Not Just Price, Quality Matters

More choice, better service and lower prices are the objectives behind the federal government’s policy goal of increasing competition in wireless services in Canada. To realize this goal, a variety of polices, starting with set-asides of spectrums in the 2008 AWS Spectrum Auction, have been adopted, and the government seems to never tire of reminding Canadians of their policy objectives and “successes”.[1] While this may make for good political sound bites, there are many good reasons to be skeptical of both the objective and effect of the federal government’s policies intended to “enhance” competition.

In order to provide the ubiquitous, high-quality networks that consumers demand, large investments must be made by wireless carriers. To recoup these investments, and to continue making investments in the future, carriers must earn sufficient returns. In a market with large fixed costs of network deployment, there will be a natural limit to the number of competitors. If government policy subsidizes entry beyond this natural limit, or refuses to allow consolidation of underperforming firms when the number is above this limit, wireless carriers will be locked into an industry where their returns are inadequate. Deliberate policies to reduce returns below competitive returns by subsidizing entry amount to expropriation of capital (“theft” of sunk investments) and has a chilling effect on incentives for service providers to invest further in the speed and capacity of their networks, resulting in lower quality wireless services.

Robert Cyran, in a recent analysis published by The Globe and Mail,[2] argues that concerns that low prices may come at the expense of network quality are well founded. He notes that regulators in the U.S. have succeeded in preventing consolidation in wireless markets, but this will have unintended longer-term consequences. In the U.S., AT&T and Verizon are the large wireless carriers, while Sprint and T-Mobile are considerably smaller and are financially strapped. Sprint has had negative cash flows for a decade. By discouraging a Sprint/T-Mobile merger, Cyran argues that U.S. regulators may have achieved “price wars,” but this will lead to “years of underinvestment”. He highlights the European experience, where consolidation has become fashionable after it became apparent that “four companies led to good deals but bad networks”. In his view, by preventing the merger between Sprint and T-Mobile, U.S. regulators have subverted meaningful competition from three national carriers and reduced incentives for investment, leading to “slow data and poor connections” in the future. His analysis is consistent with our analysis of the federal government’s policies. For more, see our two papers on wireless competition in Canada published by The School of Public Policy:  Wireless Competition in Canada: An Assessment and Wireless Competition in Canada: Damn the Torpedoes! The Triumph of Politics over Economics.