The big headline story from the first week of the CRTC hearing into the wireless market was undoubtedly Telus CEO Darren Entwistle closing hours of testimony with a threat to slash investment and jobs if the Commission follows through with a mandated MVNO model. Entwistle told the CRTC:
There’s been a lot of conjecture related to disinvestment or reduced investment. It’s been a high topic related to what will happen as it pertains to MVNOs being introduced or another 25 percent price reduction being enforced, having already bettered the existing one that’s in place. And there are some views that this is just theatre perpetrated by the incumbents, in that if mandated MVNOs come to fruition or there’s an enforced second tier 25 percent reduction we will go on with status quo investing.
So one of the additional things I would like to file with you in confidence that I brought here today is a Board resolution at TELUS signed by all of our Board directors instructing management to pursue an investment reduction plan and a job reduction plan and a philanthropic giving reduction plan should these eventualities present themselves. And we’re discussing numbers where the reduction, and we’ll go public with it, but I’ll file with you the Board resolution, in the vicinity of a billion dollars of reduced investment over the next 5‑year. The reduced employment is in the zip code of 5,000 jobs over the next 5‑years.
In other words, in a bid to demonstrate that this was not theatre, Entwistle engaged in theatrics by pointing to a resolution from a board of which he is a member that supports his case.
Leaving aside the wisdom of a board identifying specific numbers for future reduced investment based on a non-existent policy, the comments leave the government and regulator in an obvious bind that does not help Telus, maintains a trend of telecom companies saying different things to business analysts and to regulators, and represents only the latest in a long line of investment and market threats from the company in the face of potential regulatory intervention.
First, the Entwistle comments unsurprisingly garnered considerable media attention, placing the regulator and government in a position where dropping the MVNO strategy that is seemingly the preferred choice of both becomes viewed as caving to threats from the telecom giants. Given the politics associated with the wireless strategy, no government will want to be seen as placing telecom threats above the interests of consumers, whose frustration with wireless pricing is well documented. The Telus threat forces the government’s hand and leaves little alternative but to act, even if the CRTC backtracks on the issue yet again. In fact, the comments were raised at the Canadian Heritage committee yesterday, with a Conservative MP commenting negatively on the lack of respect for the regulator.
The government’s willingness to act – battling the telcos is clearly good politics – is supported both by the strong evidentiary record of high prices stemming from an uncompetitive market and inconsistencies from Entwistle on this issue. For example, in a November 2019 quarterly call with business analysts, he was specifically asked:
Are there any regulatory impact related to how you think about the investment just tying it back to the last question [on government policy], there are some decisions that are coming down the road. I’m wondering whether that has any impact on how you think about the investment for the next couple of years.
His response makes no mention of board resolutions:
The forward-looking CapEx guidance that we’re providing and the nominal CapEx number that we are articulating for 2020 and 2021 does not include or anticipate any diminution related to regulatory policy, regulatory intervention or government intervention…The only other comment I would make is that if we do get extremely onerous or interventionist activity by the government, we would rethink our investment policies as any prudent organization that would do in the face of a regulatory abnormality that is not economically conducive. But that’s not the driving force and that’s not what’s in the profile that I just articulated to you that combination of moderating CapEx and EBITDA growth and exposure to the emerging businesses on TI, health, AG Tech all underpinned by great cost efficiency supporting that free cash flow growth story and dividend accretion.
That’s a far more moderate statement compared to the theatrics at the CRTC last week and continues the longstanding trend of telecom companies saying one thing to business analysts and another to the regulator.
The other problem for Telus is that this is hardly the first time the company has engaged in these kinds of threats. For example, During the first net neutrality hearing in 2009 (the Internet traffic management practices hearing), Telus executives told the CRTC:
TELUS has invested and continues to invest enormous amounts in physical infrastructure so that its customers can access the Internet and other services faster and in more places than ever. But we will only invest where we can see either a return on that investment or a need to compete to protect our business. That’s why we are troubled by the statements of some parties that assume that all we need to do to keep up with traffic is to just keep investing with no guarantee of a return. Or, even more ludicrously, that if the Commission adopts even more wholesale arbitrage, then somehow facilities-based ISPs will be encouraged to invest more.
In the 2014 hearing on wireless competition, Telus again argued regulation would lead to less investment:
The current Canadian mandatory roaming regime is already more interventionist than regimes in other countries. In the United States, roaming is subject to commercially negotiated rates. In Europe, roaming, where mandated, is typically of limited duration to support network deployment, confined to entrants, confined to particular network technologies and subject to commercial rates. Canada is now an outlier when compared to its peers. Indefinite access to roaming plus regulated roaming rates based on an arbitrary formula will predictably depress investment and negatively affect the quality of Canadian mobile networks.
In its 2019 petition to the government on wholesale Internet rates, Telus stated:
Regulatory uncertainty raises the cost of capital for facilities based carriers who invest in broadband infrastructure, without any risk sharing on behalf of the resellers who purchase access at harmfully low rates. The result is decreased investment in broadband infrastructure, as capital-intensive projects are put on hold, and access to capital markets is compromised
This tactic is not limited to investment threats. In the 2013 hearing on developing a wireless code, the CRTC was considering real-time notifications when certain caps were reached so that consumers would have the choice of avoiding exorbitant overage fees. Telus warned that new regulation could lead to the elimination of low-cost plans:
we urge you to be sensitive to the possibility of unintended consequences from intrusive regulation, especially requirements that would conflict with consumer preferences and require significant systems development work. For example, as Brent discussed, a mandate on all carriers to provide real-time voice notifications could result in carriers moving en masse to unlimited nationwide plans, if they conclude that the cost and complexity of systems compliance would just be too high.
That might sound good for consumers at first blush, but would certainly lead to higher prices at the low-cost entry level of our rate plans, because it would no longer be possible to offer lower priced, limited usage plans to consumers who do not need unlimited nationwide calling. There are certain customer segments, some of them have been mentioned today, that simply do not need an unlimited voice plan, such as teenagers, who communicate primarily by texting, or people who keep a phone mainly for emergency purposes. Such low-cost, consumer-friendly plans would, in effect, be regulated out of the market.
Several years later, in a 2016 hearing on differential pricing plans it warned the CRTC that mandated unlimited data plans would lead to fewer Canadians using the Internet:
If we were to force all customers to purchase flat-rate, unlimited data plans, we would expect two things to occur. First, since everybody would pay the same amount regardless of how much data they use, we would see comparatively light users subsidize comparatively heavy users. Second, since cheaper data plans would be eliminated, fewer people would likely use the internet overall, and to the extent that the number of customers declined, we would be left with fewer users over whom to spread the fixed costs of our network and we would be forced to increase prices accordingly. Simply put, eliminating data caps or, more accurately, forcing all users onto flat-rate, unlimited data plans, would only leave the heaviest internet users better off.
Telus has shown little reluctance to battle the government over the years. Indeed, earlier this month, it said it was moving ahead with using Huawei equipment despite the fact that the government has not made a decision on the issue yet. The company may think talking tough to regulators advances its cause, but last week’s appearance may have only increased the likelihood of a mandated MVNO approach.