Saturday, May 31, 2014

Does Canadian Market Structure Provide Insight on U.S. Mobile Market Consolidation?

For observers trying to ascertain what might happen to competition, investment and innovation in the U.S. mobile market, if the market consolidates to three leading providers, instead of four, Canada provides some data, but probably not so much predictive value.

In Canada, a market many observers think similar enough to the United States to use categories like “North America,” there are three leading mobile providers, where in the U.S. market there are four leading providers.

In the fourth quarter of 2013, Rogers Wireless was the largest of Canada’s three primary mobile service providers, with 9.5 million mobile phone subscribers.

Consider the anomaly: in the U.S. market, no entity with strong “cable TV” roots is among the four leaders. Rogers began life as a cable TV operator.

Telus Mobility is second, with 7.81 million subscribers while Bell Mobility follows closely with 7.78 million subscribers. Including the “value” brands also owned by the three leaders, the top three providers control between 88 percent and 91 percent subscriber market share.

In the U.S. market, the leading four providers control about 86 percent subscriber market share. The top three U.S. providers control about 74 percent subscriber market share. But many believe the U.S. market inevitably will consolidate into a three-firm market at the top.

That might lead to a conclusion that U.S. market trends will converge on the Canadian model, in terms of prices, innovation and investment.

Many observers note that Canadian mobile prices are high, perhaps higher than in the United States, depending on which plans and features are measured. Based on Organization for Economic Cooperation and Development data, Canadian mobile prices are among the highest in the world.

With the caveat that comparing prices across nations and regions always is difficult, it might be accurate to say that Canadian prices are better than U.S. prices on the lower end, while U.S. plans tend to be better on the higher end (smartphone packages with lots of Internet data).

That might be the point. Either three or four providers might do about the same in terms of sustaining competition for feature phone service and plans. But four providers might be better for sustaining high end, smartphone and mobile Internet access plans.

J.D. Power and Associates in May 2013 reported that more than half of mobile users in Canada did not have a data plan in March 2013, likely due to high prices. On the other hand, the market might already be changing.

J.D. Power’s “2014 Canadian Wireless Total Ownership Experience Study” showed an average drop of CA$7 (around $6.80) on monthly wireless bills, the result of a new operating environment perhaps shaped by rules related to contract terms.

In December 2013, the Canadian Radio-television and Telecommunications Commission put restrictions on operator ability to impose three-year contracts and capped roaming and mobile Internet access prices.

Specifically, the new rules enabled consumers to break their contract without cancellation fees after two years and capped operator charges for data and roaming.

Also, eMarketer argues that less competition has lead to slower introduction of Long Term Evolution 4G services, compared to the U.S. market.

But the U.S. and Canadian markets are different in some key ways. For starters, the U.S. now is seen as a global leader in Long Term Evolution deployment, device innovation, use of Internet apps and processes, as well as software innovation.

Whether there are three or four leading mobile providers will not affect those other important trends.

Also, new competitors also are lining up to enter the market, unlike the Canadian case. Dish Network and some consortium of U.S. cable operators, lead by Comcast, are expected.

In other words, Canada’s current market structure likely does not represent what might happen in the U.S. market, if consolidation happens among the leadership ranks.

There are other reasons why investment and innovation, as well as consumer welfare, are higher in the U.S. market, even if mobile service provider prices do not seem to paint that picture.

In large part, high use of mobile data services, and the expected impact of video consumption, virtually forced U.S. operators to invest in 4G, to gain both capacity and efficiency.

Every communications market can be unique in some ways. But comparisons with the U.S. market that look only at prices fail to capture the other dynamics at work.

Convergence around LTE, for example, unifies air interface standards for the first time, creating bigger and more efficient markets for infrastructure and handset products, for example. It is true that Canadian operators have the same division between GSM and CDMA air interfaces.

But the scale of U.S. networks, compared to Canadian networks, means vastly more upside is obtained by unifying all air interfaces around LTE.

At least impressionistically, one might argue the Canadian mobile market illustrates why robust competition is not likely when there are only three leading national providers.

That probably is not a reasonable comparison.

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