More faith-based competition from the MEI

France, the United Kingdom, Denmark, Australia, Finland, Israel, Japan, Korea, China: these are some of the countries that have adopted policies granting competitors access to the facilities of larger telecom carriers. Yet all these countries are wrong, according to the Montreal Economic Institute (see “The CRTC needs to get out of the way,” Gael Campan, Oct 31).

Everyone agrees: networks require investments of tens of billions. But requiring larger players to supply access to smaller players lowers their profits and reduces their incentive to invest. Networks will not be built out as far or as fast if we follow this policy, says the MEI. Roll back that meddling CRTC and let the incumbents get on with the business of building networks.

This is the theory of “facilities-based competition,” the idea that the only legitimate competition occurs when competitors own every part of the network except the phone in your hand. Connecting to their networks is a privilege that they, not regulators, should decide upon.

You might call it “faith-based competition.” Canada has pursued this policy since the inception of cellular phones. As a result, the OECD ranks Canada’s subscriptions per 100 inhabitants as 33rd, behind Slovenia and ahead of Portugal. Our prices are higher and our rate of adoption of digital services is lower than most other OECD countries.

The CRTC recently strengthened access to wireless facilities. It has signalled its readiness to grant competitor access to the facilities of incumbent carriers, who control over 90 per cent of our domestic market. The large carriers are predictably angry.

Why have so many countries decided to follow what the MEI and the large carriers consider to be a false doctrine? The reasons are quite simple. In mature telecommunications markets, the number of competitors tends to shrink through industry consolidation, usually from four original competitors to three or even two. In countries such as the United Kingdom, Korea and Japan, the incumbent — usually the former telephone monopoly — is so dominant that the national regulators have sought to control its market power. By directing that smaller players get access to these networks, regulators have introduced competition at the retail level, with all the attendant benefits of price reductions and service innovations.

The new smaller players, known as mobile virtual network operators, or MVNOs, vary in terms of the range of services they offer and how much of a physical network they operate. They act as checks on the market power of the incumbents, which is why they were introduced, starting about the year 2000 in the U.K. and Scandinavia.

In Canada, we have very few truly facilities-based competitors. Bell and Telus, for example, re-sell each other’s capacity in their respective territories. Each is, as it were, an MVNO to the other. When you see Bell in western Canada, that’s just branding, and likewise with Telus in Bell territory. They’re using each other’s infrastructure.

Consider the benefits of competitor access. Resellers must be able to supply competitive services by filling the pipes of the larger carriers more cheaply than the incumbents can do themselves. If not, the resellers go out of business. Contrary to the claim of the MEI, no country says larger carriers must lease access below cost. Second, incoming “virtual operators” of this sort challenge the idea that competition must be a fixed kind of thing. They innovate in prices, packages, customer relations, target markets or types of services. Capitalism is a discovery process, as Hayek observed. By contrast, “facilities-based competition” assumes all carriers ought to want to deliver the same thing and build out superfluous physical networks in order to do so.

The MEI argues Canada’s prices are high because of a spread-out user base. The population density argument evaporates when you consider that both Australia and Finland, with their vast regions as empty as Canada, nevertheless rank fifth and second, respectively, in mobile broadband subscriptions per capita, while, as mentioned, we are 33rd. Norway, Sweden and Finland also experience extreme cold in their northern reaches but have far better penetration per 100 inhabitants than we do.

The MEI is right: regulatory frameworks can be strait jackets, not only to entrepreneurs, but to governments, too. The CRTC and the federal government more generally have straitjacketed themselves for 30 years in facilities-based competition, the single-minded pursuit of which is strewn with the corpses of small competitors laid waste by the large incumbent carriers. MEI would have us continue that folly. Canada deserves better. Access to the wired and wireless facilities of incumbent carriers is critical to real competition in our telecommunications markets.

Timothy Denton is chairman of the Internet Society, Canada Chapter, a group interested in issues of internet access and affordability. He was a CRTC commissioner 2009-2013.

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