This paper looks at the Canadian wireless marketplace and explores the impact that the new competitors have had on market dynamics. Our conclusion? They have made a significant difference. We also conclude, however, that the work of government is not yet done. The competitive spark is not yet robust, and it needs to be, to survive the attempts by more established interests to extinguish the challenges and return to the grand old days of oligopoly.

We suggest that Canada's government can take heart - marketplace framework adjustments are being made by other governments too, in search for better models and greater consumer benefit.

No matter the geography, no matter the industry, governments today are taking a more active role than before in creating equitable markets to serve the public's interest. Telecom markets, for which the barriers of entry have traditionally been notoriously high, have not been spared. The actions taken in this sector by the governments of the US, UK, Australia, and France are but a few examples of this post-2008 paradigm shift. These governments have been taking active measures to improve the competitiveness of their wireless sector. What kind of active measures? The right kind, helping with the market design, but not imposing control.

The UK was courageous enough to propose reallocation of the valuable sub-1GHz spectra from old and rich to new and poor. The US overcame its love affair with laissez-faire to stop the AT&T merger with T-Mobile. The French government taught its own global brand, Orange, a lesson, too, by setting spectrum aside exclusively for a new entrant. The Australians? They took 100 years or so of incumbency and turned it on its ear, transforming an old telecom framework into a competitive model suited to meet the challenges of coming generations.

The Canadian wireless communications marketplace has been dominated by three firms since the purchase by Telus of Clearnet at the beginning of the last decade. These three firms offer wireless services to customers across much of the country. The companies have done well. Shareholders are happy. Suppliers are happy. Only one group has reason to complain: customers. Their complaints centre around high prices and lack of choice. One result of consumer antipathy is a resistance to further adoption of wireless devices. Canadians are voting with their wallets.

When faced with this sorry state of affairs, the Canadian government's response was to revitalise the Canadian marketplace through the introduction of more competition by licensing new competitors. Competition was to bring more choice and lower prices, as well as enriching the wireless experience. Several new competitors were licensed, and four launched service: Wind at the end of 2009, and, in 2010, Mobilicity, Public Mobile and Videotron.

This paper will show that the new competitors have made a difference; that the rate of wireless adoption is up; and that usage is increasing while prices have fallen. These results are cause for celebration, and we congratulate Industry Canada for having the vision to recognise the issue and possessing the strength of purpose to carry out the needed framework adjustments.

We also make the case, however, that the government still has work to do. Two major issues are currently under consideration: new-competitor access to the 700MHz spectrum and the removal of foreign investment restrictions. The right decisions on both of these matters have the potential to strengthen the competitive market even further. We urge the government to act and we suggest that the time to do so is now. The time for study, for review, is over. Mr. Harper needs to show Canadians that he can stand up to established interests and that he can follow through.

Seaboard believes the evidence to be clear. Canada's government must strengthen competition by erasing foreign investment limits and providing potential challengers with access to new frequencies without the need to compete against incumbent carriers for scarce resources – electromagnetic or monetary – so that they can continue to mount their challenges to established interests. Canadians need the benefits that more competition can bring to the wireless marketplace.

SeaBoard Comment: Wireless is Working!
4Q 2011 Canadian Wireless Results Show Challengers Doing Well

Over the past week, a number of Canada's wireless carriers released their financial and operating results for the last fiscal quarter (which includes the busy Christmas season and iPhone 4S launch). The upshot? There is reason for Canadians to celebrate: Competition has arrived in the Canadian marketplace! The incumbent share of new wireless customers was only just ahead of the new entrant share. That's a significant shift for the new entrants. It shows that Canadians are responding to Canada's newest wireless companies despite the entrenched resistance (contracts, win-back plans, flanker brands) that the incumbents are putting up.

Exhibit 1
Results Roundup - New Subscribers (Net Adds)
Source: Company Reports, SeaBoard Group Estimates, 2012

{available for subscribers}

It is apparent that the new entrants into the wireless marketplace, namely Public Mobile, Wind, Mobilicity and Videotron, are winning the race for customers despite having a much smaller coverage footprint and a small fraction of the resources of the established oligopoly – namely, the triumvirate of Bell, Rogers and Telus. This is great news. It is great because it shows that Industry Canada's gamble in the last spectrum auction is paying off for Canadians. More competition is good for customers and good, too, for the country.

The latest financial reports provide even more evidence that a competitive shift is under way in the marketplace:

• Rogers ARPU (Average Revenue per User) is down 4% (Voice ARPU was down 12.1%) – a sea change from the time, four years ago, when incumbent ARPU went in only one direction: Up Up Up!
• Telus missed the analysts' estimates in its 4th quarter; it spent more on device subsidies to keep its customers from switching away to the newer competitors with better deals. Bell made the same point when it raised device subsidies.
• Bell's President and CEO, George Cope, told analysts earlier this week that he has seen "no let up in the competitive intensity in the Canadian wireless marketplace."
  

This new incumbent focus on "real" competition is a major change from the ersatz competition that Canadians have been subject to for the past decade. In an oligopolistic market, you only get the appearance of competition – the smoke of "we spend a lot of dollars in advertising" rather than actual competitive fire.

In our recent report, Long Term Evolutionary Challenge: Limiting Carrier Gluttony, we at SeaBoard Group argued that the benefits of the newly enhanced competition in Canada's wireless marketplace are leading to lower prices, better customer service, and better choice. We note that Canada's wireless incumbents, Bell, Rogers and Telus, are also pulling up their socks and lowering prices. We despaired, however, that the benefits of competition are not flowing to all Canadians but only to those in major marketplaces. What is needed, we argue, is for the Harper Government to follow through with its earlier initiative and provide access to the new spectrum that is about to be allocated to the industry in a way that the new upstart competitors have preferred access. We need to have this crucial block of spectrum set aside for the new competitors to enable them to bring their competitive spirit to more Canadians, as well as to improve their coverage in major centres.

In reaction to the SeaBoard report, the incumbent focus appears to have shifted to something they like to refer to as "sustainable competition." Their argument is that only the "national" incumbent companies have the scale and the heft to take advantage of the new spectrum, and they claim that they need the new frequencies to complete their own coverage.

Codswallop! The incumbent companies have held the adjacent frequencies, the 800 Mhz block, since the inception of their wireless companies a quarter-century ago. Have they built out all the areas of the country with that spectrum? No. There are still gaps; there are still holes. Let them use what they've already got before they come crying for more.
Some observers suggest, however, that the business models of Wind, of Mobilicity, of Public Mobile and even of Videotron are flawed; that no company can maintain an unsustainable business over time; that the challenges of building out a network are too great; that the pricing is too lean; and that the networks are too spotty for the companies to survive.

These are indeed challenges. From the comfort of hundred-year monopolies, Bell and Telus are clearly bemused over how companies without such a buttress can survive. From the perspective of Rogers, the monopoly cable provider in Canada's largest metropolitan area, this wringing of hands and focus on short-term return is clearly the result of corporate dementia. Have we forgotten the mantra of the company's founder, the late Ted Rogers, so quickly? Mr. Rogers famously eschewed a quest for profit in wireless for decades, focusing instead on building, strengthening and deepening his network. Where were the hand wringers then?

The key to the sustainability equation is investor ambition and horizons. Short-term investors aren't interested in building a national network to take on incumbent service providers with a century's head start. That takes mettle, it takes resolve, it takes patience – it demands a keen appreciation that the rewards will come, but it will be many years before those returns are generated. That was true for Bell; that was true for Telus; and it sums up Ted Rogers' approach to his wireless investment.

Canada's incumbent wireless providers appear to have forgotten about the shoulders of those they stood upon to get to their current position. Those shoulders, too, were burdened with debt. The only thing that kept the visions clear were the prospects of success – ambition if you will – and the ability to call on the cash flow of millions of customers of other federally licensed services.

One forgets, too, that the original wireless licenses – the licenses that kicked off cellular competition in Canada – were awarded by the Government. There was no auction. Her Majesty's treasury didn't reap hundreds of millions – or billions – in compensation for the spectral award. (SeaBoard estimates that the 1985 spectral award was worth more than $20B in 2012 dollars.) It was a hand-out to incumbent carriers, pure and simple – and it was definitely a hand-up. And these are the same incumbents that decry any further support to the new entrants.

Canada's wireless challengers are in building mode now. They are adding customers; they are adding facilities; they are adding employees; and they are driving competition in the marketplace.

The next steps for the Harper Government are clear. There are two. First, strengthen the competitive marketplace and strengthen the new-entrant challenge by allocating the new 700 MHz frequency spectrum to new entrants alone. Secondly, remove the restraints to foreign investment that significantly raise the cost of capital to new entrants. Let the competitive marketplace thrive!