Assessment of Canadian Mobile Business

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A COMPETITIVE ASSESSMENT OF THECANADIAN MOBILE WIRELESS INDUSTRYEXECUTIVE SUMMARYPrepared forSPECTRUM AND RADIO POLICYINDUSTRY CANADANovember, 2001Wall Communications Inc.

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1Disclaimer:This report represents the findings and conclusions of theconsultant in carrying out this contract and does notnecessarily represent the views or position of IndustryCanadaNote: Terms of Reference for the contract have been attached at the end of thedocument.Wall Communications Inc.613 747 0555 or613 235 1624gerry.wall@sympatico.ca -- www.wallcom.ca

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2EXECUTIVE SUMMARYAs part of the background work related to the development of the policyframework for licensing additional spectrum for third generation (3G) mobilephones, Industry Canada commissioned this Study which assesses the state ofcompetition in the Canadian mobile wireless industry. The Study is intended toprovide the Ministry with a better understanding of the market forces impactingthe mobile wireless industry and to assist in evaluating the potential impact ofdifferent policy provisions on future spectrum licensing.Three methodological approaches are examined which provide the variouscompetition measures employed in this Study: Porter's Competitive Analysis, theCompetition Law Approach and the CRTC Approach. These approaches are notmutually exclusive and share a common grounding in economic principles.However, each approach focuses on slightly different factors and attributes ofcompetition and forms the pool from which we have chosen the measures for thisStudy.The specific competition measurements employed in this Study are grouped into5 categories: Product-related measures, Price-related measures, Entry/exitconditions, Market share/rivalry, and Other measures. For purposes ofcomparison, the four largest wireless service providers will be examined. TheStudy finds that the Canadian mobile wireless industry displays a relatively highdegree of competitiveness, although certain conditions need to be monitored toensure that the highly competitive nature of the industry continues.

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3Product-related MeasuresThe scope and variety of services, packages, features and coverage indicate astrongly competitive state with respect to product (or non-price) relatedcompetition.Most Canadian consumers enjoy a wide variety of choices in how they canreceive mobile telephone service. From pre-paid options to numerous number-of-minute packages, from handset and service features, from combinationpackages of anytime minutes, long distance and calling features, all the way tohighly customized packages, the Canadian market offers numerousproduct/service choices. While there are still regions of the country that do nothave terrestrial wireless service available, the vast majority of the Canadianpopulation can access a mobile wireless service, usually with a choice of at leasttwo suppliers.Price-related MeasuresThe wide variety of choices in non-price related mobile service characteristics isechoed in price options. Similar to the (non-price related) options available inservice packages and features, Canadian consumers have numerous choices inprice-points for mobile wireless service.Prices have been falling over time (particularly after the entry of the PCSlicensees) and compare favourably with prices in the United States. The lack ofsupra-normal returns (or any profitability) in the industry provides furthersubstantive evidence of the vigorous price competition in the market.

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4Entry/Exit ConditionsThe mobile wireless industry is a difficult industry to enter. While the technologyto provide service does not present a particularly imposing barrier (sincenumerous vendors are available to supply network and other equipment and untilfairly recently, they acted as key financiers as well), and although the costs ofnetworks and other costs will limit the number of firms able to finance entry, thekey barrier concerns the scarcity of spectrum, and the licensing process toallocate that spectrum. In short, no one enters the market until such time as theDepartment decides to release new spectrum, and until they have successfullyapplied to and received permission from the Department1.A second key entry/exit barrier concerns the foreign ownership limits whichcurrently apply to Canadian telecom carriers.Market Share/Rivalry MeasuresThe industry has changed from two competing entities (up until the mid-1990's)to the current number of four. The end result has been a related decrease in anyfirm's given market share. The industry trend in market share and concentrationis, therefore, moving in a preferable direction.Two significant changes have seen the acquisition of one of the newest entrants(Clearnet) by an incumbent (Telus), but also the departure of one firm (Telus)from the largest competitor (Stentor).1Of course, the Department has been instrumental in bringing the mobile industry into existence,and in helping achieve a competitive environment. The finding that spectrum scarcity and thelicensing process create a barrier to entry is