Why Verizon should be allowed to aim higher.
So it looks like Verizon has emerged as the fantasy 4th player in the Canadian wireless market. A potential “game changer,” said one analyst. Observers are building up scenarios in which the u.S. telecom giant buys Wind Mobile and maybe other small companies, scoops up prime spectrum under preferential auction conditions, and then grabs 1.5-million subscribers from the big three Canadian firms by offering cheap roaming charges in the united States.
If Ottawa falls for this — and it’s the kind of dizzy populist scheme that just might appeal to Industry Minister Christian Paradis as he crusades for a 4th competitor in every region of the country — it will be another absurd lurch in Canadian telecom policy. There are a host of reasons the Verizon fantasy should be squelched before it consumes more than the brain cells of its more feverish proponents — and the share values of investors.
Bell, rogers and Telus shares took hits on the prospect that Verizon might make a bid for Wind Mobile, which it can legally do under existing policy that allows foreign ownership of firms with less than 10% market share. Why would Ottawa create a policy environment that favours a u.S. telecom giant and deliberately trashes the shareholders of the major Canadian wireless players? Allowing Verizon to buy Wind but prohibiting Verizon from purchasing the established Canadian telecom firms penalizes the Big Three firms for being large — and successful.,
The pro-Verizon argument is that it would provide a burst of competition against the Big Three Canadian firms, routinely referred to as an oligopoly or monopoly because they collectively hold 90% of the Canadian market. The split is actually pretty even, as the nearby table shows, with rogers holding a slightly larger 35%.
If that’s not competitive, then
Instead of noodling through a plan for a 4th wireless firm, let’s go big
neither by that measure is the u.S. wireless market. Verizon and AT&T combined hold almost 70% of the u.S. market, based on Bank of America Merrill Lynch estimates. That duopoly’s share — led mostly by Verizon’s soaring expansion — has increased by almost 20 percentage points since 2005. Sprint and T-Mobile are struggling and losing ground.
The point is that the u.S. market — and the Canadian market — are in fact among the most competitive in the world. In the BofA Merrill Lynch analysis, 10 of the top 17 countries have three or fewer wireless competitors, and those with more are consolidating. In europe, the telco industry sees North America as a wireless haven, filled with more competition, better pricing, more wireless usage. A recent eu industry-funded study conducted by Navigant economics -- Mobile Wireless Performance in the eu and the u.S. — found that u.S. wireless firms collect more revenue per subscription that eu counterparts. The reason is dramatically higher usage rates and activity. Capital investment is also higher in the u.S., resulting in massive LTe network coverage. “Verizon Wireless LTe network now covers over 85% of the u.S. population and is already carry- ing 50% of the company’s total data traffic,” said the Navigant study.
Most important, however, is this conclusion: “Higher levels of concentration are (very weakly) correlated with lower prices, not higher ones.” Correlations don’t mean much, especially weak ones, but it is clear that having fewer dominant players enhances investment and wireless usage.
If Canadian wireless is competitive with three major players and lesser ones nibbling at the edges, what can be accomplished by allowing Verizon to come in and begin undermining the existing order for the sake of fulfilling Ottawa’s fantasy 4th player?
The fact that Verizon appears to have some interest in Canada, however, does provide Ottawa with a real opportunity. By eliminating the foreign ownership rules for the major telecom firms, the competitive environment would be enhanced. Instead of noodling through a minor and messy Verizon entry into the market through investments in Wind and special spectrum arrangements, Verizon should go after bigger fish.
Telus would be a perfect candidate. unencumbered by the BCe and rogers broadcasting and content assets — encumbrances that expanded Thursday with approval of the BCeAstral deal — Telus makes a perfect Verizon partner.
The benefits would be many. First off, instead of punishing Telus shareholders by undermining their assets, Verizon could be rewarding Telus shareholders with a takeover bid. Second, the Verizon advantages — such as u.S. roaming options, big capital base, buying power and technical competence — would raise the temperature on the competitive environment in Canada.
One of the big bonuses of Verizon/Telus would be major pressure on Bell and rogers managements to review their conglomerate strategies. If Bell were to see Verizon/Telus eating their wireless and telecom lunch, Bell might be prompted to rethink the conglomerate model, perhaps divesting the wireless business. Would other u.S. or foreign firms be interested?
The merits — in competition and for consumers — of a big Verizon entry into Canada clearly overwhelm the timid incremental ideas now being talked about. Buying Wind and messing around with spectrum to achieve a 4th market player — when the rest of the world and the markets see three players as ample — would be a giant time waster. And a destructive one. Why not reward consumers and shareholders with true competition?