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Op-Ed by Robert Ghiz
Originally published on Cartt.ca on November 30^th, 2020

Canada’s regulators have long recognized that facilities-based competition is the best way to achieve the objectives of high-quality services, wide network coverage, and affordable prices. Favouring facilities-based competition has resulted in billions of dollars of private investment, building the fastest mobile wireless networks in the world. Even in rural areas Canada’s networks perform better than the overall networks in most other countries. This combination of quality and coverage, together with an intensely competitive mobile wireless market evidenced by a steady decline in prices, is why a recent report commissioned by the U.S. wireless industry association actually ranked Canada’s wireless offerings first for value among the G7 and Australia.

Looking ahead, the massive investments required to meet the increasing demand for wireless services, expand coverage to underserved communities, and introduce the next-generation of wireless services, 5G, to Canadians is a key reason not to deviate from policies that prefer facilities-based competition. Yet there remain those who advocate for a deviation from the policies that have produced these positive outcomes.

A recent example is the two-part opinion article by Internet Society of Canada chair Tim Denton that was published by Cartt.ca last week. In his article, Mr. Denton wrote a deeply flawed argument in support of regulators mandating mobile virtual network operators (MVNOs).

Throughout the article, a popular myth about MVNOs in Canada is perpetuated. Mr. Denton claims “We have to ask ourselves why Canada is so reluctant to allow MVNOs”. Let’s be as clear as possible, MVNOs are not only allowed in Canada, MVNOs exist in Canada.

He further claims “Countries as vast and sparsely populated as Australia have mandated MVNOs”. No, Australia has not mandated MVNOs. Nor has the U.S., which the author cites as having the largest number of MVNOs in the world. In fact, mandated MVNO network access has been used sparingly by regulators around the world and with uneven results.

In Europe, there is only one country that currently has an MVNO wholesale access obligation as a result of a finding of significant market power. That is Norway, which found that the mobile market was dominated by a single mobile carrier, Telenor. There have also been a small number of cases where some form of MVNO access was a condition to mergers between carriers. In these later cases the access obligations were voluntarily adopted and did not mandate access rates.

The market concentration levels that these cases were trying to address are not present in Canada, which has less concentration in the wireless market than most other countries in the developed world. While increasing market concentration is occurring in markets like the U.S., the reverse is occurring in Canada. The growth of regional facilities-based providers and increasing number of flanker brands continue to provide Canadians with increasing levels of competition and choice.

Nor is there conclusive evidence that MVNOs result in less market concentration or lower prices in the few countries where a mandated MVNO regime has been tried. During the CRTC’s recent mobile wireless industry review, the Competition Bureau’s expert report concluded the results of mandated MVNOs have been mixed with some countries experiencing increased competition while others did not. Where there was an in increase competition, other market events, such new facilities-based carrier entry and changes in the market share among existing mobile carriers was just as likely to be the reason.

The reality is that the number of MVNOs in a country reveals little about the health of its wireless retail market or its ability to generate the desired outcomes of quality, coverage and affordable prices. For example, the U.S. and Japan, ranked 1^st and 3^rd respectively in terms of the number of independent MVNOs in OECD countries are shown by most international price comparison studies to have higher average wireless service prices than countries with much fewer MVNOs.

In addition to not having the facts on their side, advocates of MVNOs also misrepresent the role of MVNOs in most countries. Except in rare cases, MVNOS are not competitors to mobile carriers, they are business partners. They do not come together by regulatory fiat, but as a result of identifying mutually beneficial opportunities. This happens when an MVNO is able to identify a niche market that is not being fully addressed by the mobile carrier and the carrier and MNVO think that the MVNO can target that market segment in a way that adds to the carrier’s network subscriber base and is profitable for both parties. This is worth repeating: the objective of an MVNO is not to lower prices, it is to generate profits for both itself and the underlying mobile carrier.

However, in many countries (including the U.S. and Australia) the markets targeted by mobile carriers are reaching saturation, and mobile carriers have turned their attention to these previously ignored niche markets. As a result, a number of carriers have acquired MVNOs or have launched (or are in the process of launching) their own flanker brands to address these markets. Had Mr. Denton followed the sources to his references to Wikipedia, he would have seen:

“MVNOs are disappearing because they have surpassed their MVNO role and have either consolidated, made network acquisitions, or been acquired by traditional operators who seeks to increase their market share.”

Because of Canada’s small population, Canada’s mobile carriers were ahead of the game and used the flanker brand strategy to address segments of the market that their counterparts in other countries might have ignored or left to MVNOs. As a result, when you look at the combined market share of independent MVNOs and flanker brands, as of 2018, Canada was ranked as the 4^th largest in the OECD countries, ahead of countries such as the U.S., Japan, Australia, Germany and Australia. In addition, Canada has regional facilities-based wireless providers whose combined market share is comparable to the market share of MVNOs in many countries, such as Australia.

While the alleged benefits of mandated MVNOs have not been proven, the harms are very real. Unfortunately, Mr. Denton downplays the negative impact on investment that an MVNO mandate would bring and also ignores the harm that would be inflicted on the real competition brought by the regional facilities-based carriers, such as Freedom Mobile, Videotron, Eastlink and others.

Most people will agree it is reasonable for investors to have an expectation for a financial return on their investments. When looking at expanding a network, service providers will examine whether the forecasted revenues provide an adequate return to justify the capital investment. Mandated MVNO access requires the mobile carrier to bear all of the potential downside risk of making a large investment in expanding or upgrading their network, but share any upside with MVNOs who have taken no such risk and made no network investment.

When forced to provide network access at less than arms-length negotiated rates, it is basic arithmetic to see that a reduction in that forecast of revenues will reduce the return on investment. PwC has estimated that the short-term impact of a broad MVNO mandate in Canada would be annual cuts of $5B and $3B in operating and capital expenditures respectively. The communities that would be disproportionately impacted by these cuts are those that are the hardest to serve and where the reduction in the return on investment make it no longer economic for private sector investment. As the Competition Bureau’s expert in the CRTC’s wireless review attested: “[t]his kind of erosion of investment incentives would be particularly harmful on the eve of 5G, where incumbents are poised to make significant infrastructure investments.”

A broad-based MVNO mandate would not only harm investment, it would disproportionately hurt the regional facilities-based carriers who have been credited with increasing the competitive intensity in the wireless market. According to the Competition Bureau, in order to have the same positive impact on competition as the regional carriers, an MVNO would have to achieve a 20% market share. A quick survey of MVNO markets around the world shows that such an achievement is highly unlikely, if not impossible. To the extent an MVNO is able to gain market share, the Competition Bureau anticipates that it will do so at the cost of the regional carriers as they are more likely to share the same target market. It is for these reasons that the Competition Bureau concluded “the risks associated with [a broad-based MVNO policy] are too high for it to be warranted”.

To borrow from Mr. Denton’s own words, asking a government regulator to mandate MVNO access and impose terms and conditions is precisely what central planning by government looks like.

Canada’s so-called “obsession” with facilities-based competition has produced world-class wireless networks and fierce competition resulting in declining prices. It is good policy and a worthwhile obsession.

[Op-Ed originally published by Cartt on November 30^th, 2020].