Mobilicity shows why wireless competition rules need to change, fast

Wireless provider Mobilicity’s announcement yesterday that it had been granted creditor protection is casting doubts on the government’s plans to encourage competition, and whether the upcoming 700 MHz spectrum auction should go ahead as planned.

What cost competition?

Mobilicity entered the market as the government was ramping up efforts to encourage wireless competition. Those efforts included setting aside room within each auction block for net-new bidders, and relaxing foreign ownership rules to attract investment. With the top three carriers, Rogers, Bell, and Telus, controlling over 90 per cent of the wireless market, the government’s aim was to increase competition, lower prices and drive competition.

A recently released University of Calgary School of Public Policy paper, Wireless Competition in Canada: An Assessment, concludes this strategy is doomed to fail.

Efforts to create competition in the short run, that increase the number of carriers, will simply squeeze margins in the short run and likely will not be sustained in the long run, as carriers exit and consolidate to reduce competition and restore margins consistent with profitability and the natural limit,” the paper says. “And, while consumers might gain in the short run from lower prices, everyone is likely made worse off in the long run from the misallocation of spectrum, reduction in scale of carriers, and reduction in incentives to invest from such intervention.

Mobilicity, which is operated by Data & Audio Visual Enterprises (DAVE) Wireless, launched its services in January 2010 after spending $243 million to reserve spectrum in the 2008 AWS auction. It provides coverage in a limited number of regions, including Toronto, Edmonton, Vancouver, Ottawa, and Calgary, and has struggled to attract and retain subscribers – they topped out at 250,000 in May before sinking to 200,000 at the time of this week’s announcement.

In February, Mobilicity announced a fiscal restructuring, followed by Telus confirming in May it had offered to buy the company out for $380 million. That deal, later blocked by then-Industry Minister Christian Paradis, was eventually withdrawn completely.

Mobilicity has been seeking suitors ever since, and last month was reportedly negotiating with Wind Mobile to transfer its subscribers to its competitor while it restructures. Although these reports were later denied, it now appears as though Telus is ramping up its efforts again. According to the Globe and Mail newspaper, Telus is in talks with Mobilicity to resurrect its purchase plan. Regardless of who is trying to buy the struggling wireless provider, the writing is already on the wall: Mobilicity’s business model isn’t working.

More harm than good

Mark Goldberg, a Thornhill, Ont., telecom consultant and founder of the annual Canadian Telecom Summit, says the government’s efforts to reduce consolidation are misguided.

“The government knows very well that Canada actual[ly] has lower concentration of its wireless market than most countries,” he wrote in a blog entry. “Nearly half the OECD has 100% of their wireless in the hands of three or fewer carriers. The OECD average is 93% share among the top three, so Canada has more competition already despite what the [Industry] Minister [James Moore] acknowledges as a small population across a large landmass.”

With the 700 MHz auction process already underway, Goldberg says it isn’t too late to change course.

“It would be helpful to see the scorecard by which the government is measuring the state of competition,” he wrote, adding, “I continue to believe it is time to push the reset button.”

While Mobilicity twists in the wind, Goldberg says Canada is losing its wireless edge, and needs to adopt a more cohesive approach.

“The failure of this government to produce an overall national digital strategy leads me to the concern that there are potential ripple effects that could have a long term deleterious impact on Canada’s communications infrastructure, resulting in reduced opportunities for Canadian leadership in a global digital economy.”

Carmi Levy is a London, Ont.-based independent technology analyst and journalist. The opinions expressed are his own. carmilevy@yahoo.ca