The misguided mission to cut Canada’s cellphone rates

Price controls undermine investment, remove incentive for innovation and backfire for consumers

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Daniel DuarteThere’s a pervasive belief in Canada that wireless phone service prices are a ripoff. To suggest otherwise is heresy.

Countless commentaries provide fodder for this belief, and every few years a politician takes on the purported problem. In the mid-2010s, for example, Industry Minister James Moore supported the entry of Verizon, although the U.S.-based prospective competitor backed away.

Prime Minister Justin Trudeau promised in his 2019 election campaign to lower wireless prices. The big three telecom firms – Rogers, Bell and Telus – now have two years to lower mid-tier prices by 25 per cent or face regulatory action.

What sticker prices don’t tell

The big three do dominate the Canadian wireless market with a 90 per cent revenue share. However, the notion that Canada’s prices are an outlier relative to peer nations is not only false, it serves the overbearing regulatory arm of the federal government. Price controls undermine investment, remove incentive for innovation and backfire for consumers.

The perennial problem with headline-grabbing price comparisons is they’re superficial and overlook relevant considerations such as quality, consumer preferences, geography and investment for technological advances.

It may surprise Canadians to know that from 2008 to 2017, the prices for different wireless phone-service packages, adjusted for inflation, have decreased between six and 45 per cent. Why then have service bills increased?

The State of Competition in Canada’s Telecommunications Industry, authored by Martin Masse of the Montreal Economic Institute, explains that Canadians are simply choosing to purchase more and better services. These are, of course, pricier.

For instance, if basic and unlimited phone plans are both getting cheaper over time, but more people are buying the unlimited one, then the average bill can still increase. Canada ranks sixth in tablet and smartphone usage, meaning we’re among the largest data consumers in the world.

Canada’s geography also presents a challenge. Wireless providers must invest in massive infrastructure and incur high fixed costs to serve our large and sparse population. Tiny Luxembourg, for example, boasts some of the best wireless rates, but with 2,584 square km, its infrastructure costs are nothing like Canada’s, which cover a landmass of 9.84 million square km.

In fact, Canada ranks third in private telecom reinvestment as a percentage of revenue with an average of 22.7 per cent between 2005 and 2015 (far higher than the 15 per cent average for the 35 Organization for Economic Co-operation and Development countries). According to Bank of America Merrill Lynch data, Canadian telecom companies’ capital expenditure per wireless subscriber is $67.48, the highest among G7 countries.

New gadgets and devices that connect to the internet mean an ever-increasing demand for faster connections. Over the next couple of years, Canada’s wireless operators will invest some $26 billion in 5G infrastructure to accompany technological change.

Free riding is a cure worse than the disease

Navdeep Bains, Canada’s minister of innovation, science and economic development, has been pushing for mandatory access to infrastructure for mobile virtual network operators. 

These operators don’t own their networks but rather rent and resell existing networks. The federal government claims that forcing major companies to share their infrastructure with small virtual network operators will increase consumer choice, lower prices and increase competition.

Not surprisingly, the telecom companies are resisting free riders. Telus, for example, has said such a policy would lead it to cut $1 billion in spending, as well as 5,000 jobs.

Mandating virtual network operators access to private infrastructure at artificially low prices would almost certainly reduce consumers’ service bills in the short run. However, the unintended consequence of reducing the incentive to invest would to hinder 5G deployment across Canada and, in the long term, keep wireless prices higher than they otherwise would have been.

Talking points tend to pass unchallenged when they feed into a narrative the public wants to believe. The Globe and Mail echoes that narrative: “Report after report, year after year, has confirmed that cellphone services cost more in Canada than almost anywhere in the world.”

Our telecommunications industry is one of the few areas in Canada that appears healthy and functioning. Looking to the federal government to impose lower prices without consequences defies logic. Given the telecom industry’s vital role in preparing Canada for the new digital economy and the post-pandemic recovery, an ill-conceived, albeit popular, intervention could have devastating ramifications for the country’s competitiveness.

As Masse wrote in his report, “sustainably lower prices are the result of technological innovation, investment and entrepreneurship, not of regulatory intervention.”

Daniel Duarte is a research associate with the Frontier Centre for Public Policy. Caitlin Rose Morgante, a Boston University economics student, contributed to this article.

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frontier centre, wireless, price

The views, opinions and positions expressed by columnists and contributors are the author’s alone. They do not inherently or expressly reflect the views, opinions and/or positions of our publication.

Daniel Duarte

Daniel Duarte is Econ Americas’ Spanish and English editor. A journalist and university instructor, he studied philosophy at the National University of Asunción, Paraguay. He holds a certificate in English-Spanish translation from the University of Toronto, Canada

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