A little while ago, I promised I’d respond in greater depth to some comments made by Craig McTaggart, Telus’s head of broadband policy, in his 42-page paper that delightfully borrows Cher’s “Turn Back Time” title. That document was itself a rebuttal to some of the observations previously made by me, University of Ottawa professor Michael Geist and consumer advocates Open Media. My own musings were in response to a report from Scotia Capital that sought to dispel some myths about Canada’s wireless market. It’s a long chain of rebuttals, but here we are.
It’s taken a while to get through all 42 pages, so I won’t punish anyone with a similarly long response. I only hope that if McTaggart does choose to continue the debate that he keeps it short and punchy too. I’ve distilled my responses to his points down to 10, at least as far as they’re relevant to anything I’ve written.
1. High ARPU does not equal high prices. Both Geist and I initially responded to McTaggart’s claims that Canadian carriers’ world-topping average revenue per user does not necessarily mean that subscribers here pay high prices. I think we both did a good job at countering that; claims to the contrary suggest that ARPU is high because Canadians use their phones more than people in other countries, but that’s not true. Brits use more data while Americans use more minutes, yet ARPU is significantly lower in both countries. And if for some reason ARPU really doesn’t equal high prices, it definitely does equal high bills, which is really the only measure that matters to consumers at the end of the day. There’s no two ways about it: Canadians have the highest wireless bills in the world.
2. Growth projections. McTaggart repeatedly criticizes Geist and Open Media for using outdated data – I’m grateful he doesn’t level the the charge at me – but at the same, he also repeatedly uses data that hasn’t happened yet, especially when it comes to talking about Canada’s wireless penetration. Both McTaggart and Scotia Capital flagged Canada’s high smartphone growth as somehow being important. The number is indeed high – at 49.5%, the rate at which Canadian carriers added smartphone customers was the highest among developed nations in the third quarter of 2012. But so what? It’s a figure that doesn’t matter for a number of reasons.
For one, any statistician will tell you that when a country experiences a higher-than-usual growth rate in any measure, it’s usually because it is playing catch-up to peers. Secondly, any such rate might be a temporary occurrence – if I were to guess as to why smartphone growth was so high in Canada during that time period, it could have indeed been an effect of new carriers making the market somewhat more competitive, but I’m not really sure.
Thirdly, there’s no reason to believe such a growth rate will again be duplicated or continue. If Canada is indeed playing catch-up, it’s likely to eventually moderate down to the sort of growth levels being seen in other countries. Smartphone penetration leader Sweden, for example, is seeing only about 29% growth.
Even in the unlikely event that Canada continues its big smartphone growth, it still isn’t likely to result in anything impressive, simply because the country has been so far behind in cellphone adoption overall. If all the developed countries in the Merrill Lynch Bank of America Global Wireless Matrix were to continue their growth rates from the third quarter of 2012 through to a full year later – performance that is more unlikely the more impressive it was – here’s what smartphone penetration might look like close to the end of this year:
So, even if Canada continues its high smartphone penetration growth from 37% in late 2012 to 55% in late 2013, it would go from middle of the pack to… middle of the pack. Why was that world-leading growth rate important again? That’s why talking about numbers that haven’t happened yet seems almost as useful as discussing five-year-old figures.
3. Low churn means happy customers. McTaggart took issue with my assertion that high churn rates – the number of customers who defect to other service providers each month – correlated with countries that had stronger rules governing contract lengths, and that this further correlated with lower ARPU in those countries. The numbers do in fact bear this out on the high end: the countries with the five highest churn rates – Belgium, Denmark, Greece, Spain and Italy – all fall in the lower half of ARPU as well. The correlation is a little weaker at the low end, yet a number of countries with low churn do indeed have high ARPU, including Japan, Switzerland, the U.S. and Canada.
Telus reasons that if prices were indeed as high as they supposedly are in Canada, wouldn’t customers defect more – especially after the carrier has made it easier for them to leave in recent years by simplifying the remaining payments on their devices and lowering their unlocking fees?
That might be true, but the question then becomes: where are those customers going to go? Suppose a customer signs on to a three-year contract with Telus and gets a cheap smartphone in return. Yet, after a few months, he finds he hates the service, decides to pay off the device and take his business elsewhere. Because of network technology differences, he can’t go to a new entrant such as Wind or Mobilicity without buying a new phone because his existing device – the one he just paid handsomely for – won’t work there. His choices are thus Bell, Rogers or the various flanker brands of the big three. Yet, any plan with a reasonable amount of minutes and data usage costs roughly the same regardless of carrier. I’m hard pressed to find a plan with any sort of decent usage from the big three and their various offshoots that doesn’t fall between $60 and $70, which coincidentally is right where their ARPU sits.
How close do those bills end up? Here’s the Global Wireless Matrix’s ARPU estimates for the full year, 2013:
So, moving from Telus to Bell would lower said individual’s bill by a whopping $2.02, while switching to Rogers would actually raise it by 26 cents. Between the three, the difference in bill is less than 4%. In comparison, here is the ARPU differential (in Euros) between the three biggest carriers in Belgium, which has the highest churn among developed countries:
The difference between the cheapest and most expensive is more than 10 euros, or 36%. When faced with that kind of potential savings, it’s no wonder Belgians switch carriers so frequently. And it helps that they’re not trapped by three-year contracts.
That’s actually an issue where you do have to feel a bit for the carriers – it must be tough to differentiate their offerings, especially without rocking the pricing boat too much. Yet, higher churn in other countries indicates that carriers there are somehow managing to convince customers to switch. That’s likely a result of compatible networks that don’t require a new device and better differentiated (read: lower) prices.
Whatever the case, low churn in Canada absolutely cannot be taken as a sign of customers being satisfied with their carriers, as the carriers themselves would like policy makers to think. It’s more a sign of customers either feeling locked in, or feeling that the hassle of switching to another carrier for a deal that won’t be significantly any better just isn’t worth it.
4. Canadians spend comparatively little on communications. McTaggart takes his turn dredging up some relatively ancient numbers here by referring to a 2009 CRTC report comparing how much people in various countries spend on communications services. According to those numbers, overall spending is comparatively low in Canada.
Since we are talking about wireless, let’s keep the conversation limited to that area – and let’s use Merrill Lynch’s more accurate numbers. According to the Wireless Matrix, Canadians spend about 1.1% of their gross domestic product on mobile services, which again rates middle of the pack as the left-hand column of the chart below shows. However, as the right-hand column illustrates, that doesn’t correspond all that closely with Canada’s overall high GDP, which is fifth highest among compared countries. In other words, if we’re one of the richest countries and our wireless aren’t all that high, shouldn’t our expenditure be even smaller than 1.1%?
5. Big geography means higher costs. McTaggart repeats the go-to excuse whenever anyone suggests that Canada has high wireless prices: carriers here have a lot of ground to cover, which makes it more expensive to build and maintain networks. He even supplies some nice charts depicting subscribers and revenue per square kilometer, both of which show Canada to be on the low end.
That’s all fine and dandy, but if it was really that expensive to build and maintain those networks, Canadian carriers wouldn’t be sitting near the top of the profit list. As it is, they had the fifth-highest margins in the developed world and were third in growth as of the third quarter of 2012. Seeing as costs are deducted from revenue to arrive at profit, all of that geography simply isn’t factoring into the bottom line.
Australia, for one, has a similarly sparse population and large geography, yet carriers there saw a profit margin nearly 15% lower than their Canadian counterparts.
6. Roaming prices have come down. Maybe, but they’re still ridiculously high. On my recent trip to Europe, I was caught in an emergency where I simply had to turn on data roaming to check my email and GPS. I ended up using 8.43 MB in a matter of minutes, which cost me $42. It’s an anecdotal example, but does it feel right to pay that much for so little?
7. Regional incumbent responsible for slow speeds. McTaggart references a recent blog post of mine on Akamai’s latest State of the Internet report, which found that wireless speeds in Canada were slow. When I asked David Belson, the report’s editor, about this, he confirmed that it was an incumbent operator and not a new entrant that had returned the slow speeds in tests.
McTaggart somehow jumps to the conclusion that Belson was referring to a regional incumbent – say SaskTel or MTS – but that’s not the sense I got from his response at all. My understanding is that he was referring to Bell, Rogers or Telus.
Nevertheless, more information is needed on this front. Canada’s poor performance in Akamai’s tests is indeed surprising, so we’ll see how further data bears this out.
8. Multiple subscriptions bump up ARPU. McTaggart also draws water from another familiar well in suggesting that subscribers in countries with high wireless penetration actually have it worse than Canadians. Countries such as Finland, with 175% penetration, or Austria with 161%, have it tough because it means customers there are carrying around multiple SIM cards to take advantage of different roaming rates in different countries.
He paints this as weird or undesirable, yet given that Canada is the only developed country that hasn’t surpassed 100% penetration, it seems like we’re the weird ones.
Moreover, if you factor in that greater-than-100-per-cent uptake into ARPU in those countries, here’s what you get:
That chart is exactly what it looks like. Even with multiple SIMs factored in, it still costs more to own just one phone in Canada than it does to own several in other countries. With ARPU in Portugal just $15.75, you can actually own four phones there for just about the same cost as a single device in Canada.
Of course carrying multiple SIM cards isn’t exactly ideal, but it’s better than having only one that costs you an arm and a leg. The multiple SIM argument also doesn’t apply to several non-European countries, notably the U.S. Surely few Americans are carrying around Canadian SIM cards to take advantage of our local rates when roaming.
9. High prices are keeping smartphone penetration down. McTaggart wrote, “The fact that Canadians are adopting smartphones at higher rates than in the U.S. or Europe contradicts Mr. Nowak’s claim that high prices are keeping smartphone penetration down.” I don’t think I said that. I have said that high prices historically have kept overall wireless penetration down. The accelerating growth of smartphone adoption does seem to suggest that prices have finally come down to the point where such devices are now finally within reach of most people. Like I said above, the high growth rate is also not likely a sign that Canadians are somehow special, but more likely that we’re late to the game.
There’s little doubt that the wireless market has become more competitive in the past few years. But it’s hard to attribute that to anything other than the arrival of new entrants and their aggressive pricing. Would smartphone adoption be motoring along if they hadn’t come along? It’s hard to say, but given how behind Canada was before they did, there’s no reason to expect that the situation would have been the same.
10. Boiling blood. In his conclusion, McTaggart wrote that a Halifax Chronicle Herald editorial made “our blood boil” by saying that Canadians have “the highest average wireless bills and among the highest roaming charges in the world, more competition can’t arrive soon enough.” I can’t comment on the roaming rates – they certainly feel high, but I haven’t seen any data comparing against others one way or the other – but the proof of the highest bills is irrefutable. That’s what ARPU is, and it bears repeating – it’s the size of the customer’s bill, and at the end of the day it’s the biggest in the world in Canada. Telus’s blood doesn’t boil when its executives brag about that fact to analysts on conference calls, but customers certainly do get irate when they get their bills every month.