Having initially dismissed the prospect of Verizon’s entry into the Canadian market, telecom analysts are now seeking to downplay the likely impact, questioning whether Verizon would become a consumer-focused competitor and suggesting its focus may be limited to the corporate market. While the Verizon’s precise plans remain unknown, it seems likely that much of their interest in Canada stems from roaming costs.
Carrier roaming costs (and revenues) are typically shrouded in secrecy, but it seems likely that Verizon faces a significant imbalance when it comes to roaming costs in Canada. Recent reports from both the OECD and BEREC (the Body of European Regulators for Electronic Communications) point to the typical model for roaming costs, with carriers preferring to simply swap traffic with no net payments. The OECD discusses this in an international roaming study released last month:
It is well documented that operators in certain markets seek to balance traffic to the greatest extent possible, in the first instance, and subsequently seek to negotiate the price for services at the margin. If we consider an extreme in such cases where two operators have traffic volumes which are perfectly in balance, one in country A and one in country B, then if the rates offered are reciprocal which is normally the case, then the net payments are zero. The actual costs faced by the first in question are the costs of service provision, which at the margin will be extremely low. In this instance, either operator has the possibility to offer retail services at a much lower rate if it chooses to do so.
BEREC makes the same point in its 2010 study on international roaming regulation:
In the wholesale roaming market, the majority of deals are reciprocal, so that purchasers buy and sell wholesale roaming from the same counterparty. Where the trade is intra-group or traffic is relatively balanced, in practice the unit price is of little consequence. For non-group trades, the volume of roaming sold may be of much greater commercial significance than the purchase price. In addition, the advent of traffic steering has meant that operators generally try to identify various preferred partners (in order of preference) to which the bulk of their traffic is directed. There appears to be a tendency to balance traffic as far as possible.
Swapping traffic is a problem for Verizon since its CDMA network makes it difficult to balance roaming traffic. Once Bell and Telus shifted away from CDMA, those companies benefited from Verizon customers roaming in Canada (their CDMA network remains active and can accommodate Verizon customers roaming in Canada) but Bell and Telus customers roam on competitor networks in the U.S. For Verizon, the imbalance may run into the hundreds of millions of dollars each year (a 2008 Australian study – well before today’s major roaming data demands – found Telstra’s international roaming revenue was $327 million). Assuming a major roaming imbalance, investing several billion dollars into the Canadian market by buying new entrants and bidding on spectrum could be recouped in large measure through the roaming savings.
More compelling is the prospect that Verizon could use its Canadian network to change the approach to roaming in North America altogether. As Europe moves to dramatically reduce roaming costs throughout the European Union, Verizon would be uniquely positioned to offer a single U.S. and Canadian network. The company could move to eliminate roaming fees for U.S. and Canadian customers, while offering cost-competitive U.S. and Canadian roaming together for international providers establishing wholesale roaming agreements. Such a plan would obviously be attractive to the corporate sector as well as regular cross-border travellers (think Canadians that regularly vacation in Florida or Arizona).
For the Canadian carriers, the change would require a response as a single calling market with no roaming fees would represent a serious competitive threat. Further, given Verizon’s ability to recoup costs from U.S. and foreign customers, it would be well-positioned to offer competitive Canadian domestic rates. The change would cost the Canadian companies millions in roaming revenues alongside lost customers attracted to a simplified, no roaming offer.
Unlike their response to the new entrants, which focused on low-cost flanker brands with the bet that the new entrants would not survive, the ability for Verizon to reshape the marketplace would require a more robust response that would impact on both the consumer and business segments of the market. Given the threat, it should come as little surprise to find Bell already sounding the alarm, as it warns against what it sees as unfair competition and calls for a “level playing field.” For Canadian consumers weary of an uncompetitive market, Verizon’s entry could finally result in competitive differentiation and some real change.