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Why Verizon’s Entry to Canada Would Reduce Consumer Wireless Prices

Fresh off predictions that the CRTC would not eliminate three-year contracts and that a Verizon entry into Canada was “highly unlikely“, Scotiabank’s Jeff Fan is apparently back with another report  that claims it is a myth that Verizon’s entry would lead to lower costs for consumers (I say apparently because Scotiabank declined my request for a copy of the report). The claim mirrors the talking points of the incumbent carriers, who have argued that Verizon is a high-cost carrier that will not enter the market with lower prices.

While no one knows what Verizon’s business model will be (or even if they will come), the arguments that they will not result in lower prices requires you to believe that a major new competitor will simply enter with high prices that keep the current incumbent-friendly situation largely intact. One does not need a doctorate in economics to recognize this is highly unlikely. Whether Verizon offers North America-wide roaming or other incentives to attract customers, a new entrant such as Verizon will obviously shake things up and consumers will benefit.

A new report from Colin Moore of Credit Suisse examines the experience in other countries and finds that fourth entrants have unsurprisingly had a disruptive effect on the market. For example, it points to France, where Iliad entered as a fourth carrier in 2012, dropped prices, and captured ten percent of the market within a year. It also looks at Spain, where Yoigo has led to reduced prices from all carriers with the company capturing 60% of all new subscribers over the past six years.

What might this mean for Canada? Credit Suisse says that if Verizon comes to Canada it will “be both a fourth carrier and to have the financial capacity to be a successful ‘maverick’ in the market.” In response, it says the incumbents can be expected to reduce their prices:

In most markets, if the new entrant was successful at gaining subscriber share, incumbents eventually use pricing levers to defend. Even if Verizon does not come to the market with aggressive price discounts, any subscriber momentum it gained would likely eventually lead incumbents to defend with price declines. Additionally, with a more unbalanced market, long-term discipline becomes harder to achieve.

The ultimate impact is likely higher churn of customers (aided by the CRTC’s wireless code that limits contracts to two years), reduced roaming costs, and lower pricing. That may be bad for the stock price of the incumbents (which explains why they are going to war to keep the competition out), but it will be welcome news for Canadian consumers.

20 Comments

  1. Verizon charges their US customers prices that are generally the same, but in many cases slightly higher, than Canadian carriers charge today. Does anyone really believe Verizon is going to use their US operations to subsidize lower prices for their Canadian customers? Do Walmart, Target, or Home Depot use their US operations to subsidize lower prices in their Canadian stores?

    Perhaps Verizon will use discounted promotional prices to “buy” market share from Canadian carriers and perhaps the Canadian carriers will follow their prices down, for a while. Eventually Verizon will grow restless for their profit margin and prices will drift back up to where they started from.

    The cost to Canadians will be the evaporation of $$billion of dollars from their savings, RRSPs, mutual funds and pension plans. If the Credit Suisse estimate of the cost to France was 35B Euros, we should expect at least $25B of Canadian’s savings to be wiped out. But don’t worry, we can always increase everybody’s payroll contributions to the Canada Pension Plan to make up for those losses. Carriers will be forced to reduce their investments in network expansion/modernization and our government will eventually get to issue a news release similar to the one issued by the EU a few weeks ago bemoaning the fact that 75% of the EU has no access to 4G wireless networks. The EU experiment proves that a Lada costs less than a BMW but since we all seem to prefer Ladas to BMWs let’s follow their lead ūüėČ

  2. Verizon doesn’t have to undercut the incumbents to achieve the same profit margins they currently enjoy in the states. The ability for them to act as a Canadian SMB creates the unfair advantage. They will have a lot of room to drop their prices creating the future Cynic describes.

    No one is against Verizon entering our market, IF they are treated the same as incumbents. It would create jobs and actually grow the economy.

    I don’t agree with the incumbents approach however. Instead of trying to use this as an opportunity to reverse policy, they should just want the policy to apply to Canadian owned SMB as it was first intended, and any sale to foreign ownership removes those benefits.

  3. Fighting the FUD and astroturf
    Well Cynic – consider that VZ is arguably the market leader in the US. It doesn’t HAVE to be cheaper there. In Canada, it would be a different situation entirely. I don’t see it being SUPER CHEAPER, as they have shareholders to satisfy, too. But I see them disrupting things properly.

    And seriously? More FUD, this time about savings and investments? If your mutual fund manager, or the pension managers are that stupid, you deserve to lose money. Don’t bring that bs around here. Now is probably a good time to pull out of Canadian wireless investments until things have settled and a new equilibrium is found. No more easy money for investors on the backs of every Canadian.

  4. schultzter says:

    I’m not the expert Jeff Fan is
    But it seems to me any company entering the Canadian market is doing so because they’re expecting to make a profit. Canadians are used to paying high mobile phone prices (as much as we love to gripe about them we still pay them). So most likely Verizon will try to make their plans look more valuable (i.e.: Unlimited North America Talk & Text) for the same price.

    Anyone who thinks Verizon is the Easter Bunny that’s going to hand-out iPhones, unlimited data, and what not for pennies a month is day dreaming.

  5. @Nick S

    The reduction in Canadians savings and investments can be measured in real dollars. Approximately $14.5 billion of Canadian’s savings has already been wiped out just on the rumour of Verizon coming to Canada. The Canada Pension plan has already lost $57M, Caisse de Depot Placement has lost $179M and Ontario Teachers, OMERS, HOOPP another $53 million.

    Due to current restrictions on foreign ownership of the larger telcos, the vast majority of the owners of those companies must be Canadians. If you are a Canadian and contribute to the Canada Pension Plan then you have already been impacted. If you have mutual funds inside an RRSP or are a member of a Canadian pension plan then your savings have also been further impacted.

    On behalf of all of the pension plans and investment fund managers in Canada please accept all of our apologies for not being as smart as you.

  6. Spynic
    Using Cynic’s logic the government should be doing everything it can to increase the monopolies of blue chip stocks owned by pensions because doing so will increase the value of those stocks. Albeit at the expense of the competition and consumers.

    So what do we do? Get rid of monopolies as much as possible to make room for competition (which also may be owned by RRSPs), and ensure that consumers (who own RRSPs) are getting the best value for their money, or protect monopolies so that those companies stay rich and powerful at the expense of competition and consumers. Well, I know what my answer is Comrad Cynic.

  7. Anthony Reimer says:

    It’s not Either Or
    The choices are not foreign ownership or high prices. Stronger regulation is an option, even though the current federal government would not consider this. Bell and Telus sharing towers already suggests that our geography limits the ability of a new entrant to build a network of their own (if the big guys can’t, why would an upstart?). One also has to question why companies like SaskTel and MTS are not “going national” like Telus did. We could have a domestic fourth carrier if that happened, which *should* provide the benefits that a fourth carrier is supposed to provide. So why don’t they? Because it is too hard and too expensive, even if the remaining companies that came from the old telcos banded together. I’d rather see regs that would let that happen rather than have foreign ownership increases.

    I’m not skeptical in the same way as @Cynic is, but the only fees I see going down if Verizon enters the market are U.S. roaming charges. (I think the trend is already there for lower national roaming rates except on prepaid, regardless if a new entrant shows up, so the U.S. component would be the only thing new on the horizon.) We might see lower data rates as well, but that’s only because it is an obscene portion of their revenue right now (see Michael’s tweet from earlier today) and they have room there.

  8. Anthony
    It’s not that the big three can’t build seperate networks due to geography [which is a strawman in itself given the concentration of Canadians around the border; they can achieve a huge subscription rate simply by sticking towers along the 400 series network in Ontario, for instance], it’s that the prevailing North American attitude is that more than one physical network is overbuilding and therefore a waste of money. Geography is really a nonissue in the prime markets.

  9. @Darryl

    I’m not saying the government should block Verizon from coming to Canada and I haven’t seen any of the carriers say that either. If Verizon thinks they can make a go of it then come on down and give it your best shot.

    But I don’t think it is realistic for consumers to expect lower prices because that isn’t in Verizon’s DNA today and it’s not the way other US firms have behaved when they came to Canada. But all Canadians will feel some real pain in their RRSPs, pension plans and CPP as Verizon takes some business away from the companies that Canadians own and carts their profits back to the US to beef up the savings and pensions of their owners in the US.

    Since there is negligible upside for consumers in Canada and significant downside on their savings and pensions, I don’t think it is right for the government to provide special favors and incentives to Verizon. If they want to come play in Canada they should be prepared to pay their own way.

  10. GetOutOfMyWallet says:

    I’m sorry but the big 3 have had a pretty easy ride while they repeatedly gouged customers. I’m probably one of the few that refuses to carry a phone because I think it is unfair and that is how I choose to voice my dissatisfaction with the entire industry. That and I don’t like a leash with GPS built in. I welcome a new comer to the market place competition isn’t a bad thing and I’d love to see our plans and pricing more in line with other countries. Gets tiresome being number 1 in excessive billing.

  11. Tower sharing, dreaming in colour
    I said it before and I’ll say it again. Any service deemed essential, such as telephony, should have government controlled infrastructure via crown corp who’s primary mandate is improving access vs making more money.

    As my brother likes to say, the only difference between 4g and 5g right now is that if you actually use it’s speed, you reach your data cap in 2 days instead or 4.

    An intermediary crown corp who would own all the towers in Canada would probably not evolve as fast as private in large cities, but would at least make sure you can actually get reception regardless of provider and area. People complain about not having enough choice, consider the rural regions that may have only a bell/telus tower or just a rogers tower and nothing else. Not rogers? S.O.L.

    Since network building is no longer an issue, start up costs would be significantly lower. Use of the towers could be rented at a rate per user per company that’s the same across the board.

    With the spectrum auction, the government could easily keep it to itself and start building the network without doing any major nationalization.

    Probably dreaming in color again…

  12. @Cynic “… I don’t think it is realistic for consumers to expect lower prices”.

    That’s debatable. But I’d be somewhat satisfied with better service or options. Verizon is going to have to offer at least one of that trilogy to entice customers. Canadian ISPs had their chance, years of gouging has created an appetite for change that no number of newspaper spreads will deter.

    @Cynic “But all Canadians will feel some real pain in their RRSPs, pension plans and CPP”

    I would hope that ‘all Canadians’, including our government, are not putting all their eggs in one basket. If the blip of decreased profits for three companies is going to destroy your retirement, best look for another fund manager.

    @Cynic “If they want to come play in Canada they should be prepared to pay their own way.”

    Isn’t that what the auction is for? The incumbent Canadian ISPs got their current bandwidth for pennies. Verizon is going to have pay some real change.

  13. @Joel
    Tower/network sharing has many DISadvantages too. Mainly: Network stability. In Hungary, the government owns all networks including fiber and coax. They lease spectrum to providers. The problem is when there is noise affecting your band of spectrum, and your customers, or a network outage, how do you get the government workers to fix it? How fast can you restore service?

    Forcing Verizon to build their own network not only improves the end product, it creates hundreds if not thousands of jobs across the country.

    If prices are only going to go down marginally, wouldn’t you want at the very least the same level of service?

  14. RE: Crockett
    “That’s debatable. But I’d be somewhat satisfied with better service or options.”

    This. It cannot be emphasized enough how terrible the service with the current oligopolies we have, especially Bell and Rogers. The contrast can be emphasized by calling up Bell support and then calling up Teksavvy support.

  15. Stop conflating private interests with the public interest
    The pension plan and mutual plan talk is pure BS. We need to separate private interests from public interests. Pension plans and mutual funds, no matter how widely owned, are private interests. They answer to plan and shareholders, not the public. The government, however, answers to the public and must ensure that the public interest is advanced. And that means a more competitive telecom market that will improve economic productivity, improve our GDP (and tax collection) and reduce the amount our government pays on its 200 000 subscribers.

    Pension and mutual fund managers will adjust like they do to any industrial or economic policy change.

  16. @KL

    In your happy little bubble, is the Canada Pension Plan a private or public interest? Or how about the Ontario Teachers Pension Plan and the HealthCare of Ontario Pension Plan, etc. They all got whacked. But don’t you worry, the feds will prop up CPP and the province will kick in some of your tax dollars to help the other funds make up for the losses. Or maybe they’ll just increase the CPP eligibility age again, and push it up to 69 years this time.

    Don’t forget the province of Ontario is kicking in $1000 per month to each Nortel pensioner to help top up their pension plan when it got slammed by the collapse of Nortel.

  17. Breath …
    @Cynic “… some of your tax dollars to help the other funds make up for the losses”

    Cycic, we are already being ‘taxed’ by paying higher rates for less service than comparable jurisdictions. I’ll take my savings now thanks.

    Markets fluctuate and recover. Industries cycle. Fund managers diversify. Pension/RRSP investments are a smart investment but never a sure thing. If perhaps you are personally close to retirement with a heavy telcom investment in your portfolio, then you may not have as many trips to the cottage. C’est la vie.

    Otherwise chill out, and enjoy the benefits of a more streamlined and competitive telcom sector. Who knows, maybe innovation will even lead to increased efficiency & profitability down the road!

  18. @Crockett “Who knows, maybe innovation will even lead to increased efficiency & profitability down the road!”

    It is hard to imagine much innovation being spurred on by Verizon if they are allowed to use existing network and infrastructure. The status qou will remain.

    We will learn a lot of their intentions when they obtain their spectrum. If they are buying in Dawson Creek and Moose Jaw then perhaps they will aspire to be a “national carrier”.

    If however they stick to the large urban centres then we will still be seeking that fourth carriers so coveted by Geist.

  19. I have to hand it to Mr. Geist. Picking out a positive for the consumer out of The Credit Suisse report was tough, but he found it.

    If Verizon introduces plans similar to those that were introduced in France and Spain, their could be disruption to the incumbents financials.

    The entire rest of the report talks about how a four carrier model consistently fails across the world and you pick out the part that basically says, if Verizon sells cut rate plans, at a loss, over the internet, using the existing backbone that they do not have, they could disrupt the incumbents financials.

    I understand your fans will not look at the report but I still admire your nads for referencing it; even more than the OECD report that you cherry picked from.

    One of the things I was wondering was, what does a telco does when revenue decreases. Well one thing is, I think they stop spending. That means both Opex with downsizing and OEP, but also Capex. So if they are not building, and Verizon is not building, who is building?

    Anyways the great news behind all this is really for the 100 million or so Verizon Wireless customers in the US, as you can bet they too will be clamouring for these $8/mo plans.

  20. Free Markets says:

    Verizon Slammed by False Ads
    How many thousands of people does Telus employee outside of Canada? Cancel that & bring the work to people here at home. All Bell Roger Telus care about is keeping cell rates some of the highest in the world, keeping a monopoly. For years these few companies have made billions off the backs of Canadians. The Big 3 do everything they can do keep control of their markets. Time for that to stop.