June 13, 2018
On this page:
- CRTC Should Impose LCDO Plans as an Interim Measure
- Other Issues Raised in the Notice of Consultation
- Conclusion and Summary of Recommendations
Pursuant to section 125 of the Competition Act, the Interim Commissioner of Competition ("Commissioner") wishes to intervene in this proceeding, and is pleased to submit these comments of the Competition Bureau ("Bureau") in response to Telecom Notice of Consultation CRTC 2018-98 ("Notice of Consultation"), published by the Canadian Radio-television and Telecommunications Commission ("CRTC") on March 22, 2018.Footnote 1
In this proceeding, the CRTC questions whether it is appropriate to establish a condition of service requiring national wireless service providers to make lower-cost data-only plans ("LCDO Plans") broadly available to Canadian consumers.
The Bureau supports the temporary establishment of such a condition of service.
Generally, the Bureau does not favour price controls. However, the presence of market power in this industry; the natural experiment offered by Sugar Mobile’s attempted entry into the wireless services industry; and the fact that similar LCDO Plans have arisen without government intervention in some foreign jurisdictions informs the Bureau’s view that LCDO Plans can increase economic welfare and consumer choice in Canada’s wireless industry.
Nevertheless, LCDO Plans are not a substitute for true competition in this industry. Therefore, the Bureau believes that LCDO Plans should be imposed on a temporary basis only, until such time that the CRTC can establish longer-term, more robust solutions to competition problems and other public policy issues that may exist in this marketplace.
In terms of the specific attributes of LCDO Plans, the Bureau makes three recommendations. First, the Bureau supports the use of price ceilings and capacity floors, rather than specified prices and capacity levels, as a means of preserving some scope in the marketplace for competitive strategies aimed at undercutting or differentiating product offerings. Second, the Bureau believes that LCDO Plans should be made widely available to all Canadians, as limiting the distribution of such plans threatens the benefits that they may bring about. And third, the Bureau notes that it is difficult, from a competition perspective, and in the presence of market power, to judge exactly what the correct price ceilings or capacity floors should be.
III. CRTC Should Impose LCDO Plans as an Interim Measure
The Bureau believes that the imposition of LCDO Plans can increase economic welfare and consumer choice in Canadian wireless markets. This section of the submission outlines the Bureau’s perspective and analysis in support of this position.
Price Controls are Generally Not Favourable
LCDO Plans are a form of priceFootnote 2 control, where a government prescribes the price or non-price elements that firms must charge in a marketplace. Typically, price controls are antithetical to competition, as they replace the key role of market forces in determining market outcomes.
As a matter of economics, price controls can be as harmful to the economy as market power. Both situations result in the creation of either deadweight loss or other economic inefficiencies – that is, resource misallocation that harms the economy.Footnote 3
However, price controls can aid economic welfare in situations where there is a market failure.Footnote 4 Market power is one such example of a market failure. As such, when market structure (or some other factor) confers market power on one or more firms, government action to reduce the impact of that market power can have positive effects on economic welfare.
Market Power Concerns Persist in the Canadian Wireless Industry
In 2014, the Bureau commissioned a report from The Brattle Group to evaluate the competitiveness of the Canadian wireless industry ("Brattle Report"). As part of the Brattle Report, its authors analyzed publicly available information, and concluded that Canadian wireless service providers have "... earn[ed] above-normal rates of return on their investments, consistent with the exercise of market power". High profits are an indicator of market power.Footnote 5
The Brattle Report also notes significant capital market reactions to the notion that Verizon Wireless was poised to enter Canadian wireless markets earlier this decade. This finding implies that entry of a vigorous and effective competitor into Canada’s wireless industry would constitute a significant risk to the profitability of Canadian wireless incumbents.Footnote 6
More recently, in 2017, the Bureau examined Bell’s acquisition of MTS. At the conclusion of that examination, the Bureau communicated, through a position statement, its findings that wireless prices are typically lower in the parts of Canada where there is "... a strong regional competitor who can disrupt the effects of coordination among [established, large service providers]." This finding is consistent with the conclusion in the Brattle Report that Canadian wireless firms enjoy market power in at least some parts of Canada.
When market power is exercised, prices are higher, and wireless penetration is lower, than in a market that is competitive.Footnote 7 The exercise of market power forces some consumers, who would purchase a product or service at a competitive price, to forego such purchase because prices, as a result of market power, are simply too high. These consumers no longer participate in the marketplace, and these foregone purchases create what economists refer to as deadweight loss.Footnote 8
Sugar Mobile’s Entry was a Commercial Response to Market Power
However, in some circumstances, a short term exercise of market power can create a competitive opportunity. When customers are excluded from a marketplace through an exercise of market power, new players may have an opportunity, in the absence of significant barriers to entry, to tailor an offer aimed at serving those customers.
There is little doubt that there are significant barriers to entry in the wireless industry.Footnote 9 One can see Sugar Mobile’s attempt to enter as exploiting what they perceived to be a grey area in the Wholesale Wireless decision in order to overcome these barriers.
Through this strategy, Sugar Mobile attempted to create a new, lower-priced offer in the marketplace – one that was different from incumbents’ and valuable to consumers. Although the CRTC has determined that Sugar Mobile’s business model went beyond what is allowed under its 2015 Wholesale Wireless decision, it is easy to view Sugar Mobile’s offer as an attempt to establish a new level of competitiveness in the Canadian wireless industry.
LCDO Plans Can Counterbalance Market Power
From an economic perspective, the relevant question for this proceeding is whether the imposition of LCDO Plans, as a means of at least partially replicating the marketplace role that Sugar Mobile played, can help combat market power. The Bureau’s position is that LCDO Plans can act as a step in the right direction, providing at least some of the consumer advantages and general economic benefits that Sugar Mobile promised.
Sugar Mobile’s services were the best choice for those consumers who purchased them.Footnote 10 Removing Sugar Mobile from the marketplace, then, shifts these consumers away from their best choice and towards a second-best situation where they are worse off.
For example, consider a consumer who was a light data user, and initially subscribed to Sugar Mobile’s offer at $19 per month for 400 MB of data. When Sugar Mobile’s offer disappeared from the marketplace, this customer had two choices: (1) not consume, and go without mobile data services, or (2) switch their subscription to, say, one of Bell’s, Rogers’, or TELUS’ flanker brands, that currently offer plans for $45 per month for the equivalent of 2 GB of data and unlimited talk and text.
In the first case, where the consumer chooses not to purchase, that consumer saves the monthly cost of his or her data plan, but loses all of the benefits therefrom, such as instant, mobile access to banking information, driving directions, and time sensitive communications from family members and business contacts. In the second case, the consumer continues to receive these benefits, and may even consume more data, but now pays more than two times as much for those services. In both of these cases, the consumer is better off in a world where an LCDO Plan exists.
Based on this, the Bureau believes that economic welfare could be increased if the CRTC chooses to impose LCDO Plans. Such an action would address the gap in the marketplace that was left when Sugar Mobile exited, and would work to restore the best choice for at least some portion of Canadian wireless consumers. In respect of those consumers who stopped consuming mobile data services because of Sugar Mobile’s exit,Footnote 11 the imposition of LCDO Plans will bring at least some of those consumers back into the marketplace, thereby increasing Canada’s wireless penetration rate and reducing deadweight loss in the Canadian economy.
LCDO Plans Need Not be Restricted to the Lower End of the Marketplace
The Bureau notes that not one of Canada’s national wireless service providers has proposed to offer an LCDO Plan with a capacity limit exceeding 500 megabytes. Notwithstanding whether this is an acceptable capacity limit for the lower end of the market, it is not obvious to the Bureau why LCDO Plans should not feature a variety of capacity limits, stretching into multiple gigabytes per month (e.g., a range of LCDO Plans at 1 gigabyte, 2 gigabytes, 5 gigabytes, etc.).
In this industry, market power is not likely to be limited to customers who purchase only lower-capacity products. That is, even those who purchase high-capacity plans likely face at least somewhat higher prices than would be delivered in a competitive market. Therefore, if the CRTC wishes to address market power in this proceeding, it would be helpful to consider whether higher-capacity LCDO Plans would also be appropriate.
It is important to recognize that combatting market power is not just about establishing low-end offers in a marketplace. Some consumers genuinely want to pay more to receive higher quality or, in this industry, higher capacity services. For these consumers, the establishment of low capacity plans will do nothing to enhance their position; they will remain captive to high prices, and some proportion of these consumers will continue to be unable to subscribe to their preferred plan.
Voice and Data Services are Bundled; Unbundling Increases Consumer Choice
LCDO Plans could also play an important role in shaking up industry norms by unbundling voice and data services. Such unbundling would increase consumer choice, and could do a better job of matching evolving consumer demands to new services that increasingly rely on data streams, rather than traditional talk and text.
A significant majority of wireless plans in Canada require a consumer to purchase both voice and data services; in this respect, voice and data are effectively bundled together. If some consumers see little value in purchasing one aspect of the bundle (e.g., voice or data services), then it is fair to question why that consumer must purchase both aspects. In a world where voice and text traffic is increasingly being served over data streams,Footnote 12 the necessity of purchasing voice services becomes even more questionable.
Accordingly, the Bureau sees value in allowing consumers to choose only the services they want, and pay for only the services they select.Footnote 13 LCDO Plans, by definition, will provide this choice to Canadian consumers.
LCDO Plans Exist in Foreign Jurisdictions
The Bureau notes that wireless service providers in many foreign jurisdictions offer plans that resemble the type of LCDO Plans contemplated in this proceeding. A list of such plans is set out in Table 1.
|Country||Service Provider||Monthly Price||Monthly Capacity|
|Caption: Data-only plans are offered by wireless service providers in the USA, UK, and Germany, amongst others. These plans range from a monthly price of € 14 to US $40, and monthly capacity limits range from 2 GB to 4 GB.|
|USA||Verizon||US $35||2 GB|
|USA||Sprint||US $40||2 GB|
|UK||Orange||£ 17||4 GB|
|UK||British Telecom||£ 17||3 GB|
|Germany||Vodafone||€ 15||2 GB|
|Germany||T-Mobil||€ 14||2 GB|
Comparing international prices and capacity limits can be difficult. Differences in costs, regulatory environments, and market structures, perhaps amongst other factors, can result in significant price differences across jurisdictions.
Nevertheless, what is important is the fact that these plans, in these countries, exist not because of price controls, but because of market forces and competitive pressures. There are two implications here. First, it is possible that a more competitive Canadian wireless market could deliver these types of LCDO Plans on its own. And second, because the Canadian market generally has not delivered these types of plans to date,Footnote 14 it may well be the case that serving unfulfilled, data-only demand through LCDO Plans could enhance Canadian economic welfare.
LCDO Plans Cannot Replace True Competition; They Should Only be an Interim Solution
Notwithstanding the above, the Bureau notes that the imposition of LCDO Plans will not have the same beneficial marketplace effect as true competition between arm’s length firms.
The Bureau is concerned about the incentives of certain wireless service providers to vigorously promote their product offerings and innovate at the low end of the marketplace.Footnote 15 Wireless service providers with a large number of customers who subscribe to higher-margin, "premium" packages have a stronger incentive to ensure that LCDO Plans do not cannibalize higher-margin products. If LCDO Plans are difficult for consumers to access, not vigorously promoted, or not seen as a real option for consumers (perhaps because of high prices or low data limits), then it is unlikely that they will have beneficial effects on economic welfare.
The Bureau is therefore concerned that, if ordered to introduce LCDO Plans, wireless service providers will follow the letter of the order, but recognize that cut-throat competition would threaten their profits, and avoid, to the best of their ability, direct competition either between themselves, or between their LCDO Plans and their higher-margin plans.
From the Bureau’s perspective, what is important is that an appropriate remedy is imposed by the CRTC to constrain market power. While the regulatory tool available in this proceeding – i.e., price controls – can constrain market power, it is a blunt instrument that can have uncertain short term results, as noted above, and can be unduly rigid in the face of changing market conditions. The Bureau therefore believes that LCDO Plans should only be a temporary fix, until such time that the CRTC can establish longer-term, more robust regulatory solutions.
Review of Wireless Industry Competitiveness is Warranted
The Canadian wireless industry continues to evolve. The establishment of fourth carriers in some parts of Canada demonstrates the opportunity for a more competitive future.
A competitiveness review of the Canadian wireless industry is therefore an appropriate first step in better understanding where we are today, and the right steps to take going forward. Such an evaluation, with the goal of identifying any potential constraints on market forces in this industry, will allow the CRTC to enact a more appropriate and less rigid longer-term remedy to market power concerns. The Bureau views the upcoming Wholesale Wireless consultation as both a timely and appropriate place for this conversation.
IV. Other Issues Raised in the Notice of Consultation
In the Notice of Consultation, the CRTC also invites comments on specific attributes of LCDO Plans, such as price and capacity levels, as well as other operational aspects that will better define LCDO Plans. The Bureau offers comments on three such aspects.
First, the Bureau recommends that price caps and capacity floors be used to define LCDO Plans, as opposed to specified price and capacity limits. Second, the Bureau recommends that access to LCDO Plans not be limited through means testing or any other method. And third, the Bureau recognizes the difficulty of judging, from a competition perspective and in the presence of market power, whether the proposed plans filed with the CRTC are sufficiently attractive to consumers.
Price Caps and Capacity Floors Preserve Some Incentive to Compete
The CRTC has asked whether price caps, which dictate the maximum price that a wireless service provider could charge for an LCDO Plan, and/or capacity floors, which dictate the minimum amount of data that an LCDO Plan could include, are appropriate in this matter.
In the Bureau’s view, it is preferable to use price caps and capacity floors in defining what an LCDO Plan is, rather than specifying particular price and capacity levels. Unlike specified price and capacity levels, price caps and capacity floors provide at least some scope for competitive business strategies designed to undercut competitors or differentiate one’s product offerings.
As the Bureau has noted previously, LCDO Plans will not have the same beneficial marketplace effect as true competition between arm’s length firms. From this perspective, the Bureau believes that it is critical that any scope for competition between those who offer LCDO Plans be preserved.
Furthermore, the Bureau recommends that the CRTC regularly review the appropriateness of any specified price cap or capacity floor to ensure that they remain relevant and effective in the context of the industry.
Limiting Access Through Means Testing Will Eliminate Benefits
The CRTC has asked whether LCDO Plans should be made available to the population generally, or whether their availability should be restricted to certain qualifying persons.
From an economic perspective, it is important to not confuse those with low incomes and those with low willingness to pay for a product or service. For example, even those with high incomes may have a low willingness to pay for wireless data services if they spend a good portion of their time in areas where WiFi coverage exists.
As such, limiting access to LCDO Plans, through means testing or any other method, will limit the economic benefits offered through these plans. Accordingly, the approach that will generate the greatest benefit is to make LCDO Plans available to all consumers, and allow consumers to pick and choose the wireless service plan and provider that is best for them.
From a Competition Perspective, it is Difficult to Tell Whether Proposed Plans are Sufficient
The CRTC has asked for comments on whether the prices and capacity levels for LCDO Plans proposed by Bell, Rogers, and TELUS are appropriate to address the issues in this matter.
The Bureau’s preference is for pricing and capacity levels to be set through a competitive process. It is for this reason that the Bureau advocates price caps and capacity floors, rather than specified prices and capacity levels. However, absent true competition in this space, it is difficult to know exactly what price and capacity levels would be delivered by a marketplace unaffected by market power.
The Bureau does note that, from an economic perspective, it is essential to ensure prices charged through LCDO Plans are sufficiently high as to cover the costs incurred by wireless service providers in providing these services, and should maintain an appropriate incentive for service providers to continue to invest in their networks at socially optimal levels. Failure to do so will detract from economic welfare, and could threaten to negatively offset the gains to consumers flowing from LCDO Plans.
Further to that perspective, the Bureau advises that LCDO Plan prices should not be set at a rate lower than the wholesale roaming rate that national wireless service providers are required to offer to entrants, plus any other reasonable costs, including those necessary to acquire, provision, and support a customer. The methodology used to calculate wholesale roaming rates, as noted by the CRTC in Telecom Regulatory Policy CRTC 2015-177, "[enables] national wireless carriers to recover their costs and obtain a fair return on their investments".
The Bureau also notes that the prices of proposed plans filed by Canada’s national wireless carriers exceed the wholesale roaming rate by a wide margin. Table 2 reports the results of calculations comparing the wholesale roaming rate per megabyte of data with prices per megabyte proposed by Canada’s national wireless carriers in this proceeding. These calculations show that the proposed prices exceed wholesale prices by more than three hundred percent.
|Caption: LCDO Plan data prices per megabyte proposed by Canada’s national wireless carriers exceed wholesale roaming rates for each carrier by between 326% and 351%.|
|Proposed Price per MB Footnote 16||$0.06||$0.0625||$0.06|
|Wholesale Rate per MB||$0.013281||$0.013978||$0.014071|
V. Conclusion and Summary of Recommendations
The Bureau supports the imposition of LCDO Plans as a temporary solution to competitive issues brought about by the existence of market power in this industry.
In summary, the Bureau recommends that:
- national Canadian wireless service providers should be required to offer LCDO Plans;
- the order requiring wireless service providers to offer LCDO Plans should:
- be limited in duration until such time that the CRTC can establish longer-term, more robust solutions to competition problems and other public policy issues that may exist in this marketplace;
- establish price ceilings and capacity floors applicable to all LCDO Plans, rather than specifying price and capacity levels; and
- require that wireless service providers make LCDO Plans available to all Canadians, and not just those with low incomes;
- the CRTC should actively and regularly monitor the implementation of LCDO Plans, and be prepared to revise price ceilings, capacity floors, and other aspects of these plans as necessary to ensure that they remain attractive to consumers, and have meaningful and positive marketplace effects; and
- the CRTC should commence a competitiveness review of the Canadian wireless industry, with a view to identifying potential impediments to market forces, and potential regulatory steps needed to support competition into the future.