One of the most interesting questions in the Great Wireless Debate of ’13 is whether Verizon’s entry into Canada – if it actually happens – will lead to lower cellphone prices. The government is insistent that it would, relying on simple economics for the argument: more competitors in any market means more choice for consumers, which leads to lower prices because some participants inevitably choose to use price as their differentiator.
That has been the case with the likes of Wind, Mobilicity and Public Mobile. The government credits its policies – which created those carriers – with helping to lower average cellphone bills by 20 per cent since 2008. The small companies have had a dual effect in that they have generally offered lower prices than Bell, Rogers and Telus, and they’ve also disciplined the Big Three in their own pricing.
The small guys are now in financial trouble, so wouldn’t it be nice if a well-resourced and stable force – also known as Verizon – could just slip into the new entrants’ shoes and continue the battle? So goes the government’s thinking.
But this is the wireless market we’re talking about, where simple logic doesn’t always apply. There are a zillion different makers of smartphones out there, for example, so why are such devices selling for $600 or $700 and inching up in price? I’ve covered that particular distortion before (it’s because phones aren’t sold directly to consumers, but rather through middle-men wireless carriers who artificially keep their prices up through “subsidies”).
There is the very real and distinct possibility that Verizon may choose not to play the role that has been carved out for it. Several observers and the Big Three have pointed this out, and they do have a point.
Verizon could go in one of two directions. The first, which government and consumers would be hoping for, is that the company comes at Canada with a truly competitive spirit. With a widespread public desire for better prices and a veritable raft of disadvantages to overcome, 10 of which I wrote about last week, Verizon could enjoy much success by taking up the mantle of consumer champion by giving people what they want – decent service at a decent price. Or at least better prices than the other guys.
Some observers say this would be out of character for the company, given that it’s a premium carrier with high prices in the United States. That’s another straw-man argument – the world is full of examples of companies acting as defensive incumbents in one market and as disruptive challengers in others. It’s a phenomenon that can and often does make these companies look hypocritical, but it’s also a simple fact of business and competition. Anyone with half a brain understands that.
The other, less desirable possibility from the government and public’s perspective is that Verizon enters Canada as a co-operator rather than as a competitor. The Big Three could easily become the Big Four through mutual back-room deals to carve up the market. Verizon could eliminate its biggest disadvantage – a sub-par network – through roaming agreements with the Big Three. The quid pro quo would be that it doesn’t go too crazy with lower prices.
The company would most likely offer customers attractive North American-wide plans, but it could return that capability to its competitors too, again in exchange for other considerations such as Canada roaming or even media content. The result would be four more-or-less identical services at roughly the same prices, rather than three. Not exactly what anyone has in mind.
This still isn’t good news for the Big Three. Ceding a quarter of their $17 billion market to Verizon would cost each about $1.4 billion revenue a year. That’s a lot, but it could be worse if everyone is actually engaged in fierce competition. Either way, it’s clear why they’re fighting like hell to keep the U.S. company out.
The problem with Verizon is that, unlike Wind and the other small players, it has the luxury of time and money. It can sit back and suffer losses for years if the end result is a quarter of a richer pie. For smaller new entrants, it’s do or die – they need to get customers fast because they have few if any other sources of income to make up for all that hefty network and spectrum investment. They can’t afford to be anything but disruptive.
The government would be very displeased with Verizon if, after receiving special considerations in exchange for entering Canada, the company came in as a co-operator rather than as a competitor. But realistically, so what? It’s not like the government could renege on selling spectrum licenses to the company.
If lower prices are truly what the government is after, it may need another lever to guarantee them. As it stands, the Conservatives may end going through a lot of trouble only to end up with egg on their figurative faces. Consumers, meanwhile, could get stuck with the status quo.
What are those possible levers? Short of outright price regulation, I don’t know, and with the deadline to apply for the upcoming spectrum auction only weeks away, it’s likely way too late to introduce any.
That Crown wireless corporation idea is starting to look more and more appealing, isn’t it?