It’s not the number of players that matters but how competitive they are with each other.
Fewer wireless carriers:
Heading into 2015, the Canadian government is doubling down on its dream of a fourth national wireless carrier with lots of new spectrum that will be made available to anyone but Bell, Rogers and Telus.
But here’s a crazy and bound-to-be-unpopular idea: What if fewer wireless carriers is actually what Canada needs? What if it’s not the number of carriers that matters, but rather the competitive dynamic between them?
Here’s Canada’s problem in a nutshell – identical pricing between the Big Three results in a market share breakdown of near perfect equilibrium:
The situation is better in the United States. For one thing, average bills are already lower – Canadians pay about $58 (U.S.) per month versus $50 for Americans, a difference of 14 per cent, according to the Bank of America Merrill Lynch Global Wireless Matrix.
That differential is likely to increase, with prices between the two countries heading in different directions. Compare and contrast the plans being offered, where an on-contract smartphone with one gigabyte of data costs a minimum of $85 on Rogers (in most parts of Canada), versus only $65 on AT&T:
The largest U.S. wireless carrier is significantly cheaper than its Canadian counterpart, thanks enitrely to hungrier competitors in the form of T-Mobile and Sprint.
T-Mobile, especially, is considered a maverick – a company that has broken from the pack and is driving consumer-friendly terms and pricing into the market.
Sprint is getting in on the action too, recently unveiling an offer to literally cut Verizon and AT&T customers’ bills in half if they switch.
This is motivated by a significantly different market-share snapshot. In the United States, there is no equilibrium:
In some ways, Wind Mobile is Canada’s de facto fourth maverick, or at least that’s the long-term hope for many. Wind and other new entrants have had an effect – they were essentially responsible for killing the system access fee and probably sped the widespread adoption of nation-wide calling and possibly even lower roaming rates.
But Wind’s market share remains in the low single digits and probably won’t grow much without more massive investment in additional spectrum licenses.
With prices again heading upward, its effect on the market was short-lived and questionable going forward. Where it will get the needed money is also an open question.
So what’s the solution? How about a merger between Bell and Telus.
Despite their similarities, the companies don’t really compete on much. They do on government and business telecommunications contracts, but they don’t on wireless pricing. Their other wireline and television operations don’t overlap geographically. And they share their wireless network.
Here’s what Canadian wireless market share would like look after such a merger:
That chart looks more like the U.S. breakdown above. In such a scenario, Rogers would find itself far behind.
A merged Bell and Telus would have significant advantages in the form of reduced network, spectrum, billing and marketing costs, and more heft in negotiating with equipment and handset suppliers.
Investors would also love the merged entity, thanks to those lower costs and increased market power. Rogers stock could find itself in the doghouse.
That would put a lot of pressure on the company. Rogers would have to compete – and meaningfully so, on price and in wholesale.
Another thing the United States has that Canada doesn’t is a healthy wholesale market, with numerous mobile virtual network operators – ironically including Canadian firms Ting and Ready SIM – piggybacking on the networks of Sprint and T-Mobile to provide meaningful competition.
Ultimately, it’s not numbers that matter, but the desire – and ability – of market participants to actually compete. Those two things are what Canada desperately needs.
So how could a merger between Bell and Telus be engineered or encouraged? Well, that’s a story for another day.