It’s a bit of theatre Canadians have seen before. Two years ago, Anthony Lacavera boasted of subscriber numbers that made Wind Mobile, the company he chaired, the nation’s fastest-growing mobile communications provider. “These numbers prove what we at Wind already knew—Canadians are tired of paying sky-high prices and want a real wireless alternative,” he declared. “It is proof that wireless competition has been long overdue.”
The experience since then proved something else: Wind attracted little more than a third of the 1.5 million subscribers Lacavera hoped he’d have by now. Lacavera departed, and Wind is for sale. Two other competitive wireless companies, Public Mobile and Mobilicity, are in worse shape. For a while it seemed like a replay of the fates of earlier wireless entrants like Microcell (Fido) and Virgin Mobile, both of which were acquired by larger competitors (Rogers and Bell, respectively). But then came some twists: Public Mobile has just been acquired by two private equity firms, while the attempted acquisition of Mobilicity by Telus was kiboshed by a federal industry department bent on creating a fourth national wireless company.
The ever larger wireless phone-and-data-services business remains a quasi-oligopoly dominated by Bell, Telus and Rogers. This environment has enabled the national telcos to earn generous margins, on the strength of some of the world’s highest cellphone fees. In hopes of fostering more competition, in 2008 Industry Canada reserved a sizable portion of available spectrum for new entrants to bid on. The arrival of Wind, Mobilicity and Public Mobile, in 2009 and 2010, suggested it was working. One industry researcher predicted they’d collectively control a quarter of the market by 2014.
Nope. What happened?
It’s worth recalling that from the outset virtually nobody thought all entrants would survive. Desirable spectrum is expensive, entrants must also build wireless networks and continually upgrade them. Then comes the cost of advertising. And since new entrants mainly compete on price, they squabble over the lowest-margin customers. Incumbents took the dimmest view: Nadir Mohamed, CEO of Rogers (which owns Canadian Business), claimed Canada could not sustain even one additional national carrier.
To help fulfil that prophecy, the incumbents introduced “flanker brands,” such as Telus’s Koodo and Rogers’ Chatr, that matched entrants’ services and pricing—but on their parents’ bigger networks. With high up-front costs and low uptake, the newcomers lost money. Once they’d burned through their initial capital, they learned that patient investors willing to lose money for years on end to establish a fourth-place carrier are in short supply.
Duncan Stewart, director of technology, media and telecom research at Deloitte Canada, has a name for all this: the Rule of Three. “Which is that in any given country, you can usually have one, two or three viable national carriers,” he explains. “But having one beyond that is extremely unlikely.” It was hypothesized in 1976 by the Boston Consulting Group’s Bruce Henderson, who posited that a stable competitive market never has more than three competitors, the largest of which cannot sustain a market share greater than four times that of the smallest. Henderson admitted a lack of empirical evidence, but observed the phenomenon “in fields as diverse as steam turbines, automobiles, baby food, soft drinks and airplanes.”
Last year Boston Consulting attempted to validate the hypothesis by studying data on 10,000 companies dating from 1975 to 2009. It found the prevalence of industries with three competitors having market shares greater than 10% was “striking.” (Notably, exceptions occur in sectors where governments intervene aggressively to prevent consolidation.) Stewart says the rule can also be observed in mobile markets in the U.S., Europe and elsewhere. Over the past 20 years, governments have tried to break the rule with new rules of their own. “It almost never succeeds,” he says. “What’s happening now in Canada isn’t really that much of a surprise.”
Other explanations for the new entrants’ poor showing include a fatal miscalculation in their business plans. Canada’s incumbents rely to an unusual degree on offering handsets to consumers for low, subsidized prices, provided they sign up for long-term (often three-year) contracts. Entrants wrongly assumed Canadians would abandon subsidized handsets in exchange for low-priced voice and data plans with few contractual terms. Wind eventually capitulated and began offering subsidized handsets; the others still do not.
Stewart, though, says explanations emphasizing unique qualities of Canada’s wireless market miss the point. “If you’ve seen Hamlet in England and you watch it in Canada, I’ve got news for you: Hamlet’s dead at the end of both plays. There’s a script for this thing.”