The Canadian Wireless Rip Off

Ben Klass
Update: Have a look at this request that I've sent to the CRTC

 

 

Wireless service is so expensive in Canada because the cost of doing business isn’t cheap, or so the argument goes. “Canada’s vast and challenging geography” is the big communication companies’ go-to talking point for explaining why this is so. Proponents of this view point to figures like capital intensity to justify this claim, which shows that Canadian wireless companies’ capital-spending-to-revenue ratio is about on par with similar companies in other countries.

Okay, so Canada’s wireless providers are about as productive as the rest of the world, even if it is more expensive to put up a tower in 40 below. We’ve all got LTE in our ice fishing shacks and canoes, so what’s there to complain about? Well, as it turns out, lots.

Capital intensity doesn’t tell the whole story of why our prices are so high; as you might know, the path from revenue to prices is long and winding. So let’s look at another way of measuring how well a company’s doing. According to Jeffrey Church of the University of Calgary’s School of Public Policy, when assessing profits and market power we need to be mindful of one indicator in particular: a company’s internal rate of return.

Shareholders seek a competitive return on their investment; fair enough. The idea is that there is value to the risk they take, and paying shareholders back for this risk is part of the cost of doing business for Rogers.

So how are the investors doing?

If I believed that “there is no competitive problem in Canada’s wireless market”, then I’d have to feel sorry for the Rogers’ investors, who were surely experiencing self-inflicted hair loss between 1986 and 2006. Apparently Rogers Wireless “suffered nearly two decades of low or negative cash flow returns,” although from Church’s figures I counted only 13 non-contiguous years of negative real returns during that period.

I would hazard a guess that companies like Bell Mobility probably faired poorly as well. Back then cell phones were seen as a luxury good and a status symbol; I remember saving up money in high school so I could buy a Motorola Startac (never did wind up getting one - couldn’t afford it). Putting up new towers is expensive, or so I’m told, and there wasn’t very much demand for wireless service outside the business community at the time. Most people were relying on pay phones and traditional land lines, especially the latter since back in the day there was only dial-up Internet access. The closest thing we had to text messaging was pagers, I still have some AOL CD’s lying around my place, and a lucky few knew someone who could use their office’s T1 line for gaming in the off-hours.

After years spent owning shares in  a money-losing wireless business, you’d think that prudent investors would go off in search of greener pastures. So how was Rogers able to keep kicking the can?

Well the thing is, both of these companies are owned by conglomerates who do much more than just sell cell phone service. Rogers Communications Partnership also owns a lucrative cable business, which at the time didn’t face competition from Bell. Bell Canada Enterprises, on the other hand, owned many of the telephone networks that were considered a basic, necessary service at the time (they still are). Local phone service didn’t become competitive ’til the late 90’s, by the way.

Bell and Rogers were betting dollars to donuts that wireless was the way of the future. Since they were making plenty of money in their other businesses, I wouldn’t be surprised if they decided to get in on the ground floor, put up with the loss, and wait for wireless service to turn a profit. It was either that, or risk letting someone else lay their hands on a potential golden goose. Church’s argument that current profits are justified by past losses pretty much confirms that this was the plan all along.

I don’t think “gone today, here tomorrow” is the way it works for most people, but Rogers’ investors probably know a lot that I don’t.

One thing I do know is that in the 90’s, the idea that one day everyone would be watching videos on their phones sounded like science fiction. Since investors weren’t sticking around waiting for the starship Enterprise to deliver their returns, it seems far more likely that Rogers’ cable operations were picking up the slack for the loss-leading wireless division.

 

If I had to guess, I’d say that Rogers was probably using revenue from its cable business to cross subsidize its wireless division. And, if my intuitions about Bell are correct, it probably used revenues from its telephone network to cover Bell Mobility’s losses. Bell has been using the same dynamic between local and long distance rates for over 130 years. The wireless private losses of the 80’s and 90’s would have likely been considerably more substantial if the public hadn’t been taking one for the team, subsidizing these underwater enterprises by giving them nearly-free access to spectrum. You know what they say, one man’s loss is another man’s gain.

When you look at the way its business was organized during the 80’s and 90’s, it seems pretty likely that Rogers was using profits that came from its cable division to subsidize business users’ demand for wireless services. Of course, it’s clear that demand wasn’t enough to cover costs, but what’s the use of having a limo if you can’t get your accountant on the phone from the back seat?

Can you remember wondering why your cable bill was so high back in the 90’s? Me neither, but if you do, you might be interested to hear that the likely culprits were people using cell phones to conduct business, and it seems like Rogers didn’t have many qualms about taking your money and stuffing it into their pockets.

Feel free to disagree with me. Of course it’s possible that investors kept sinking cash into a money pit for decades out of the goodness of their hearts. But if you’re with me, then you’ll probably agree when I say that all signs point to one explanation: losses at Rogers Wireless were borne mostly by the public and Rogers’ cable subscribers, while the lion’s share of the gains went to wireless subscribers and people who invested in Rogers’ parent company.

You see, shareholders can’t invest in just Rogers’ cable division or Bell Mobility. They invest in Rogers Communications Partnership or BCE (or both), the umbrella corporations that own these smaller operations. Shareholders might have no idea where the money's coming from - and it doesn't pay to ask too many questions. So when Church reads the financial tea leaves out of this context, it’s is kind of like he’s skipping to the last chapter of a novel to find out how it ends.

Speaking of how it ends, things are looking up for Rogers these days.

Like I said, back in the day cell phones were just for the rich. Some early phones cost thousands of dollars, and were so heavy they had to be installed in a car, for goodness’ sake. Regular people relied on their home phones and pay phones to stay in touch, and no one in their right mind was talking about watching video on their phone. On school field trips they used to have TV screens in the chartered busses, and if we were lucky they’d put on Ferris Bueller’s Day Off. Such an idea seems laughable today, and I’m not just referring to the exploits of a young Matthew Broderick.

Fast forward to the present. Wi-Fi, which barely existed in the 80’s and 90’s, is such a big deal that something like 75% of global smartphone traffic originates on home networks, not cellular. Giant flat screen TVs are cheap and plentiful, we’ve got waterproof HD camcorders the size of cassette tapes, and you can’t walk down the street without bumping into someone whose gaze is fixed on a tiny glowing screen. I’m still holding out hope for a hover board.

Nowadays, it seems like everyone and their dog has got a smartphone, and it’s been a bona fide jackpot for the wireless companies. Finally, after decades of hard times, investors can finally reap the benefits, and it’s all thanks to Apple’s ingenious little device.

When the iPhone first came out, networks in the States were crippled by the huge demand for data. AT&T had to scramble to get its customers onto Wi-fi networks to keep its towers running. Canadian carriers like Bell and Telus saw this play out, but they didn’t individually have enough cash to upgrade their networks. So they combined forces, and blanketed Canada in 3G coverage using their existing towers and spectrum. You know, the spectrum they got at a discount 25 years earlier. Ever since then, nothing but profit.

As far as Church is concerned, all the profit that companies like Rogers Wireless are generating is their just dessert for hanging in the breeze over the past couple decades. They stuck with it for so long, despite all those losses, so doesn’t today’s profit really just mean that Rogers is breaking even?

Personally, I have a really hard time swallowing the idea that Bell or Rogers is still paying for publicly-subsidized investments it made nearly thirty years ago. Rogers Wireless isn’t even the same company it was 30 years ago - it used to be called Cantel - and it definitely isn’t in the same business anymore. It used to sell dumb phones to smart businessmen. Today it sells miniature computers to virtually everyone. Claiming that Rogers’ profit today is paying for Cantel’s losses 10 years ago is like saying that Netflix should pay Blockbuster for putting it out of business.

The networks that were originally set up in the 80’s have long since been replaced with new equipment. Bell and Telus are reusing spectrum they got back then with technology that they installed 5 years ago. Rogers is offering LTE so fast you could watch 50 Netflix streams on it at once, at least for the 15 minutes it would take to reach your data cap on their top plan.

Speaking of Netflix, Rogers, Bell and Telus are all scrambling to think of ways to save their TV business. They don’t want to be the next Blockbuster. And plus, Rogers Wireless owes its cable buddies a favour for bailing it out during that rough patch back in the 90’s. So Rogers has launched the Anywhere TV app, which lets you watch its content on your smartphone. Bell’s followed suit with the Mobile TV app, which doesn’t even count against your data cap. What's so special about Bell-owned TV shows that they get a free pass? Telus is kind of out in the cold on this one, since they don’t own any content, but I’m sure they’ll think of something.

Bell doesn’t want their wireless network to become a dumb pipe that can carry all the Netflix you can watch. If you’re watching Youtube instead of CTV, Google’s getting ad money, not Bell Media. So Bell decided that its subsidiaries would work together to offer broadcasting content on your smartphone. Right now Bell’s top two plans include the Bell TV app as a “bonus.” (Everyone else on Bell can pay $5/month.) Like every other gimmicky app, it works on the freemium business model, which means that the first 10 hours are free, and after that Bell charges.

You probably wouldn’t have to worry about ever hitting that cap if you got the Bell TV app with your mobile plan. From the looks of the reviews in the iTunes store the app is full of crippling defects. (937 reviews, 275 current version.) It’s got a 2 star overall rating, and even the few four- stars are curiously critical. Blueduck89 really heaps on the praise:

“This is a great app but I can’t watch the end of hockey games. For example if tsn has a game scheduled from 7-9:30 the feed cuts off and I cannot watch the rest of the game. I would love to see this corrected.” (4 stars, #44 on the list)

That doesn’t sound too great in my books. In fact, given that the vast majority of the reviews (including the most recent ones) say things like “”L’app ne fonctionne pas.” (Go_Habs_Go, 1 star,#4) it makes me wonder who’s paying for it. I wouldn't be at all surprised to learn that Bell Mobility is losing money on their mobile TV app, which is not a good thing, since I’m guessing you know who’s picking up the tab. (Hint: Check the mirror)

If I can get 10 hours of mobile TV for free with my wireless plan, why would Bell charge me at least $35 to watch 10 hours of Netflix? At this point, the answer seems pretty obvious.

From here it looks like Bell is taking a page out of Rogers’ 90’s playbook. History might not repeat, but it does rhyme; yesterday, local phones were lucrative and wireless was a money pit. Today, wireless is the big moneymaker and Bell's Media and IPTV divisions are taking the hit. Cord cutting might just be a fad, but Bell isn’t willing to take that chance. They’re meeting the Netflix threat head on, cocked and loaded. And despite what their TV ads will tell you, they’re not interested in playing fair.

Bell puts a cap on your data plan, not because there’s too little spectrum to go around, but because they don’t want you watching too much Netflix. They’re hoping that you’ll be worried about going over your cap, and that you’ll decide to watch Bell TV instead. It’s a win-win for them; even if you don’t go over your 10 hour TV limit, every eyeball on their channels nets them advertising dollars. If you do watch "too much," they get you for $3 or more. They make sure that their app doesn’t work on bigger screens, unless you also subscribe to their satellite or IPTV. All in the name of providing more choice for Canadians.

As usual, Canadians are caught in the middle of a corporate free for all. But we don't always have to be the ones to pick up the pieces. this time something’s different.


The CRTC was listing when J.P. Blais took over last year. But he’s set about righting the ship by capping roaming fees, unlocking phones, and getting rid of long contracts. The Government of Canada has even got his back, but there’s a still lots of work that needs doing. Blais’ job is to speak truth to power, but he can’t do it without your help. He needs your support, to know what you think is fair, and to find out how to get the task done right.

We need to help the CRTC so that they can help us. Bell, Rogers and Telus have got a team, and now so do we. Let’s start off by telling these companies that we don’t need any more data caps, gimmicky TV services and oversized bills. What we need is real choice, an open internet and affordable high quality services, and we won't take no for an answer.




 

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