Competition in the Canadian telecom market

Perhaps by now you have seen the TV commercials for Bell touting its much faster 3G network for web phones. Rogers is suing on the basis that Bell is basically making this up. What’s interesting about it, though, is that Bell, Telus and others entering the web phone (or should we just say iPhone) business are not seeking to compete on price, but on perceptions about reliability, speed or just plain coolness, for what is in fact a very generic service, the provision of “pipe”.

For years, the central objective of telecommunications policy in Ottawa has been to create competitive markets in what used to be regulated monopoly sectors like phone, cable and so on. This is based on a naive understanding of how markets work – i.e. competition leads to lower prices for consumers, end of story. Apparently, our policy makers skipped class somewhere between the lesson on perfect competition (where price competition drives long-run profits to zero) and the one on monopoly (where the monopolist restricts output and raises prices in order to maximize profits). They would have learned that oligopolies are much like monopolies in outcomes due to incentives to keep prices and profits high (whether through overt collusion or tacit cooperation). And in the case of telecommunications there are massive barriers to entry because you basically need to build a network before being able to compete.

In Canadian telecommunications, there exists ostensible competition, but Canada ranked near the bottom of the OECD in terms of consumer prices, and not surprisingly given those prices, market penetration of cell phones and high-speed Internet. In the case of new iPhones, the entry of new competitors held out the promise of lower prices, but has not delivered, as competition is through advertising campaigns based on other dimensions of product quality.

This is a shame, given that the televisions, computers and mobile devices that are driving demand have experienced such phenomenal increases in performance and decreases in price. But while the hardware is sophisticated and cheap, the gateway is ever more expensive, even though the providers are just providing pipe for digital information to flow through. As the size of those networks grows, the marginal cost of providing the pipe, and thus prices, should be falling not rising.

Across the board, I’m disappointed in the results of more competition in telecom. I have an iPhone through work but would never pay those subscriber fees if I had to get one for personal use. In local phone service, I could save a little bit of money by switching to cable phone service but it requires a pile of wires running through my bedroom and a big modem on the wall. In cable television, I get all kinds of channels I never watch, but need to buy the whole buffet just to get TSN (I’m on a cheap starter rate that will take me through the Olympics, NHL playoffs and World Cup, but after that I cannot afford $100 per month to keep it up).

The one exception to this is long-distance phone calls, where prices have fallen. Policy has allowed smaller competitors to get in the game without needing to own a network. But even here the old monopolists still charge pretty much the same on the grounds that many consumers just keep doing what they do once they have something that works, even if it means leaving money on the table (the same problem lurks for energy efficiency upgrading). There is a good behavioural economics paper waiting to be written on this.

So, that’s just a long-winded way of saying that consumers are getting gouged, and telecommunications services are not delivering for Canadians. How to fix it? One easy option is for the feds to get in and regulate prices down to fair levels. This is well-known terrain for the CRTC, and could still provide a fair return on investment to the telecom companies. They should also force companies to offer a la carte pricing for digital and HD television channels, or even better let stations broadcast in HD over the Internet so that you do not have to buy a cable subscription on top of Internet service.

A more radical approach would be to nationalize the pipes and treat them as a utility the way we do electricity. That’s obviously a harder sell given how cozy Big Pipe is in Ottawa with politicians and regulators. An intriguing middle-way option would be to get some real competition in by leveraging the CBC, since they have national reach and big, public pipes. They could start by partnering with municipalities who have wanted to offer public wireless connections, then branch out from there, winning market share by providing services at much lower cost.

At any rate, I think there is pent-up demand for such moves, and would welcome any political party to take this on as a populist action.