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Canadian wireless: when good profits go bad

24 Jul
The economy versus the wireless industry?

The economy versus the wireless industry or the government versus the wireless industry?

In yesterday’s post, I stressed that only two numbers matter in the debate over whether Canada’s wireless market is competitive enough: monthly average revenue per user (ARPU) and earnings before interest, taxes, depreciation and amortization (EBITDA), otherwise known as profit. In both measures, Canada is a leader – number one in the world in ARPU and number three among developed countries in EBITDA, with the first figure leading to the second.

The intention of that post was to address some of the claims Telus has recently been making, so I decided to hold off on the actual philosophical discussion about what those numbers actually mean until today.

So Canadian wireless carriers are making profits. Surely there’s nothing wrong with that, right? Of course there isn’t. Canada is a capitalist country where publicly owned corporations have a duty to maximize returns for shareholders. Not only that, profits are also naturally better than losses because it means companies are less likely to cut jobs and are more likely to pay more taxes and invest in new innovation and infrastructure. That certainly appears to be happening in Canadian wireless.

But there is a difference between good profits and bad profits. The old basic human rights maxim of “your freedom to swing your fist ends at your neighbour’s nose” also applies to businesses, where the freedom to earn profits ends when someone else unnecessarily or unfairly suffers.

The unfair suffering is happening in the realm of mobile penetration, an industry term for the percentage of the population that has a cellphone. According to the latest Bank of America Merrill Lynch Global Wireless Matrix, Canada’s penetration level is 79 per cent, or dead last in the developed world and actually closer to where developing countries such as Iraq and Nigeria are.

Sure, those countries barely have landlines, but among developed peers Canada is the only one that has yet to surpass 100-per-cent penetration. Part of that phenomenon, particularly in Europe, is the result of some people carrying two service subscriptions to take advantage of better roaming rates from different service providers. But part of it also represents how many people in a given country are using multiple wireless-connected devices, which includes not just phones but also tablets and laptop sticks. That is certainly the explanation in the United States, the most similarly structured market to Canada’s, where penetration is a full 25 percentage points higher.

Simply put, the cheaper that mobile services are, the more devices people connect to networks. That’s a good thing because it means people can connect in different ways, choosing whichever form factor makes sense for their desired task.

In Canada, where prices are high, people are connecting gingerly if at all, hence the country’s woeful penetration rate. Canada’s carriers have touted their high smartphone penetration rate – or the percentage of overall cellphone users who are in fact smartphone users – as well as high voice and data usage. These numbers do indeed compare well against other countries, but they’re not the proof of low prices they’re presented as. They are instead evidence that Canadians, once they experience the value of mobility, take to it no matter what the cost.

It’s the “taking to it” that’s the problem, and it’s where that swinging fist is hitting a lot of noses. High prices are keeping a good number of Canadians from either signing up for their first mobile phone, or from signing up for mobile tablet and laptop data plans on top of their smartphone subscriptions.

Plenty of studies have shown the big economic value of people using cellphones, and therefore the cost of this holding back. Back in 2007 – the last time there was a heated debate over prices – a study by Videotron found that Canada could have seen a five-per-cent increase (links to PDF) in gross domestic product, or $56 billion in economic activity, added between 2002 and 2006 had penetration growth been higher. Even under the most modest assessment, GDP would have grown by about $14 billion. That’s between $3.5 billion and $14 billion a year.

Those aren’t just numbers – they represent real new jobs, businesses, corporate cost savings, innovations, opportunities and productivity that didn’t happen. That’s forward growth that was lost, but at least the shareholders of wireless companies got their dividends. Ouch, those punches really hurt.

Corporations, whether they admit to it or not, don’t just have responsibilities to their shareholders, they’re also partners in a social contract with their respective governments and therefore the public. Companies making profits is good, but when they make big profits, it’s either because they’re throttling their competitors or it’s because someone else is hurting, which is a violation of that contract.

If the wireless market was indeed as competitive as the industry says it is, there would have to be some losers, other than poorly funded startups who didn’t have access to proper investment until it was too late. Industry profits, protected from foreign competition, were swimming along well before any of those startups came along. Every player was winning and none were losing. Clearly the loser was penetration and the economic value that goes with it.

When that happens, governments have a responsibility to their shareholders – the voters – to find out what’s going on, and if necessary, step in.

This happens all the time. When Google makes a lot of money, privacy and anti-trust regulators wade in to see if the public’s rights are being trampled on. When Apple makes a lot of money, federal prosecutors take it to court for price fixing. When telecom companies make a lot of money, they get split up or governments build their own networks.

There is a certain price relatively involved. Other countries have cheaper wireless rates than Canada, but they have higher food or gas prices, so it all evens out in the end, right? Perhaps, but it’s the responsibility of those governments to figure out what’s going wrong with their respective social contracts and the providers of those respective goods and services. Canada, meanwhile, must deal with its own issues.

In tackling the wireless industry, the Harper government – a staunch supporter of good corporatism if there is one to be found in Canadian politics – is actually doing exactly what it should be doing. There’s no doubt that wireless companies are giving back to the country in the form of jobs, taxes and investment, but there’s also a solid case that they’re taking a lot away.

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4 Comments

Posted by on July 24, 2013 in government, mobile, telecommunications

 

4 responses to “Canadian wireless: when good profits go bad

  1. Marc Venot

    July 24, 2013 at 12:38 am

    Now that you have done a snapshot of the actual situation and explained why Canada can endure those prices, it would be interesting that you look at the close future, in particular with the advent of payment by those smartphones.

     
  2. jvanl

    July 24, 2013 at 3:33 am

    Thank you for offering this courageous and timely commentary.

    Now if our incumbents actually cared about social responsibility, we might start getting somewhere.

    I hope you’ve made a difference here.

     
  3. Ry

    July 24, 2013 at 8:44 am

    “High prices are keeping a good number of Canadians from either signing up for their first mobile phone, or from signing up for mobile tablet and laptop data plans on top of their smartphone subscriptions.”

    Or, signup for the highest plan they can afford on a budget, and then be too afraid to use their phone. I know many people in this boat. Paying their limit of 35-45 dollars and basically rarely use it due to fear of overages.

     
  4. F__k you, pay me!

    July 24, 2013 at 10:20 am

    I recently dumped Rogers because they let the service in my area degrade to the point of being unusable. I used to be able to tether my computer to my phone when my cable Internet went out. That became impossible when I was getting 0.4 Mbps down & 0.07 up. So not much motivation for me to add a tablet or stick on a cellular plan.

    In 2009, Rogers sold me 6 GB/month for $30, or $5/GB. You know that’s profitable for them. Here we are 4 years later when data pricing is supposed to be plummeting and I’ve switched to Telus where I’m paying $25/500 MB or $50/GB. Telus’s 6 GB plan is $65.

    In addition, that Rogers data plan came with 3-year handcuffs. Why? There was no upfront capital subsidy to be paid off. It was just their way of saying, “We’re giving you such a good deal, why would you leave anyway? Fuhgeddabout it.”

    This is progress? This is reasonable profit? No, this is gouging.

     
 
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