The wireless consultation: it’s still about competition (3)

This is the 3rd instalment of my comments on the CRTC’s wireless code consultation.

In part 2, I strayed into some wireline data to make a larger point about shortcomings in the CRTC’s handling of two major duties: conducting research and communicating with the public. Today I want to add some followup on the issue of competition.

Tuesday marked the official end of the online portion of the public consultation. In the Toronto Star, that milestone warranted a piece from personal finance columnist Ellen Roseman, who talked with the Commission’s new consumer chief, Barbara Motzney.

The piece makes for salutary reading. I see, first of all, the number of comments left on the Commission site runs to about 500. That sounds disappointing, given the millions of Canadians with a stake in this process. Yet the rundown of visitor recommendations ranges well beyond the most liked (and highly predictable) banishment of 3-year contracts. Don’t allow carriers to participate in spectrum auctions if they repeatedly violate the new code. Set up an online repository of all publicly offered price plans. And not altogether realistic but one of my favorites: measure consumer stress and productivity levels (after dealing with your friendly customer awesomeness rep) as a sign of the code’s success.

Forbearing from forbearance

It’s clear, moreover, that Ms Motzney has thought seriously about the value of online consultations, not to mention the value of plain speaking. She points to one of my favorite examples of a regulatory term of art that makes regular folks glaze over:

“We can do a better job of telling the story,” she says about the way that CRTC decisions are written, linking backward to historical decisions instead of standing on their own. It also means using less jargon, such as “forbearance,” which means deregulating the price of telecom services once a healthy level of marketplace competition is reached.

This passage raises two points worth elaborating on, apart from the obvious positivity in this new style of Ottawa thinking. First, I don’t think we should hold our breath on “standalone” decision-making. Regulatory lawyers, like other kinds, always operate with an eye on precedent. The task of plain speaking belongs more to the 60 people who work for Ms Motzney than to the Commission’s legal officers. But hey, if we can have plain-language insurance contracts, anything is possible.

My second point arises from the translation of forbearance as deregulation, triggered when a regulator determines a market is sufficiently competitive. Unfortunately, the CRTC has fallen short on something even more critical than lack of clarity or failure to communicate. As I’ve argued ad nauseam on this page, it has habitually pronounced various markets to be “competitive” – then failed to square its evidence with what’s adduced by others, if not failing to offer any evidence at all.

Color me squared

Not long after I’d put part 2 to bed, I read the November 26 post on Dwayne Winseck’s blog, an instalment in his series on concentration – this one entitled The State of Media and Internet Concentration in Canada, 1984 – 2011. Thanks to Dwayne, Canadians are finally getting a rigourously researched, publicly available history of concentration of ownership in all our media and networked industries. Read for yourself about the astounding extent of concentration in Canada compared to other developed countries, measured not using some made-up yardstick, but widely applied measures like the Herfindhal-Hirschman Index (HHI) and CR (concentration ratio) indexes.

Let me single out one of Dwayne’s calculations that happens to shed light on a question I had for the Commission last week:

Typically, if you learn an industry suffers from low penetration plus high prices plus poor satisfaction, you leap to one overwhelming conclusion: the industry in question is not competitive. Hence my question: Why, in the face of all this evidence to the contrary, does the CRTC claim our wireless industry is competitive?

Dwayne’s contribution here is based on his application of the HHI and CRs to Canada’s wireless industry. It’s helpful to understand the HHI methodology, which involves nothing more than some arithmetic (quoting from Dwayne’s post):

The HHI method squares and sums the market share of each firm with more than a one percent share in each market to arrive at a total. If there are 100 firms, each with a 1% market share, then markets are highly competitive, while a monopoly prevails when one firm has 100% market share. The following thresholds are commonly used as guides:

  • HHI < 1000 – Un-concentrated
  • HHI > 1000 but < 1,800 – Moderately Concentrated
  • HHI > 1,800 – Highly Concentrated

In the table provided in his post under “The Network Infrastructure Industries,” Dwayne calculates that, for the year 2011, the HHI for Canada’s wireless sector amounted to 2923. So what does that number mean in plain prose?

In their Horizontal Merger Guidelines, updated in August 2010, the U.S. DoJ and FTC spell out in detail how they wield the HHI. The US regulators deem a market scoring over 2500 on the HHI to be “highly concentrated,” with the theoretical maximum score being 10,000 (p.19, pdf uploaded here). The authors of this document are quick to point out that the “purpose of these thresholds is not to provide a rigid screen to separate competitively benign mergers from anticompetitive ones…” (For a short, simple example of the HHI in action, see Stacey Higginbotham’s discussion on GigaOM in March 2011 of the proposed AT&T/T-Mobile merger.)

One countervailing factor in the HHI of 2923 for 2011 is that it misses 2012, when we might experience significant change in our wireless market. Indeed, we may soon count a grand total of 10 providers across Canada. Before we start celebrating, let’s keep a few things in mind. First, in the data provided by Dwayne, going back to 1984, Canadian wireless has never scored lower on the HHI than 2700 (in 2000). Second, the drop over the 1990s (from an all-time high of 6181 in 1992) was prompted by the capture of 12% market share by Clearnet and Microcell – which were then scooped from the market by Telus and Rogers in 2000 and 2004 respectively. Given Canada’s world-leading levels of concentration (which are still rising while much of the industrialized world experiences a decline), I have absolutely no faith a Harper-led government will encourage real, sustainable competition in the coming years.

Which brings us to a third point about what “real” and “sustainable” competition means. Keep in mind that in wireline Internet access, the incumbents still hold some 94% of the market. Keep in mind as well that only last week Marc Gaudrault, CEO of TekSavvy, said in connection with the CRTC review of wholesale pricing that “TekSavvy’s rates will become unsustainable as consumers turn to bandwidth-consuming online streaming services in the years to come” (Wire Report, pay wall). The CRTC can unbundle all the network elements it likes, up to and including colocation in incumbent facilities. But if it allows the incumbents to price the new entrants out of the market, competition is a dead letter.

One more comment here about the realities of competition. No matter how many small wireless carriers we have in Canada beyond the Big Three, they won’t necessarily make a difference to you and me in terms of price, service quality, innovation, and choice of packages and handsets. This observation is borne out by the metrics behind the HHI:

“Although it is desirable to include all firms in the [HHI] calculation, lack of information about firms with small shares is not critical because such firms do not affect the HHI significantly” (Horizontal Merger Guidelines, p.18, footnote 9).

That reflects the empirical rationale behind the use of squares in the HHI, which “gives proportionately greater weight to the larger market shares.” I think that’s what they mean by nothing succeeds like success.

Meanwhile, back at the ranch…

If you look carefully, the Commission has squirreled away a key piece of the puzzle on page 169 of its current CMR. Here’s the chart: 

Figure 5.5.4 shows the share by subscriber in the wireless market, for 2010 and 2011, with Rogers and Bell each shedding a point (37% to 36% and 29% to 28% respectively), with Telus holding at 27%. Using the new entrant-and-other gain from 2010 to 2011 of about 30% (from a 7% share to 9%), we would see the market for this year (2012) with 88% still in the hands of the Big Three. That’s the number that matters, not whether we have four, six or more relatively tiny alternative carriers. At 88% (arbitrarily knocking one point from each 2011 incumbent share figure), the Canadian wireless market would register 2630 on the HHI, still well above the highly concentrated HHI threshold (Rogers=35² + Telus=26² + Bell=27²).

If the Commission has an interpretation of these figures that’s more appropriate and upbeat, I would love to stand corrected. Whatever the case, it would do well to heed what Ellen Roseman notes in her article, namely that the “second most-liked comment [on the consultation site] is a lament about the state of competition, showing the prices for new wireless plans as almost identical among the big three carriers.” 

Even at this stage, with a public hearing to come in February 2013, the consultation has shown that Canadian end-users don’t believe the wireless industry is competitive. It’s thus going to become increasingly difficult for the Commission to keep saying to Canadians: your hunch is wrong, your rates are fine. Ms Motzney and her boss need to see that plain speaking extends to dealing in facts and avoiding wishful thinking. Taking that path may not provide an easy fix to our long history of over-concentration. But it will do a great deal to repair the Commission’s tarnished image and misunderstood mandate, thereby strengthening the hand of Chairman Blais in his progressive agenda.

D.E.