Are Canadians Asking Too Much From Cellular Providers? Why More Competition Doesn’t Mean Lower Prices

Unsatisfied Customers

For a long time now, the Canadian Cellular market has been dominated by three large Canadian-owned corporations: Rogers Wireless, Bell Mobility, and Telus Mobility. Combined, they employ nearly 200,000 Canadians and over the last 60+ years, they have built and paid for a world-class, globally leading, technology infrastructure. Despite being the world’s second-largest country by land size, Canada has over 99% cellular coverage within its borders, something that many other countries cannot say for themselves.??

Yet despite these impressive accomplishments, there are many who are unsatisfied. Every few years, there are rumblings that our cellular market needs more competition in order to drive down prices for Canadians. The most common argument is that if we allow another carrier to operate in Canada, our prices will naturally fall due to increased competition. However, this points to a myopic understanding of the telecom cost structure and business model.?

When describing how a new cellular provider could benefit consumers, Canadians often turn to the United States for comparison (solely focused on price). This doesn’t really work though, as the US does not have the same population or geographical conditions. For example,? T-Mobile in the US has 110M wireless subscribers dispersed across 9.8M KM squared, or 10-12 subscribers per Square KM. In Canada Bell has 9M subscribers across 9.9 KM squared or >1 person per every Square KM.? Basic supply and demand begs the question, how could Bell and T-mobile possibly offer the same pricing on comparable pricing? Additionally, the capital requirements of standing up a Coast-Coast-Coast network with 5G quality from scratch are estimated at $2B-$4B CDN.?

Assuming that the next carrier into Canada would be an existing US carrier (as that would make the most sense), would you invest Billions into a project to launch into a new and over-regulated, socialist-leaning jurisdiction like Canada, whose BEST CASE outcome is less than 1 subscriber per square KM? Probably not, especially when a single state like California holds the same population as all of Canada, and you could reap the same or better ROI by working in that limited geography alone with negligible capital required.?

Maybe that is why Canada does not have a fourth large carrier - The math doesn't make sense for anyone other than cost-conscious consumers.?

What Went Wrong?

If Canada makes it so attractive for new entrants, why are we still not seeing competition growth? Ideology aside, if Canada (and Canadians)? wishes to subsidize a new Telco, then why doesn’t it work?? The answer is that Canadians don’t want to subsidize a new Telco — they just want one to exist.? So what does the Canadian Government do? They mandate that existing Telco’s subsidize the new entrants! Yep, that's right - existing publicly traded companies are paying for their own competition!

The notion that companies fund their own competition would be absurd in any other industry, yet every few years the Federal Government in Canada mandates that incumbent carriers allocate spectrum and capacity for new entrants, giving these entrants access to network assets at below-market rates for at least 5 years. The idea is to provide time for a new entrant to establish a presence and develop its own network assets off its own revenues, yet despite several new entrants hitting the market over the last few years, often with the support of major global Telcos, none have seen any sustained success, and none have put up a network to speak of.?

There is a simple reason for this: the Canadian market isn’t set up for larger amortized networks. The harsh reality is that Canadians are clustered in a handful of cities across this huge country, and Canadians travel.? So they demand full service from coast to coast to coast. While several of the new entrants had solid products to offer, they could not generate enough revenue to sustain anywhere near the capital investment required to stand up their own networks.?

Even if they could though, this wouldn’t bring in the lower prices that consumers desperately want. A reduction in consumer prices with no reduction in service levels or quality based on increased competition is premised on the notion that there is enough net income within the three largest existing carriers to drive three things:?

1. Lower consumer prices,?
2. Continue to fund the operations and expectations of shareholders,
3. Continue to invest in technology upgrades

Ask any Canadian telecom executive, and they will happily explain that there simply aren't the revenues and margins that some believe are there.?

Shareholder Value?

Even if a hypothetical fourth carrier was established with a functional and comparable network and could somehow offer cheaper prices than the competition, the results wouldn’t be as positive as some would like to believe. If the fourth carrier were to claim a sizable chunk of the customer base, the incumbent carriers would lose a material piece of their operating budgets, driving service level reductions and capital investment slowdown. For example, if Telus loses 10% of its base, the revenue lost is over $100M per year. This is not factoring in the cost of share price volatility, or revenue lost with a price drop. In a situation like this, the company would have little reason to continue growing or innovating, as it would likely need to focus on revenue maximization to keep shareholders happy.

The reality is that consumers don’t want to give up the benefits that they have with existing cellular coverage, they just want lower prices. But even if a viable fourth carrier were to emerge, it would not bring down prices, or if it did, it would come at the expense of service levels or availability. Despite this, we hear constant arguments that we need more carriers, with the government more than happy to whip up support. We cannot have government regulation overburdening these private companies and then insist that they happily subsidize their competition, especially when the said competition has never been able to stand on its own.?

While the desire for lower prices is understandable, vilifying existing cellular carriers that have poured Billions into this country and employed hundreds of thousands of people is inaccurate and dishonest. With little in terms of funding support, these companies have built some of the most advanced mobile infrastructure in the world, with a higher standard of quality and availability than most of the world. Canadians demand the best service, so they cannot be surprised when that comes with a cost.