher. In fact, the U.S. comparison is convenient since it stands as one of the only countries where Canadian prices compare favourably in some studies. The CRTC's Communications Monitoring Report 2012 provides data comparing wireless service pricing across three levels - basic users, average users, and premium users - in Canada, the U.S., UK, France, Australia, and Japan (Table 6.1.1).
The CRTC report finds that Canadian prices are on the higher end across each category. For basic users, Canada ties with the U.S. as the most expensive country (double the price of the UK). For average and premium users, Canadian prices were the third most expensive among the surveyed countries. While the U.S. was more expensive in both of those categories, Canada was far more expensive than the UK and Australia in every category and more expensive than France and Japan in two out of three categories.
Moreover, last August the U.S. Federal Communications Commission released its third annual International Broadband Data Report, which compares broadband services as required by a U.S. law. Canada ranked 26th out of 37 countries for the cost of smartphone data based on plans with usage limits. Canada did not even rank in a comparison of countries with no usage limits since no such plans could be found. In other words, concerns that Canadian prices are high is no myth.
3. Still Gouging, Part One: Enhanced 9-1-1 Costs
A clear indication of an uncompetitive market are fees to consumers that are relatively uniform across the major carriers but that bear no relationship to actual costs (in a competitive market, carriers might be expected to reduce those fees to closer to actual costs in order to lower prices and attract more consumers). For example, the incumbents all charge their subscribers 75 cents per month for enhanced 9-1-1 services.
But as WindMobile told to the CRTC during the consumer wireless hearings (para 10084), the actual cost for E-911 service is closer to ten cents. WindMobile does not include a separate fee for E-911 on its service, choosing instead to bear the cost. However, it pays a monthly tariff rate for E-911, which it told the CRTC was "around seven to 11 cents." Assuming the tariff rate more closely reflects actual cost, the 75 cent charge to consumer represents an enormous markup. Consider the costs to Canadian consumers: assuming an actual cost of 10 cents per month, the carriers generate 65 cents profit per subscriber per month. With roughly 25 million subscribers with the incumbent carriers, that is an extra $180 million in annual revenue after costs are covered.
4. Still Gouging, Part Two: High Roaming Costs
A 2011 OECD study captured national headlines after it found that Canadian carriers had the most expensive data roaming charges in the world. The study looked at the cost of using 1 MB in a single session for a traveler assuming they travel to all OECD countries. The result left Canadians paying the most at an average of $24.61. By comparison, Greek consumers paid $4.17 and Iceland customers paid $4.42. The OECD average was $9.48. The report included several other baskets of roaming data with Canada typically ranking among the most expensive (with the exception of 20 MB packages).
In the two years since that study, Canadian carriers have introduced various measures to address roaming costs, but the persistent stories of roaming sticker shock remain. For example, last week the CBC reported on a B.C. family that ran up $22,000 in charges for 12 hours of YouTube streaming while in Mexico. While critics of the story argued that Rogers never actually billed the full amount and noted that cheaper roaming packages were available, left unsaid was any explanation for how charging $30 for one MB as a pay-per-use charge is anything other than gouging. Indeed, other countries have taken action against high roaming fees with the European Union placing price caps on data roaming and opening the door to greater competition on roaming rates next year by separating domestic service from roaming service. The OECD has also recommended that countries take action, including the possibility of wholesale or retail price regulation.
5. Still Gouging, Part Three: Regulatory Recovery Fees
A long-time staple of the Canadian wireless market was the system access fee, which misleadingly suggested a fee for accessing the network that was mandated by the government or the CRTC. In fact, the fee was not a regulatory requirement, but rather an effort by the carriers to disguise the actual costs of their plans as it shifted nearly six dollars each month to a separate fee item. Some carriers dropped the system access fee in 2009, though a multi-billion dollar class action lawsuit continues to wind its way through the courts.
Rogers replaced the system access fee with a monthly government regulatory cost fee. These costs would be a cost of doing business in just about any other sector, but for Rogers it is a chance to charge for spectrum licensing, CRTC contributions, and local number portability. Other carriers have dropped the system access fee, but maintain an assortment of other fees for device setup, unlocking (see below for more), and rate plan changes.
6. Three Year Contracts Are Not Correlated to Smartphone Adoption
The Scotia Capital report touts the value of three-year contracts, arguing that "we think the three-year contract has actually led to low handset prices that helped smartphone penetration in Canada." Yet the evidence doesn't appear to support claims that there is a correlation between three year contracts and smartphone adoption. Comscore just released its 2013 Mobile Future in Focus report which indicates that Canada is ranked third for smartphone adoption, trailing Spain and the UK, but ahead of France, Italy, Germany, and Japan (no other countries are listed).
If Scotia Capital were right, one would expect three year contracts in other countries with leading smartphone adoption such as Spain and the UK. But Spanish incumbent carriers have actually reduced handset subsidies in recent months and new entrants have aggressively promoted two-year contracts with a better subsidy than that offered in Canada (the iPhone 5 is available for free from Yoigo, a new entrant, with only a €25 per month cost). Meanwhile, the UK banned three year contracts in 2011, making a two-year contract the longest permitted and requiring all carriers to offer one-year deals. With countries ahead of Canada in smartphone adoption rejecting the three-year contract, claims that it is needed to help smartphone adoption simply isn't supported by the experience elsewhere.
7. Mandatory Unlocking of Phones Does Not Delay Market Entry of New Devices
During the recent CRTC hearing on a consumer wireless code, Bell claimed that a rule mandating unlocked phones would delay entry of new devices into the Canadian market. The company told the CRTC (para 8041):
I don't know because I'm not Apple but we were discussing, for example, would Apple have allowed -- if Canada had a rule that mandated unlocking, would we be one of the first countries to get the latest iPhone? I don't think so. I think they would want to launch it in other countries. I'm not saying that it wouldn't come to Canada. So I don't want to overexaggerate to say they wouldn't ever. What I'm saying is if we had a rule like that, I think it's going to put Canadians getting iPhones, the next generation iPhone later if it was a mandated requirement.
Yet there is no evidence to suggest that Apple would delay entry into the Canadian market due to an unlock requirement. JF Mezei of Vaxination Informatique notes in his final submission to the CRTC:
The incumbents argued that Apple's iPhone would not be available as quickly in Canada if a requirement it be sold unlocked were made. For the iPhone5 launch, Hong Kong (which requires unlocked handsets) was part of the original list of locations (including Canada and USA) which got the iPhone5 on launch day (Sept 21). Italy and Finland [which also require unlocked handsets] got the iPhone a week later on the same date (Sept 28th) as the other western European countries.
Not only are the claims of delayed market entry unsubstantiated fear mongering, but the exorbitant fees for unlocking should be factored into the analysis. Bell charges $75 to unlock a device and admitted to the CRTC that "we absolutely could do it for less. We choose not." (para. 7916). That fee - effectively an additional $2 per month charge on a three year contract to unlock a phone - poses a significant additional cost for consumers and helps lock consumers into the high roaming fees discussed above.
8. Actual Canadian Mobile Speeds Are Slower than Peer Countries
Canadian wireless providers have trumpeted their new LTE networks, yet recent data from Akamai still indicates that Canadian mobile data speeds are far slower than many peer countries. The most recent Akamai State of the Internet report (2012, Q3) includes data on carriers around the world. There is data on one Canadian carrier, which badly trails both average and peak speeds when compared to China, Hong Kong, Singapore, Austria, Belgium, Czech Republic, France, Germany, Greece, Hungary, Ireland, Israel, Italy, Lithuania, Netherlands, Russia, Spain, UK, Australia, and New Zealand. The CRTC reported similar slow speeds (based on Akamai data) in its 2012 Communications Monitoring Report (figure 6.1.8), with Canadian mobile data speeds slower than all other countries in the comparison group.
9. Fewer Subscribers Per Capita in Canada Than Peer Countries
Canadians may love their cellphones, but there are far fewer subscribers in Canada on per capita basis than in other countries. The CRTC's 2012 Communications Monitoring Report reported that Canada had the lowest mobile subscription penetration among Canada, the U.S., UK, France, Germany, Italy, Japan, and Australia (Figure 6.1.5). While higher penetration rates (well over 100 subscriptions per 100 inhabitants) may be expected from European countries where roaming between countries in close proximity is widespread, Japan and Australia are islands and the U.S. market is not driven by roaming outside the country. Yet the U.S. (106 per 100), Japan (101 per 100), and Australia (130 per 100), all rank well ahead of Canada's 78 per 100. With prices high and contracts long, Canadians are often locked into a single provider and less likely to subscribe with more than one device.
10. Canadian Carriers are Inefficient Users of Spectrum
The incumbent carriers continue to claim that they need more spectrum, yet Canadian carriers have hoarded more spectrum than their counterparts in practically any other country. In 2011, the CTIA, the lead association for U.S. wireless companies, compared the amount of spectrum with the number of wireless subscribers to determine how many subscribers are served per MHz of spectrum allocated. In a comparison of ten leading countries, Canada ranked last in spectrum efficiency. While the U.S carriers used one MHz to nearly 740,000 subscribers, the Canadian rate was 90,992 subscribers per MHz. The Canadian market was the smallest of the 10 countries (which would reduce the number of subscribers per MHz), but the data suggests that Canadian carriers could do far more to maximize current spectrum holdings and reduce their costs in the process.
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Sunday March 10, 2013