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Phone hang-up: Regulation is slowing the adoption of cellular in Canada. It stifles investment and competition and adds customer cost
Neil Quigley and Margaret Sanderson
Financial Post
Tuesday, December 13, 2005
Canadians driven to distraction by the sound of yet another cellphone chiming across the restaurant, or appalled by the sight of one more highway driver arguing distractedly with her BlackBerry, might be surprised to learn that Canada was 26th among developed countries to roll out digital cellular networks. Not only that, we stand 28th among 30 OECD countries in cellular subscriptions per person.
Like it or not, the cellular telephone's convenience and commercial usefulness has changed forever the way we communicate in our personal and business lives.
Because of digital networks' cost-effectiveness and importance, many developing countries have dodged the cost of stringing cables throughout the countryside, jumping directly to the world of wireless digital communications -- in those countries, new investment in wires is focused on data transmission, not voice or consumer services.
Within a few years, cellular network devices will be the pre-eminent communications tool worldwide for e-mail, voice and digital photography. But not necessarily in Canada, where regulatory immobility is a problem and Canadians have been slow to cut the cord and share in the benefits of cellular digital services.
One cause of Canadians' slowness to adopt cellular telephony is our regulatory policy. In particular, long-standing cross-subsidies maintain artificially low wireline prices, reducing cellular's relative competitiveness and incentives to invest in better-quality, expanded cellular coverage. Canadians who drive even small distances know how spotty service coverage can be, and slow investment in networks just might be the reason.
Because relatively few Canadians have cut the cord -- replacing their wireline service with cellular only -- the Canadian Radio-television and Telecommunications Commission (CRTC) believes cellular service is not an effective competitor with wireline service. Accordingly, the CRTC has maintained regulatory control over retail and wholesale wireline rates and set local retail rates at very low levels -- undermining the cellular market.
The CRTC's May, 2005, decision on voice over Internet protocol (VoIP) telephony reflects its narrow view of competitive conditions. The CRTC established a regulatory regime that protects various VoIP service providers from competition from incumbent local exchange carriers.
The CRTC believes it is protecting competition by protecting VoIP "competitors."
Their choice is misguided. Although it will certainly encourage customers to transfer from the Incumbent Local Exchange Carriers (ILECs) to VoIP competitors, it will also result in higher prices for VoIP than would otherwise exist. In addition, the spread of VoIP throughout Canada is likely to be slower and less extensive with regulation of VoIP services than it would otherwise be. By failing to consider the wider competitive environment, the CRTC maintains extensive regulatory control over ILEC retail wireline services at a time when technological advances -- either by cellular or VoIP -- are undermining the case for regulation of retail prices and for universal retail wireline service obligations.
The CRTC's policy of keeping wireline local access prices low is a classic illustration of the trade-off between static and dynamic efficiency. Low wireline prices benefit the consumers of that technology but inhibit the development of a competing technology -- cellular.
The lower rate of adoption of cellular technology has large dynamic efficiency costs for Canadian consumers because the low uptake creates an environment in which expected return on investment in new technologies is reduced, investment is retarded, and new services are introduced much more slowly than in other countries. Canadians therefore pay higher prices for, and/or receive fewer services from, cellular subscriptions than consumers in other countries. Limited demand inhibits new investment and denies network operators the benefits of economies of scale. The same situation may arise with VoIP.
A dynamically competitive cellular sector in Canada would benefit all consumers of telephone services by providing lower prices, superior service and greater competitive discipline for incumbent wireline providers. It should therefore be a matter of concern to Canadian telecommunications policy-makers that the pace of cellular service adoption and the transfer of local and long distance calls to the cellular network lags OECD countries. Because of the pervasiveness of regulation of telecommunications in Canada, regulatory policy has a substantial effect on the patterns of substitution and competition, and that means regulatory change could provide substantial benefits to consumers.
What to do?
First, the CRTC should consider finding an alternative to universally low regulated prices for local wireline service as a way to address any perceived equity issues associated with the low-cost access to wireline service.
Second, the CRTC should acknowledge that the evidence of call substitution and line replacement from other countries (and Canada) suggests that, despite being differentiated products, wireline and cellular services do compete with each other. If prices for local wireline service were consistent with those in other countries, the price of cellular service would be closer to that of wireline service and cellular adoption and wireline call and line displacement would all increase.
The price difference resulting from CRTC policy creates the impression that, for most consumers in Canada, cellular and wireline local service are not substitutes and are therefore not part of the same market; this in turn perpetuates the regulations that created the price difference in the first place.
Third, once it is recognized that cellular and wireline services compete, government policy-makers need to consider how cellular policies affect the competitiveness of both cellular and wireline service. Foreign ownership restrictions and limited spectrum allocations will limit the number of cellular providers, thereby making cellular and wireline markets less competitive than they would be without these restrictions.
All those beeps, buzzes and ring tones are the sounds of business getting done and families and friends arranging dinner and to meet at the show. Federal regulation need not complicate their arrangements.
Neil Quigley is professor of economics at Victoria University of Wellington, New Zealand, an International Fellow of the C.D. Howe Institute. Margaret Sanderson is a vice-president of the consulting firm CRA International Limited. Their recent paper, Going Mobile -- Slowly: How Wireline Telephone Regulation Slows Cellular Network Development, is available at cdhowe.org.
© National Post 2005
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