Competition Bureau opening statement for the CRTC hearing on mobile wireless services

Speech

Remarks by Matthew Boswell, Commissioner of Competition
CRTC hearing on mobile wireless services
February 18, 2020
Gatineau, Quebec
(As prepared for delivery)

View the supporting presentation: (HTML) | (PPT, 4 MB)

Introduction

Good morning Chairperson Scott, Vice Chair Laizner, Commissioners, Commission staff and counsel. My name is Matthew Boswell and I am the Commissioner of Competition at the Competition Bureau of Canada.

Before I begin, let me introduce the members of our panel.  To my immediate right is Laura Sonley, a Senior Competition Law Officer in the Competition Promotion Branch who leads the Bureau team in this Proceeding. To her right is Dr. Tasneem Chipty of Matrix Economics; Dr. Chipty is the economic expert the Bureau retained in this Proceeding.  To her right is Derek Leschinsky, legal counsel for the Competition Bureau.  Finally, to my left is Anthony Durocher, Deputy Commissioner of Competition who leads the Bureau’s Competition Promotion Branch.

Overview

This Proceeding involves a complex industry, and a complex set of issues, analyzed and interpreted by a group of stakeholders with highly divergent perspectives. While most stakeholders agree that the benefits of competition in this industry, such as lower wireless prices, more choice and high-quality networks, improve the welfare of Canadians, there is little consensus on just about anything else.

An evidence-based assessment

This is why the Competition Bureau has placed such importance on our participation in this Proceeding. Evidence and impartiality is needed to make sense of this complexity, and this multiplicity of views. As an independent agency acting in the public interest, the Bureau is mandated to protect and promote competition in Canada. The recommendations we have made in this Proceeding are based on the evidence we have reviewed and analyzed.  As you set out in your Notice of Consultation, your focus in this Proceeding is to ensure that your mobile wireless service regulatory framework facilitates sustainable competition that provides reasonable prices and innovative services, as well as continued investment in high-quality mobile wireless networks in all regions of the country.  In line with your focus and based on our work, we have proposed what we believe is the most promising path forward to drive effective, long-term, sustainable competition in this industry.

We are grateful to be here today to share our perspective and findings to assist you in considering these important issues in the wireless industry.

Of course, there are other issues in this Proceeding that are beyond our mandate and expertise. Our submissions and the views expressed today focus on what we do, competition.

Our aim this morning is to explain the basis for our recommendation that you adopt a facilities-based MVNO model to drive competition. In order to do so, I will first describe two key findings of the extensive analysis undertaken by the Bureau and Dr. Chipty that underpin this recommendation:

  • First, Bell, Rogers and Telus, or the Big 3, exercise market power in many areas across Canada.
  • Second, regional facilities-based wireless disruptors drive significant price competition where they operate by challenging the Big 3’s market power.

Bell, Rogers and Telus possess market power

Our analysis began with a foundational question – is there a competition problem in Canada’s wireless industry?  This question is key because, in our view, without a competition problem, there is no need for a regulatory solution. To test whether a market is sufficiently competitive, the CRTC assesses whether firms have market power. This test is also at the heart of what we, at the Bureau, do on a daily basis.   There are different indicators of market power, including the level of market concentration, the profitability of market participants, and the presence of high barriers to entry. By any measure, the wireless industry in Canada is highly concentrated, very profitable and it is extremely difficult to enter given, among other factors, the need for spectrum and capital-intensive network build-outs.

These indicators of market power are reinforced by Dr. Chipty’s in-depth quantitative analysis using wireless carrier data made available to her through this Proceeding.  Dr. Chipty tested for market power by assessing whether, and how, the Big 3 react to increased competition. Dr. Chipty consistently found that they significantly lower their prices when faced with increased competition from regional facilities-based wireless disruptors, such as Videotron and Freedom Mobile.  This solidified the Bureau and Dr. Chipty’s finding that the Big 3 possess market power in many markets across Canada.

Having concluded that there is a competition problem in the industry, we next assessed how it should be addressed, keeping in mind the need to balance increased competition with the incentive to invest in Canada’s high-quality networks.  Depending on a stakeholder’s viewpoint, the recommendations that have been put forward fall within a spectrum from broad MVNO access to no change to the status quo. The Bureau’s perspective is that regulators should only intervene when necessary and based on the best available evidence.  In the wireless industry, that would mean that facilities-based competition is the preferred solution, if it is working. Which brings us to the Bureau’s second key finding.

Facilities-based competitors are increasingly disrupting the competition landscape and delivering significantly lower prices

Facilities-based competition from wireless disruptors is creating a marketplace where Canadians can enjoy the benefits of competition, including lower prices and more choice.

The evidence we analyzed painted an encouraging picture of the significant progress made since the CRTC’s last wireless review five years ago.

The evidence demonstrates that Canadians are choosing facilities-based wireless disruptors more and more.  Five years ago, Videotron had around 10% of Quebec’s subscribers and Freedom, formerly Wind Mobile, was approaching 800,000 subscribers. Since then, both of those numbers have nearly doubled.

Further, the evidence demonstrates that the Big 3 are clearly responding to competition from facilities-based wireless disruptors.  Dr. Chipty estimates that Canadians pay on average 10% less for a GB of data where a wireless disruptor has achieved a 5.5% market share compared to areas without a wireless disruptor. This benefit increases to a 65% saving where a wireless disruptor has achieved 20% market share.

A facilities-based MVNO model is the most promising path forward

Simply put, in parts of Canada, competition from facilities-based wireless disruptors is increasingly delivering lower prices and more choice. Knowing this, the Bureau proposed a facilities-focused MVNO model aimed at enhancing and expanding the reach of these competitive benefits to more Canadians.

In contrast, an MVNO policy without a facilities focus raises several issues.

First, an MVNO would rely, largely, on both their competitor and the CRTC to set the bounds within which they can compete. The competing network operator’s incentive would be to raise the MVNO’s costs and use whatever levers are available to make them a less effective competitor. A broad MVNO policy may result in more entry than the Bureau’s facilities-focused MVNO model, but those entrants will likely be less effective, even in aggregate, because of their cost structure.  To illustrate the importance of cost structure, consider that the existing wholesale rates in the context of mandated roaming would need to decrease by up to 64% to offer comparable plans to those of Videotron, Sasktel and Freedom Mobile.

Second, the evidence of the success of broad mandated MVNO policies internationally is mixed, with some policies resulting in greater competition, but not others.

Finally, and perhaps most importantly, a broad MVNO policy could weaken or slow the growth and competitive impact of facilities-based wireless disruptors.  As mentioned earlier, Dr. Chipty found that Canadians begin to see meaningful benefits when facilities-based wireless disruptors achieve a scale of at least a 5.5% market share, and these benefits are substantially greater where a wireless disruptor reaches a 20% market share. In order to significantly improve pricing and choice for Canadians, these are the targets that we should aim for.  A broad mandated MVNO policy could work against this goal by forcing facilities-based wireless disruptors to compete against MVNOs for the same customers on an uneven playing field.  Namely, the MVNOs would have access to broad incumbent networks built up over decades, while facilities-based wireless disruptors would be limited to their own networks that are decades behind in build-out.  This places at risk the benefits that wireless disruptors are bringing to consumers. Dr. Chipty calculated that just for Freedom, if their forecasted growth were to slow by 25%, it could amount to a savings loss of around 234 million dollars annually due to unrealized price reductions for consumers.

For these reasons, to adopt a broad MVNO policy at this stage is a risky bet, when the evidence demonstrates that the entry and expansion of wireless disruptors will continue to pay off for Canadians.

Our recommendation aims to encourage and incentivize network expansion by the wireless disruptors through a time-limited regulatory intervention.

The facilities-focused MVNO model targets areas where consumers’ options are still limited to the Big 3 by promoting growth of the most effective form of competition – facilities-based competition. Wireless disruptors have been aggressively expanding the reach of their networks into these areas. For example, at the end of the period studied by Dr. Chipty, four areas remained without a regional competitor.  Freedom has since entered all four of those areas. Our policy seeks to preserve and enhance the investment incentives of wireless disruptors so more Canadians can benefit from the demonstrated competition that wireless disruptors bring.

The facilities-focused MVNO model we recommend is time limited with a view to a world where wireless disruptors are no longer reliant on their competitors. Wireless disruptors who operate their own network, like Videotron and Sasktel, have full control over their pricing, product offerings and network quality, allowing them to compete more aggressively given the greater latitude afforded by their cost structure. And, importantly, the Big 3 are incented to respond to this increased competition by improving their own offerings to win new customers and retain existing ones.

Some have argued the risk of decreased investment is overstated since the Bureau did not find concrete evidence to suggest investment decreased after broad mandated MVNO policies were implemented internationally. However, it is important to distinguish between the investment incentives of the Big 3, and the investment incentives of wireless disruptors. In many of the jurisdictions studied, a broad MVNO policy was introduced, in part, to incent entry by facilities-based carriers akin to the wireless disruptors in Canada. Our international findings regarding investment, therefore, may provide some indication that the investment incentives of the Big 3 are unlikely to be impacted by a broad MVNO policy but do not provide much insight into the impact on the investment incentives of facilities-based wireless disruptors.

Additional remedies to explore

Lastly, in terms of additional remedies, we believe certain measures aimed at lowering barriers to entry and expansion, and reducing switching costs for consumers could improve the level of competitive intensity in the industry. In this respect, we specifically note mandated seamless handoff, tower sharing and site access rules, roaming rates and device decoupling as issues warranting your consideration to enhance competition.

Conclusion

To conclude, the Bureau recommends a policy focused on encouraging and incentivizing facilities-based competition from the existing wireless disruptors.  We submit that the evidence in this Proceeding has shown facilities-based competition from these wireless disruptors is working, and this finding should guide the path forward.  As such, we recommend an MVNO policy that is facilities-focussed as opposed to a more speculative, new policy that is untested in the Canadian context and has had mixed results  in other jurisdictions. Moreover, we recommend this policy approach as a broad MVNO model could put the demonstrated competitive impact driven by the wireless disruptors at risk.

A broad MVNO model is a less targeted remedy that, without a defined path to independence from the Big 3, will mean continual monitoring and intervention by the CRTC.

Incentivizing and accelerating growth of facilities-based wireless disruptors is the most promising path forward. The facilities-focused MVNO model would enable wireless disruptors to operate as an MVNO in areas prior to ultimately serving customers with their own networks.  This is designed to encourage the expansion and growth of facilities-based wireless disruptors, something that we have seen drives competition and improves price and choice for Canadians.

Finally, a facilities-focused model would deliver more effective competition from independent, self-sustaining competitors and therefore is the most likely way to provide lower prices, greater choice and increased innovation for wireless customers for years to come.

We look forward to today’s discussion and greatly appreciate your time this morning.  We will, of course, endeavour to provide you with clear and concise answers to your questions.

Thank you, once again, for inviting the Bureau to participate in this Hearing.

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