So, the big news from last week is that Canada’s two biggest cablecos want to become Canada’s biggest cableco.
This shouldn’t be surprising – Canada’s two biggest telcos have thought about merging for years, but the political winds have apparently not been favorable. While you can generally (but not always) satisfy shareholders with a big enough bucket of cash, governments are another matter. Since telecom liberalization in the 1990s, public policy has tried to move the country away from monopoly and towards a competitive marketplace for telecom services. Incumbent telephone and cable companies were unmoored to compete with one another across the country, but the practical consequences have been a gradual consolidation of the industry through mergers & acquisition. Because it makes little sense to build infrastructure in a ‘territory’ that is home to a well-established incumbent, the big companies stuck to their domains, and the biggest grew their territories by gobbling up potential competitors in other regions. People have been saying that there isn’t much left to gobble – or not much room for further consolidation in the industry – since the 2000s. But deals that further reduced the number of incumbents have continued to be approved by regulators. Eastern cableco Rogers is still hungry, and it’s confident government will agree to their planned purchase of Western cableco Shaw. Perhaps they will get what they want, but this is not a done deal and will be debated for some time to come. So, what are the options?
Option 1: Let the capitalists have their way
Rogers acquiring Shaw wouldn’t change much of the status quo anyways. The two companies already don’t compete for wireline customers (although they have previously squabbled over whether there is actually a non-compete agreement). The big change is going to come in wireless, where Shaw does compete (as Freedom, formerly WIND) with Rogers and the rest of the Big Three (Bell & TELUS), and access to spectrum is a critical factor. Given how hard it has been to develop a fourth wireless competitor, we could just embrace the reality of the Big Three. But why stop there? Maybe two companies is all you need for competition? Much of the country already operates as a duopoly for wired internet access (where Canadians can choose between their local cableco and telco). Regulatory proceedings at the CRTC would be greatly simplified in a world with only two players, as long as the regulator can assure itself that this is what competition looks like and there’s no need to set rates. Canadians will pay more – shareholders will profit. However, this would in many ways give up on what liberalization was meant to accomplish. Sure, governments care about shareholder interests, but they also care about other things, and will have to draw the line somewhere. Apparently that line wasn’t reached when Bell acquired MTS (followed by former MTS customers paying more). Is Rogers-Shaw going to be the line?
Option 2: Release the Americans
If no facilities-based competitors are going to organically develop from within the Canadian telecom industry (by climbing the mythical “ladder of investment”), then one option is to attract competitive interest from outside the country, and U.S. companies offer the best potential given their infrastructure south of the border. Of course, it’s not as easy as simply relaxing foreign ownership rules. A new foreign-owned competitor would have to spend billions to build infrastructure to compete against the comfortably-situated incumbents. More realistically, foreign investors would buy an existing Canadian incumbent where they saw an opportunity. This does have the potential to shake things up, just as WIND mobile did with its foreign backers (or when Verizon seemed interested in acquiring WIND and Mobilicity). Ultimately, WIND was bought by Shaw, and now Rogers is buying Shaw. As a new entrant, WIND required favorable regulatory treatment to stand any chance against the incumbents. New entrants need access to existing infrastructure (towers, poles, rights of way) and wireless spectrum. Long-time telecom journalist Rita Trichur (who was a correspondent during the ‘telecom war’ of 2013, when it seemed that Verizon might move into Canada) has come out advocating government drop the foreign ownership rules as a source of getting fresh competition into the market. She imagines that Verizon or AT&T could buy up the infrastructure that Bell and/or TELUS have built. Perhaps customers would see lower costs, and she points out that we already coordinate with the Americans on spectrum and security. After all, Canada and the U.S. are both members of the Five Eyes security alliance. Those AT&T/NSA splitter rooms were just for foreign traffic right? And Canada’s not really foreign, because the Five Eyes have a “gentleman’s agreement” not to spy on each other. Right?
Option 3: Service-based competition/structural separation:
The “European” model – recurrently floated as a possibility in Canadian telecom, but never seriously considered as a broad approach given our commitment to facilities-based competition. If we can call facilities-based competition a failure, then how about we accept a leading alternative? Let service providers compete over some kind of shared infrastructure (with the infrastructure owner “separated”, so that they don’t compete with these service providers). Canada’s rejection of this approach in favor of facilities-based competition was once justified by the fact that the country had overlapping cableco and telco infrastructure in urban areas, but being stuck with just two competitors was not imagined as the final outcome (in wireless, there are the Big Three, but Bell and TELUS split the country between them and share facilities, rather than build competing networks in the same territories). If we don’t like the outcome of duopoly, let’s deal with the policy failure by pushing in a different “separated” direction. There’s a lot of different models such an approach could follow, however the path will be difficult, and many people will be very upset by a change in the status quo.
Option 3b: MVNOs
Given the implications of the deal for wireless competition specifically, this could be the time to extend mandated access to wireless facilities to MVNOs (Mobile Virtual Network Operators). MVNOs have been very controversial in Canada, as another way of mandating access to incumbent facilities for new competitors to provide (wireless) services over — a specific kind of service-based competition. Canada has historically expanded mandated-access regimes for other forms of connectivity to deal with the flaws of facilities-based competition, but incumbents have opposed the introduction of MVNOs as they opposed other forms of mandated access. This opposition will be harder to maintain in the wake of a Rogers-Shaw deal.
Option 4: Just say No
In some ways, this is the conservative approach – reject the deal as bad for consumers, bad for competition, and keep things the way they are. In other ways, this would be a departure from Canada’s post-liberalization approach to competition policy, because some arm of government would have to finally signal that enough is enough. Perhaps this would just kick the can down the road and maintain regulatory uncertainty, but rejecting the deal provides an opportunity to articulate a new policy approach that the industry can orient to.
Are there other options? Sure – the deal can be approved with various conditions (as Rogers apparently expects), but these are not likely to make a fundamental difference to the outcome. Even if Shaw hands over Freedom and its spectrum to a different player, this won’t translate to a national competitor. And of course, we could go all-in on monopoly consolidation (let the biggest fish eat the rest) — which takes us back to the utility model and erases what liberalization was supposed to accomplish.
I do not want to weigh in on what is likely to happen, but to highlight the fact that this presents an opportunity to do something differently in Canada. My worry is that regulators will focus too much on how they might somehow make the Rogers-Shaw deal seem acceptable, and not enough about how they might steer policy in a different direction. The Competition Bureau is already getting an earful about the deal, and you can let them know your own thoughts.