MASTHEAD-1Government policy will play a key role in determining whether we remain a world leader with respect to broadband infrastructure or slide down the rankings and in turn put the country’s broader innovation goals at risk.

By Paul Beaudry and Sean Speer, Aug. 29, 2016

The Olympics are one of those rare instances when Canadian humbleness and civility are replaced with a competitive spirit and drive to be a world leader. We want to win and we are not self-conscious about it.

The lasting images of the Rio Olympics will invariably be Penny Oleksiak capturing the gold medal in the 100 metre freestyle, Erica Wiebe’s golden performance in freestyle wrestling and Andre De Grasse pushing Usain Bolt in the 100-metre and 200-metre sprints. It was in these moments that Canadians exhibited their determination to be number one in the world.

This nascent national ambition is not limited to athletics. Canadians take tremendous pride on our global achievements in various fields – from music to philanthropy and science to film-making. Canadians are competitive and confident that we can compete and win against the world.

Prime Minister Trudeau and his government have set out the goal of establishing Canada as a world leader in innovation. He famously told the World Economic Forum that he wanted the country to be known for its “resourcefulness” and has since promoted Canadian leadership in quantum physics and recently tested out a gyroscope. Innovation has become the byword for the Trudeau government’s economic agenda.

But becoming a global leader in innovation will require more than determination. It needs world-leading broadband infrastructure to enable and sustain it. Indeed, the increasing demand for bandwidth, combined with the growing number of devices connected to the Internet, implies an immense data throughput on broadband networks. Cisco estimates that global mobile data traffic grew by a staggering 74 percent in 2015 alone, and predicts an eightfold increase by 2020.

Innovation has become the byword for the Trudeau government’s economic agenda.

The good news is that Canada starts from a position of relative strength with some of the world’s best digital networks.  Government policy will play a key role in determining whether we remain a world leader with respect to broadband infrastructure or slide down the rankings and in turn put the country’s broader innovation goals at risk.

Broadband infrastructure has become a driver of innovation, digital adoption, and economic growth. Everything from consumer products to high-tech business processes to medical research rely upon a digital foundation. It is a crucial enabling technology that is akin to the training facilities and equipment that athletes use to prepare for Olympic competition. No broadband; no innovation. No proper training facilities or equipment; no Olympic gold medals.

Sean SpeerPresently access to high-quality broadband technology is a competitive advantage for Canada. A recent CRTC report finds that 99 percent of Canadians have access to high-speed Internet, and that 96 percent of Canadians can subscribe to download speeds of 5 Mbps.

This extensive coverage is largely a product of substantial private investment in Canada’s digital infrastructure. Total Canadian investment in wireless networks has consistently exceeded $2 billion per year for the past several years and has been among the highest in the OECD on a per-subscriber basis. Wireless infrastructure investment has totaled more than $55 billion since 1987. Capital investment in networks between 2007 and 2013 was lower than in the United States but significantly more than in the European Union (see Table #1). The result is that Canada is now home to the second-most high-speed LTE networks in the world.

TABLE #1: CAPITAL SPENDING IN THE WIRELESS SECTOR, 2007-2013

Countries Capital Spending (percentage change)
European Union -3%
Canada +21%
United States +74%

But we cannot take this type of sustained investment for granted. It is not the natural order of things. It depends on a number of factors, including government policy. A new MLI study shows how Europe’s experience with state-imposed mandates and top-down regulations has contributed to underinvestment and poor broadband deployment and penetration.[1] It is a clarion call to the Trudeau government as it seeks to position Canada as a world leader with regards to innovation.

European broadband policy has been marked by what policy experts call “access-based competition.” What this means is that regulators mandate that incumbent firms must grant access to their broadband networks to upstart competitors at regulated rates. The assumption was that high and non-transitory barriers to entry produced a “market failure” that necessitated this type of state intervention in the name of competition. Mandated access to incumbent networks would lower the barrier to entry and create the conditions for new competitors to grow and eventually invest in their own broadband infrastructure. The so-called “ladder of investment” theory would guide European policy and hopefully create the conditions for more sustainable competition.

Becoming a global leader in innovation will require more than determination. It needs world-leading broadband infrastructure to enable and sustain it.

The only problem is that the theory proved a failure in practice. As European scholar Andrea Renda writes in the new MLI study:

“….regulators have often been unable to create a regulatory environment that encourages substantial investment by new entrants. The large empirical literature that discusses the economic effects of telecommunications access regulation strongly supports the hypothesis that access regulation does not promote, and indeed can hamper, telecommunications investment and broadband penetration.”

The European experience finds that new entrants never climbed the last rung of the ladder to invest in their own networks, preferring to rely on access to incumbent networks and below-market rates. In turn, incumbents responded by cutting back on their own broadband spending. Europeans got marginally lower consumer prices, but at the cost of significantly less investment in broadband. Considering the importance of broadband to the broader economy, this is not a good trade-off.

And the facts are well substantiated. Europe performs poorly relative to its peers on several measures related to broadband investment and deployment. Here are some highlights.

  • Europe’s level of telecommunications investment has consistently underperformed that of the United States even though the latter has lower population density. As an example, Europe’s per household investment was less than half (USD$244) of the US level (USD$562) in 2013.
  • EU incumbent firms invested between 10 percent and 40 percent less than equivalent US companies between 2006 and 2012.
  • Fibre-to-the-premise coverage in Europe is approximately half the US coverage and overall Next Generation Access coverage is 54 percent in Europe compared to 82 percent in the United States.

It is no surprise then that European policymakers are now trying to reverse these negative trends, including by liberalizing access-based regulations in certain cases and spending public resources to build broadband infrastructure. It is a powerful admission of the failure of the “ladder of investment” theory and the negative consequences it brought about in the form of less broadband investment and penetration.

What does it all mean for Canada and the Trudeau government’s Innovation Agenda?

It is a reminder that an overemphasis on competition – particularly artificial competition produced by government diktats – as an end in itself can carry real costs that can eventually come to undermine broader economic goals with regards to innovation, digital adoption, and entrepreneurship.

Europeans got marginally lower consumer prices, but at the cost of significantly less investment in broadband. Considering the importance of broadband to the broader economy, this is not a good trade-off.

The lesson comes at a critical juncture for broadband policy in Canada. Recent years have witnessed a policy shift in Europe’s direction. The so-called “fourth wireless player” policy was rooted in a similar vision of access-based competition and mandatory network sharing. A change of government has done little to reverse this trend. The July 2015 CRTC decision, mandating telcos to share their highest-speed broadband networks with small ISPs, and the federal Cabinet’s affirmation of this ruling has Canada heading down the European path at the precise moment that Europe is coming to terms with its own challenges.

While we have not witnessed the same negative effects as Europe, there is similarly little evidence that most new entrants have climbed the “ladder of investment” and made substantial investments in their own networks. Instead many of the firms that benefited from preferential spectrum access (one estimate is the 2007 auction rules amounted to a $617 million subsidy to new entrants) have since sold out, extracting significant value for investors at the expense of taxpayers. It highlights the limits of government intervention, the potential for inadvertent consequences, and the unsustainability of artificial competition.

It is time to chart a different course that creates the conditions for ongoing private investment in Canada’s broadband networks.

Canada has managed to achieve high-quality networks with limited public investment in part due to a regulatory policy framework that has generally sought to strike a balance between supporting competition and promoting investment. We have the makings of the digital foundation for today’s and tomorrow’s innovation mostly paid for by private capital.

Why, then, would we continue to move in Europe’s direction when the European Commission has essentially admitted failure? It is time to chart a different course that creates the conditions for ongoing private investment in Canada’s broadband networks.

This could include:

  • Lifting foreign investment restrictions to enhance dynamic competition and create opportunities for Canadian firms to become more integrated in a contiguous North American telecommunications market.
  • Experimenting with more ambitious build-out requirements particularly in rural communities as a condition of spectrum licenses.
  • New rules around spectrum trading and leasing on the secondary market to create the potential for new market arrangements and partnerships including with Indigenous service providers.
  • A “dig once” policy whereby public infrastructure construction could be leveraged to lay new wires, cable, or fibre particularly in rural and under-serviced communities.
  • Expediting consultations and local approvals for telecommunications construction including broadband investment and new towers.

The Trudeau government’s ambitious innovation goals appeal to Canadians’ determination to be world leaders. We have the ingenuity and tenacity to achieve them. We just need world-class broadband infrastructure to support our efforts.

Paul Beaudry is the Director of Development at the University of Calgary's School of Public Policy and a research associate at the Montreal Economic Institute and Sean Speer is a Munk senior fellow at the Macdonald-Laurier Institute

[1] See: http://www.macdonaldlaurier.ca/steering-canada-clear-of-europes-disastrous-broadband-strategy-mli-study-by-andrea-renda/.

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