Can government make wireless better?

This post was written by Simon van Norden of HEC-Montréal.

The CRTC announced this week that they wanted Canadians’ opinions on our cell phone service providers. They’ll be holding public hearings starting in January with an eye towards developing a code of conduct for the Canadian retail wireless services industry (i.e. cell phones and mobile internet.) As they put it...

“In the past, Canadians have told us that contracts are confusing, and that terms and conditions can vary greatly from one company to another...Canadians are therefore invited to share their views on:

• The terms and conditions that should be addressed by a code for cell phones and mobile devices
• to whom the code should apply
• how the code should be enforced, and
• how the code’s effectiveness should be assessed.

Mobile data services are big business. Tech giants like Google and Apple got that way by staking their futures on mobile computing. This week we heard that the world has roughly as many cell phones as people. Wireless services are the first 21st-century piece of essential economic infrastructure.

Many experts seem to think that Canada’s suck. The OECD reported last year that Canadians faced the highest wireless data costs of any of the 34 countries they examined. Comparing the prices I see as I travel in the US and other markets, I get much the same feeling. With a pro-growth, business-friendly federal government that cares about international competition, I’d also think that they might want to do something to improve the situation in ways that help promote market efficiency.

I suspect readers of WCI can come up with lots of creative suggestions, but here’s a few to help get the ball rolling.

1. Open up to foreign competition. Most of the Canadian market is controlled by 3 firms (Telus, Bell and Rogers.) They’ve been trying to limit market penetration by non-Canadian firms, including Wind and Virgin, who are hindered by rules limiting foreign ownership and control of telecom providers. These rules stifle competition; we should get rid of them.
2. Improve clarity. Competition is effective when consumers can choose effectively. One way companies limit choice is by hiding the available set of prices. Each chooses to advertise a selected set of service bundle prices, but nothing requires them to make the public the full set of deals that customers currently enjoy. Instead, some deals are only available to those who ask for them, or those threatening to switch providers, or those grandfathered by older contracts. Another popular tactic is to target consumers with limited-time verbal offers for new services, but without making a written offer of the terms. All this limits competition by limiting consumers’ ability to make informed choices.
3. Improve substitutability. Providers will feel stronger pressure to compete when it is easier for consumers to switch between companies. Phone number portability was one step in this direction, but more is needed. Companies instead try to limit these pressures in several important ways. The first is the use of long-term contracts with stiff financial penalties to limit the fraction of consumers who will realistically consider switching at any given time. A second is to offer discounts on new phones only to existing customers, to further discourage switching. A third is to offer discounts for bundling mobile data services with others (television, landlines, etc.) to make comparison and switching more difficult. 

 

This post was written by Simon van Norden of HEC-Montréal.

Comments

[david]

A number of countries ban SIM locks (Chile, Hong Kong, Israel, Singapore...); Canada is not among them. Provided that it is reasonably difficult for customers to disappear from fixed-term contracts, removing the SIM lock reduces the barrier to switching companies.

Oddly enough, it seems that the EU forced Belgium to suspend its ban on bundling on free trade grounds.

[Bob Smith]

(1) makes sense. Presumably, if Canada is part of the same telecom market as the US, prices will converge with the US.

(2) and (3) are tricky. While eliminating discounts on new phones or bundling might make it harder to "lock-in" customers, it does so by driving up the cost to existing customers. Similarly, forcing companies to offer a set menu improves clarity, but it might not improve price, since it reduces the menu of available discounts to consumers (by way of example, a friend of mine insists on telling Rogers that he'll leave if they don't extend his discount - after ten years, they finally called his bluff. Or so they thought, he went to Bell - at a discount). I suspect the telecom companies might be quite content not to offer their customers those incentives, if their competitors couldn't either (since that would reduce their ability to undercut one another at the margin).

I'd be curious to know what happens in other countries. In the US and the EU, arguably the markets are so large that you can have many more competitors and economies of scale can kick in for each one, but what do countries like South Korea, Australia or New Zealand do to keep their costs relatively low (all with similar sized, or smaller, populations, relatively isolated markets and, in the case of Australia, similar sized land mass).

[jt]

Similar to david's comment: prohibit locking of phones when you pay for then outright.

Enable phone portability by separating financing of handsets from service contracts (like when you lease a car). These handsets would also be unlocked. (You can get your auto service from any dealer.)

Force handset makers to honor warranties independent of the carriers (like Apple). Today, the big 3 will only honor your warranty if you have a postpaid account "in good standing". Extended warranties are tied to the carrier. These warranties would naturally be portable when the phone purchase is portable.

[Daley]

A note: Virgin is a wholly-owned part of Bell.

[jt]

Slightly off-topic, the big 3 justify their high prices because of the low population density of Canada. It would be interesting to test this theory. Like Ofcom in the UK we could require all carriers to detail the location and operating power of all base stations. (This is done for health reasons.) Then we could see where the truth lies (as well as protect the health of Canadians).

[Bob Smith]

JT: I've always wondered about that rationale since presumably the cost should really only be a function of the population density of the areas that actually have coverage (which has to be some tiny fraction of Canada's entire territory). Low population density doesn't seem to be a problem for Australia.

[Vladimir]

I would second David's point on "locking" phones. If locks were removed we may be able to purchase phones like laptops or tablets, in cash or on an installment plan at the electronics store. The provision of mobile phone services will then become more like the market for an ISP, where for all of our complaints we still have great flexibility as consumers.

[Michael]

Bob,

I'm not sure how our wireless prices compare, but I believe Australia's internet services are expensive compared to other developed countries. I don't know if that is the case for Canada as well?

[Simon van Norden]

For those who want information on how costs compare internationally, you could check out

http://newamerica.net/publications/policy/an_international_comparison_of_cell_phone_plans_and_prices

or

http://www.cbc.ca/news/technology/story/2009/08/11/canada-cellphone-rates-expensive-oecd.html

The OECD tries to produce meaningful statistics on this and published an overhauled methodology last month. You can find their statistics at http://www.oecd.org/internet/broadbandandtelecom/oecdbroadbandportal.htm (scroll down to item #4 -Prices....they vary them by usage plan.)

[K]

Why not require them to provide plans that sell voice at a flat rate per minute and data at a flat rate per MB. Totally unbundled. And ban them from restricting VoIP or any other application. Why can we have mobile net neutrality?

And shouldn't I be able to get voice from one provider and data from another? Or do phones not support that?

[david]

@Vladimir

Oddly, no; in none of the four countries I mentioned is that the case. Furthermore, carriers also still sell whole laptops bundled with 3G internet via the same contract service, even though none of them are locked.

However, mobile phone companies compete instead on carrier-only services delivered via software preloaded to your phone and/or laptop: tie-ins to wifi at your local Starbucks and so forth. The services only work for that carrier, of course, and most users cannot figure out the trick to acquiring software for another carrier. Still, value-adding instead of lock-in. Yay competition!

[david]

@K

Dual-sim phones exist; they are mostly a creature of the developing world, however.

I for one like my capped flat-fee plan, mostly because it is absurdly cheap compared to any comparable flat-rate data plan (1GB/month, HTTP/S-only without excess charges above that amount, £3.33 per month).

[Simon van Norden]

David: didn't know about the ban on locked phones in several countries -- sounds like a no-brainer to boost competition.

I suspect that the arguments about low density may be largely spurious; Canada may have a big surface area, but most of it has no cell phone reception. The vast majority of the traffic is in big, urban centres and there are dense in all countries. Furthermore, geography doesn't explain much of the international differences in cell phone rates: Canada and Japan are high-cost, while Sweden and Hong Kong are low-cost.

[K]

Btw, what's the presumed cause of the market failure that we are trying to remedy? From personal experience I'd go with information asymmetry (I have no clue which plan would have cost me the least in the past, never mind the future). Any other candidates?

Which makes me think: maybe they should be required to tell us what our past usage would have cost us under each plan. And release the usage data at the request of the client so that competitors could provide the same information.

[K]

David,

"£3.33 per month"

???!!! Let me tell you about my plan (Canada). Nominally $65/month for 1 GB of data and 200 mins of voice + unlimited SMS (yes, people actually pay per SMS in Canada). After god-knows what extra charges it costs me $120+ per month or hundreds more when traveling. Same for my wife. Kids on prepaid SMS only for $10/month.

[Thomas]

New Zealand prices have fallen quite a lot in recent years, after (and likely because of) a third company entering the market and increasing competition.

That's happened despite long contracts and various anticompetitive pricing schemes. I get a 35% discount on home broadband for using the same company as my mobile phone, and there used to be big differences in prices for calling someone on another network.

[Frances Woolley]

As others have said - unlocked phones. Exchangeable SIM cards. It's all about competition.

[Simon van Norden]

K: "what's the presumed cause of the market failure that we are trying to remedy?"

Hard to know where to start....

1) Lack of arbitrage. When a phone company offers me a deal, I have no way of reselling that service bundle. This gives the phone company the ability to price discriminate across customers. This price discrimination, in turn, is used to reduce consumer surplus/boost profits. Of course, by setting prices far from marginal costs, this leads to an inefficient allocation of resources.

2) Asymmetric information. I agree with you: service providers selectively inform customers about available packages and prices. I see a lot of the "Lowest Price is the Law" effect - price discrimination between well-informed and poorly-informed customers. The fact that the "give me a deal or I'll switch" strategy that Bob Smith mentioned above works is proof of this kind of discrimination. I've had sales people tell me that they "had" to charge me certain fees, but (after pressing them) have them confess that they could simply offer me an offsetting credit. Along similar lines, Canadian service providers continued to charge customers a $6.95 monthly "system access fee" long after the govt. stopped collecting it because most people didn't realize it was no longer required.

3) Barriers to entry. The extent to which the above tactics boost profits could be mitigated in the long run if it encourages competition that lowers prices. However, this industry has powerful barriers to entry, which include large fixed capital costs and foreign ownership restrictions. Potential entrants understand that incumbents face very low marginal costs, which in turn can make prolonged price wars credible and thereby deter entry.

4) P=MC? The result of these (and other?) important market failures is a high-tech infrastructure that sets prices way out of line of marginal costs (....and we haven't even touched on the question of international roaming rates!) Moving those back towards more realistic levels should be a goal of public policy.

[Simon van Norden]

Frances: as I hope I've made clearer in my previous post, I think unlocking phones would help, but would leave some severe structural problems.

So here's a modest proposal:
- all wireless providers must publish all their pricing plans (including discounts and credits offered over the past five years)
- providers may not price discriminate between users based on geography or demographic factors.
- users have the right to "sublet" their calling plans
- phone vendors must provide phone unlocking free of charge on demand
- providers may not restrict VOIP services (i.e. must allow Skype and other internet-based calling services)
- drop foreign ownership/control restrictions

Other suggestions?

[david]

Telecoms are all natural monopolies to begin with - high fixed costs, low marginal costs - and so the extent to which there is competition is already only the extent to which public policy obliges several companies to exist. That can depend finely on non-obvious policy details. This likely accounts for the vastly different ways in which telecoms behave across the world, despite similar underlying technology.

@K - awesome, right? UK plans are pretty price-competitive; plans here compete on features vs. reliability outside of London.

[Wonks Anonymous]

#2 Sounds like it's a matter of price discrimination. Which is often economically efficient. Timothy Lee & Eli Dourado had a back and forth about that some months back. It's hard to find a summary post, but this should link to relevant bits:
http://www.forbes.com/sites/timothylee/2012/06/15/why-im-fine-with-apples-daylight-robbery/

[Edeast]

My latest plan is to rent a digital number, forward to skype and use the cell phone companies as an isp. I'm not sure why skype and google can't offer their respective call-in numbers in Canada. Some Crtc ruling I assume.

[K]

Simon:

"price discrimination between well-informed and poorly-informed customers"

I've negotiated several times by threatening to leave, and actually leaving once. I tried again recently and totally hit a wall. They gave me *free* visual voice mail! I'm wondering if the policy is hardening. Also, my feeling is that even if you are "well informed," it is almost impossible to be sufficiently well informed to make a rational decision. Imagine calculating what your cost of your past years usage would have been under every plan available in Canada? There should be a button on the web site that says "Export my usage to standard format" and another button that says "Upload my usage for cost valuation under each of the available plans."

Even better would be to reduce the consumer problem to a straightforward comparison of the costs of the two things that actually cost something: voice and data. So how about you can't charge for free stuff like:

-Using data for VoIP instead of something else
-Call display
-"visual" voice mail
-$/SMS
-"System Access Fee" %*#&ers!

Forcing them to unbundle voice and data would also be good. They need to be reduced to the commodity data service providers that they are.

Also, and this is a big one: if someone has their own phone you must provide service *month-by-month* at the same rate or better than the *&%#$*# 3-year contract!

[K]

Oh, yeah... You cannot charge more than the unamortized value of the associated phone if somebody terminates a contract.

[Bob Smith]

"That can depend finely on non-obvious policy details."

I was wondering if there might be a cultural explanation. Could the legendary Canadian deference to authority prevent Canadians from being more aggresive with their internet service providers on pricing (since in practice, if you ask, they'll usually give you hefty discounts)? It's interesting, at least based on the OECD survey, that countries like India or Hong Kong (where haggling over prices is often, or so I'm told, a point of pride), prices are much lower.

[Simon van Norden]

Wonks Anonymous: "#2 Sounds like it's a matter of price discrimination. Which is often economically efficient."

The word "often" does not mean what you think it does...you really should look that one up.

The Timothy Lee that you linked to argues that a price discriminator should quickly lose market share because there is free entry into the market for laptop computers unless they can differentiate their product. (He also argues that Apple's market power will last only as long as their technological superiority.) Our wireless telecom market has large barriers to entry and is not particularly innovative....they pretty much pick up the same technology that is being deployed globally.

[Simon van Norden]

Edeast: I've never understood what is preventing skype from offering numbers in Canada....but I'm can't fathom why preventing them from doing so makes our market more efficient. Similarly, it would be great if you could buy wireless data service for a smartphone without buying voice time...but I've not seen it offered. (There are wireless internet USB sticks for laptops, which seem to sell at a crazy mark-up....and a laptop is a poor replacement for a phone.)

[Edeast]

I just bought this lte enabled wifi hub thing from rogers, 50 bucks 10 gigs. Normally when i'm in the cities I use Wind, unlimited everything. But for coverage I tried the big three again. However, after experimenting today with the virtual number and skype, not all calls get through and the call quality sucks, so I don't recommend it. I'll try out some more DID forwarding companies. I was planning on using a bluetooth headset with an ipad, instead of getting a phone. But it doesn't look like the quality of calls is there yet.

[Simon van Norden]

K: Good points. Unbundling voice and data, and lowest-marginal-cost-pricing would greatly help consumers compare (and help get the marginal prices right!) A back-door way to the same result is allowing consumers to "sublet" their contracts in the hopes that a secondary market will erode telecoms' ability to price-discriminate.

[K]

Simon,

"A back-door way to the same result is allowing consumers to "sublet" their contracts in the hopes that a secondary market will erode telecoms' ability to price-discriminate."

I agree 100% in principle. In practice, if comparison shopping between new contracts is tough, imagine trying to compare second hand contracts. Obviously it's easier than buying healthcare insurance, but I'm skeptical that it's sufficiently so. 

Why don't we just go for a solution that'll definitely work: What if we cut the telecom network operators out of the retail business and had them just sell bulk voice and data to resellers? We could have lots of  unregulated resellers, none of whom would have any market power whatsoever. Wouldn't we be paying marginal cost in no time?

[Alex Burr]

Competition in the mobile communication market is limited due to the need for access to RF spectrum. The way that RF spectrum rights are distributed to companies unnecessarily limit competition:

Usually, there is a big auction and goverment sells a permanent right to a whole tranch of spectrum across the entire country to the highest bidder. Competition is provided only in the sense of allowing a market of three or four big companies.

This mechanism was probably the best we could do back in the days of analog radios, but these days there is no technical reason why spectrum should not be allocated by a continuous auction process whereby mobile providers have to bid every day for spectrum in each cell area. This would radically change the competitive landscape, allowing small providers to enter the market in underprovided areas, new, more efficient technologies to enter the market easily, etc.