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Canada’s wireless policy has lacked ambition

04 Apr
Is Industry Minister James Moore out of wireless tricks?

Is Industry Minister James Moore out of wireless tricks?

With the imminent unveiling on Friday of Canada’s long-overdue digital strategy – titled Digital Canada 150 – it’s perhaps timely to take a look at how the federal government has fared in its most visible – and often volatile – technology-oriented policy: wireless. Since the declaration in 2007 by then-Industry Minister Jim Prentice that the Canadian wireless market suffered from too high prices and too little choice, the Conservatives have effectively waged war on the country’s three big incumbents, Bell, Rogers and Telus.

Its main weapon in this battle was spectrum, or the public airwaves that all wireless carriers need in order to operate. In 2008, the government held a spectrum auction that blocked off 40 per cent of these airwaves for new companies, which ultimately gave rise to the likes of Wind, Mobilicity and Public Mobile, as well as new wireless operations from cable companies Videotron and Eastlink. Six years later, the cable companies are doing well, but the other three are either dead or on their way to the grave.

Consumers apparently reaped the benefits over that time, with one government-funded study finding that prices had generally gone down nearly 20 per cent thanks to all the new competition. Even if subscribers didn’t sign up with any of the new carriers, the very presence of these companies in the market forced the Big Three to moderate or lower their prices. But, with competition now ebbing, the status quo – and inevitably continual price hikes – is re-establishing itself once again. Here’s how things look, according to the latest figures from the Bank of America Merrill Lynch Global Wireless Matrix, otherwise known as the industry’s bible:

arpu-2014

In the third quarter of 2013, Canada was still the global leader in average revenue per user, or the size of the typical customer’s bill at the end of the month, at $58.43. That was about 11 per cent higher than the next country, the United States, with its $52.25 and a full third (33 per cent) more than the developed world average of $41.61.

Perhaps of more concern is the direction in which things are going. Only three countries – the United States, New Zealand and Canada – saw ARPU increases in that quarter, with every other country seeing decreases. Among developed countries, ARPU decreased an average of 3.2 per cent, yet in Canada it climbed slightly, by 0.4 per cent. With the recent price increases by the Big Three, it doesn’t take a rocket scientist to guess what the next round of results will show.

Things look equally good for Canadian wireless carriers on the profitability side:

profit-2014Canadian carriers ranked near the top of the list with earnings before interest, taxes, depreciation and amortization of 47.7 per cent. Only Italian and Portuguese carriers wrung more profit out of their operations, which is really amazing when their respectively tiny ARPUs of $17.54 and $14.42 are considered.

Canada’s carriers are also performing well in terms of growing that profit margin, with a year-over-year increase of 186 basis points (which are percentages of percentage points).

The carriers have in the past made pains to stress that high ARPU doesn’t necessarily equal high prices and therefore inordinate profits; that it’s more a measure of voluntary usage by customers. If so, things get pretty interesting when comparing like with like. According to the Wireless Matrix, wireless users in most English-speaking countries are paying just about the same for voice minutes – about 7 or 8 cents per – with the exception of the U.S., where calls are so cheap they don’t even register a cost. Voice prices are becoming irrelevant in such comparisons anyhow, given that unlimited minutes are now becoming the norm around the world. Now, data is key.

According to Cisco’s Virtual Networking Index, Canadians, Americans, Brits and Australians are all close to each other in terms of mobile data usage, which can be explained by the simple fact that much of the internet is in English and therefore geared towards them.

So, given that data usage is similar across similar countries, ARPU should be also be similar, right? If only that were the case: english-arpuLogic dictates only one possible conclusion: in Canada, high ARPU does indeed equal higher prices.

For further proof, we simply have to look back a few years to the pre-smartphone age. In the April, 2008 Global Wireless Matrix, things were much the same. Canada wasn’t actually the world leader in ARPU back then with its $60.83 – it was second to Ireland’s $62.97. Nevertheless, Canadian bills still far outstripped the rest of the world – they were about 14 per cent higher than the U.S. and 31 per cent higher than the developed world average.

At the time, the carriers’ explanation for the big bills was the same as it was now – big usage by customers, who indeed did account for a lot of minutes. But, then just as now, that rationale didn’t hold weight because Canada was one of the few countries to count (and charge for) customers’ incoming calls, which bloated the results in the carriers’ favour. Prior to the smartphone revolution and subsequent government and regulatory crackdowns, Canadian carriers made a good chunk of change on extraneous charges such as voice-mail and caller ID – free services in most countries – and the ever-popular and uniquely Canadian system access fee.

Those extra charges are mostly gone now thanks to additional competition and the likes of the CRTC’s Wireless Code, but they’ve been made up for with higher basic rates. The long, uninterrupted reign of Canadian carriers atop the ARPU throne attests to that. Their stock performances – BCE shares have gained 46 per cent since April 2007, Telus 33 per cent and Rogers 20 per cent, while the TSX Composite Index has increased a comparative 8 per cent – also reflects that to an extent.

So how has the government’s intervention in the market played out? Here’s a simple chart that pretty much summarizes it:

matrix-yearsIn comparison to the United States, the government’s efforts have done okay. ARPU has barely changed down south over the past six years while in Canada it has declined nearly 4 per cent. Profitability, meanwhile, has improved in the United States by nearly 7 per cent while in Canada it has only inched forward by a comparative 1.5 per cent. These numbers probably aren’t exact because they don’t compare the same quarters, but they do give a good general snapshot at how things have changed over time.

Compared to the rest of the world, however, the government’s efforts don’t look as good. Average monthly bills among developed nations have decreased nearly 6 per cent since 2007, or almost a third more than in Canada, although profitability has grown at a similar level to the U.S. So, Canada may be performing decently compared to its neighbour, but with similar problems – high prices and market concentration – happening down south, that’s not exactly a consoling thought.

When it comes right down to judging the government’s wireless efforts over the past six years, there’s the undeniable bottom line: Canadian bills were among the highest in the developed world then, and they still are now.

Last week, the government introduced its promised legislation on wholesale wireless roaming rates, or the fees that carriers charge each other for connecting their respective customers when they’re out of their own carrier’s coverage area. As telecom consultant Mark Goldberg has observed, the proposed changes to the Telecommunications Act appear to take a balanced approach that makes it cheaper for smaller carriers to connect to the networks of the Big Three, but not so cheap as to discourage them from building out their own networks. The government could have been more “aggressive” by demanding even lower roaming prices by the Big Three, but it chose not to go that route.

That pretty much sums up how things have played out over the past six years. As far as the consumer is concerned, the wireless situation has been slightly better in Canada than in the United States, but that’s not saying much. On a global level, developments in Canada have certainly been lacking in aggression and progressiveness.

Solving Canada’s wireless problem will indeed require aggressive or progressive policies – the splitting of carriers from their networks or the formation of a Crown wireless corporation are two ideas that are gaining currency with the public – but there’s no reason to believe the current government is even thinking about such options. Current Industry Minister James Moore doesn’t have any further apparent weapons to deploy in his government’s wireless “war,” which means that the lukewarm results of the past six years might be as good as it got for Canadians. And with the efforts that it did take now fizzling, things could actually get considerably worse.

It’s going to take more than just harsh words for wireless incumbents for Canada to truly blaze a new path forward as a digitally-focused economy. Will the government’s long-overdue digital strategy offer up more ineffectual platitudes or will it indeed contain aggressive and progressive plans? I’ll have a deep dive on it here next week.

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9 Comments

Posted by on April 4, 2014 in government, mobile

 

9 responses to “Canada’s wireless policy has lacked ambition

  1. FrankandErnest

    April 4, 2014 at 10:29 am

    I believe James Moore tried his best to do more for the people but his opponents were just to big and powerful and he had to pull his horns in. The battle doesn’t look good, but the war isn’t over. This analogy of wars and battles is a sad state of affairs, when providers and consumers should be striving to constantly come up with a better deal for each other in order to drive this digital economy forward into the future.

     
  2. Michael

    April 4, 2014 at 1:11 pm

    Interesting article, but comparing ARPU across different countries is largely meaningless, unless normalized for population, area of the country covered, average disposable incomes, service speeds (bandwidth), and consumption. Canada is an enormous country, with the second lowest popl’n density on the planet, but amongst the highest cellular usage rates. And Canadians are fortunate enough to be able to pay for downloading endless videos, watching sports on line, endless emails, etc. EBITDA is a more interesting indicator. However, even that doesn’t provide a clear comparison between countries, as other nations have different market values for stock in various wireless companies. For example, Canadian tech companies generally have lower stock valuations than similar US or foreign firms which results in Canadian firms needing higher EBITDAs to sustain stock values comparable to the US, and often must pay higher dividends if they want to ensure investors get similar returns, which requires greater revenues. So one needs to also look for other indicators, including comparative rates for similar packages normalized for national incomes (PPP). Which the independent reviews posted on the CRTC site seem to indicate that Canada is in the middle of the pack of advanced countries for mid and high-end usage packages. Not the cheapest, but not the most costly country either. (Just got to the CRTC site and search ‘Wall’, for the reports done by Wall Communications Inc.) The OECD has done similar multi-country reviews.

    Here in Canada, in addition to the very high cost of building / running a modern national network, (technically more advanced now than many other countries,) one also has to take into account the enormous cost of spectrum in this country compared to the US or other nations. Industry Canada is very proud of the huge amount of revenue the spectrum auctions produce for government — over $5 Billion for the 2008 and 2013 events combined, I believe. Some consumers see this as almost ‘just punishment’ for the carriers, but they don’t seem to understand that the carriers need to pass that cost through to we consumers, substantially pushing up the cost of service for each of us over the life of the licenses.

    To have the government ‘at war’ with one of the country’s major industries doesn’t help any of us. Competition is good, and needs to be encouraged, through sensible and predictable policy and regulation. But to have governments and the wireless carriers spending our money (as customers and as taxpayers,) on costly advertising campaigns isn’t helping anybody except the ad agencies, newspapers and TV stations carrying those ads. We need a more thoughtful and fact-based debate about how to achieve best customer value and price while supporting this important industry, whose shares are held by millions of Canadian through their pension funds and RRSP holdings. Peter Nowak’s article above is a good contribution, but doesn’t address many of the factors at play.

    (P.S. I do NOT work for any of the carriers, or their associated lobby groups, or for government, nor do any of my family. Nor do I own stock in any of them, unless perhaps through mutual funds, which invest in many companies.)

     
    • Joan McArthur

      April 8, 2014 at 2:14 pm

      Michael, if you don’t work for a Canadian telecom, etc, you certainly should.
      (And why not leave your last name on your messages?)

       
    • Peter Nowak

      April 9, 2014 at 11:42 am

      A) Comparing ARPU across different countries is entirely appropriate: besides being the size of the average customer’s bill, it’s the key measure investors use to determine carriers’ viability. By your logic, it is pointless to compare anything because there are too many variables at play.

      B) Population density is largely irrelevant. Canada has one of the most urbanized populations on the planet, which makes it cheaper and easier here to roll out services to the vast majority of the population (80%) than in many countries: http://wordsbynowak.com/2014/04/08/digital-strategy-4/

      C) Companies in other countries, whether tech or otherwise, also have lower stock valuations than their U.S. counterparts, yet their wireless carriers have lower ARPU and EBITDA.

      D) The OECD finds that pricing on both wired and wireless services is among the highest in the developed world across all service baskets: http://wordsbynowak.com/2014/04/08/digital-strategy-4/

      E) The government cites the Wall Report in Digital Canada 150: “Average wireless rates have decreased nearly 20%, but Canadians still pay some of the highest wireless rates in the developed world.”

      F) Spectrum is expensive everywhere. The UK raised more than $6 billion in an auction last year, or more than Canada despite being a much smaller country geographically. France’s auction in 2011 pulled in $4 billion. The U.S. auction of 700 MHz in 2008 cost carriers $19 billion.

      G) “War” is arguably a necessary state of affairs when the issue is lowering prices. Canadian carriers have demonstrated they will not do so voluntarily.

      H) Carriers’ strong results do indeed help out pension funds and RRSPs, but do these contributions equal a lifetime of over-payment to these companies for services?

       
      • Jeremy Hodder

        April 9, 2014 at 4:37 pm

        thank you for clearing that up peter! i had to admire “michael” using the age old argument that canadians will pay more so they just have to put up with getting gouged argument. like we haven’t heard that from all the corporations in or outside of this country. one would think michael was paid for those words. just because things are this way doesn’t make it acceptable to continue when everywhere else is progressing forward. canada is on the brink of being left behind on everything when we could be world leaders in tech.

         
      • Michael

        April 10, 2014 at 6:14 pm

        Peter;
        Very interesting to see the responses. If I may reply—-
        I agree that the government’s attempts to increase competition and force lower prices haven’t been a great success. What I was trying to point out (while apparently being assumed to be a ‘stooge’ or ‘hired gun’ for the carriers) was;
        1) I doubt that ARPU is the best measure, and while EBITDA gives a better picture, both need to be ‘normalized’ for whatever environment they are being used to portray, and we need to also develop other measures,
        2) There are likely other factors beyond the desire of the wireless carriers to maximize profits that account for our wireless costs being higher than a number of other countries that should also be considered, and
        3) I resent having my left pocket (as taxpayer) being used to fund government ads slamming the wireless carriers and right pocket (as a consumer) being used to fund corporate ads trying to rebut the government. This is an important industry that we need to better understand and better manage, through appropriate and predictable policy and regulations. Not pick school yard fights with.

        Regarding your specific points;
        a) I agree that ARPU is often used by investors to compare companies, but not countries. It is one thing to compare the ARPU of Rogers to Bell, but to compare ARPU aggregated across different countries can be misleading, and should be ‘normalized’ by taking into account purchasing power parity, etc. etc. (For example, to take an extreme — the ARPU in Egypt or Nigeria is about 1/10th North America, yet they have thriving cellular carriers.)

        b) As an engineer in IT/Telecom, I doubt very much that it is cheaper to build a network in Canada than in the UK, Sweden, etc. Your columns often have excellent data references, so if you have one that provides such cost (rather than only pop’ln density) comparisons, I’d be happy to ‘recant’. I have no inside access to their costs, but surely building huge towers across rural areas between major cities to handle a few hundred calls a day, and running fibre or microwave across the country, ain’t cheap. If it was, then why did the new entrants stop their build out with the major popl’n centres, which also left them relying on the big guys for roaming support.

        c) Yup — Just another factor in the mix, however. It appears to me that in this country where it appears to be much easier to attract investors to oil/gas or mineral exploration and extraction, technology companies need to be significantly profitable to sustain market valuations and dividends similar to what investors see in other countries. (Especially the US) Happy to see any studies that can confirm or deny this perception.

        d) I’m certainly not denying that we’re not a low cost economy in this, or many other fields. The OECD reports show us between 21st and 24th most expensive of 34 nations, depending on the service bundles. (See pages 219 – 226 at http://www.keepeek.com/Digital-Asset-Management/oecd/science-and-technology/oecd-communications-outlook-2013_comms_outlook-2013-en ) (This stuff is really pushing me to do my homework!) Not cheap, but a long way from the most costly. (Or even “–amongst the highest in the developed world —“. ??)

        e) It was your column that pushed me to check, as I’d heard mention of this ‘Wall Report’. So I found the Wall data on the CRTC site. The most recent (see section 4.3, and chart 4 at http://www.crtc.gc.ca/eng/publications/reports/rp130422.htm ) certainly identifies a 19% average price drop — but the words “—but Canadians still pay some of the highest wireless rates in the developed world.” appear to be from the ‘Digital Canada 150’ paper, not the Wall reviews, which appears to be purely data without the value judgements.

        f) Yes, spectrum is expensive in most places, but I believe you’ll find that until the 2008 US 700 MHz auction the amounts taken in were in the tens to low hundreds of Millions, not Billions. The $19B is truly an incredible ‘take’. But still only a bit more than half what Canadian carriers paid in the equivalent recent 700MHz auction here, when ‘normalized’ for population. I merely point out that we all pay, every day, for this extraordinary bonanza the government has taken in.

        g) Yes, we all want lower prices. (Who doesn’t!) But ‘wars’ are by nature destructive for both sides. Surely there’s a better way!

        h) A personal judgement call I guess — or a two year study for a PhD economist. I’m simply pointing out that making buckets of money does have its good side too, if you’re able to make an investment in one of these Big Three. (I haven’t.)

        Finally, in response to Jeremy — I’m not suggesting that it’s a good thing that Canadians pay more — far from it. I would suggest, however, that the fact that we can, along with our apparent preference to whine rather than switch, is a factor that allows for higher charges. Why, for example, did / do the new entrants Wind, Public Mobile and Mobilicity (the ‘Tiny Three’, if I may) find it impossible to attract enough customers to cover their costs? (Aside from obvious factors such as the ‘Big Three’ charging high roaming fees when subscribers leave the coverage of the Tiny Three.) I have Wind — they provide excellent service, good coverage, at considerably less cost. Yet they are the only survivor of the three and can only find 700K subscribers?? We’re voracious users in Canada, but apparently would rather whine than switch, continuing to pay the bills.

        Anyway — I’ve only recently been pointed to your work, so thanks for the opportunity to comment — both last week and today. And I repeat — I may well be mistaken in some points, but I’m no ‘stooge’ or paid hired gun for the carriers. Which reminds me — time I got back to my real work!

         
    • Dawn

      April 9, 2014 at 6:40 pm

      Definitely a stooge for the big 3.

       
  3. Ottawaboy

    April 7, 2014 at 3:03 pm

    The only figure that matters is average profit per customer.
    A figure most phone companies will guard with their lives, I have no idea where you got those figures from.

    but yeah , those phone companies are living high on the hog. Their profits could use a little more slashing.

    Such opinions , of course, are why they hide their profits as if their lives depended on it.

     
  4. Michael Elling (@Infostack)

    April 9, 2014 at 8:06 pm

    I brought Clearnet public in 1994. When Microcell introduced its 10 cent plan (400 minute bucket) in 1996 I did the seminal analysis that predicted it would be a huge boon for the wireless carriers. http://bit.ly/x3gWuK I was roundly criticized by CEOs and CTOs in the US and that I didn’t know what I was talking about. But it was George Cope who cut off all communications and dealings with me. He called me a traitor to Clearnet and the industry. Yup same guy who managed to (re)create the cozy du/oligopoly you’ll have up there. The problem is Canada never underwent a logical or vertical separation and you didn’t really attempt a horizontal separation so it was easy to (re)introduce monopoly pricing. Anyway, the US embraced the model, went to an extreme, did a whole bunch of other good and bad policy stuff, but at least we built the two major OS’ here.

     
 
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