The merger of telecommunications companies Rogers and Shaw makes good business sense, but the resulting consolidation could be bad for consumers, experts say.
Rogers Communications Inc. is proposing to buy Shaw Communications Inc. in a deal worth $26 billion. The companies hope to clear regulatory hurdles to have the deal closed by the first half of 2022.
Shaw provides cable and internet in Western Canada as Rogers does in the East. However, the merger means that the companies’ fierce competition in the wireless market would come to an end.
Ian Lee, associate professor of management at Carleton University, said the deal is a good business move.
“When any company in any industry buys a competitor, by definition, there’s basically 100 percent synergy. So from a strategy point of view, buying a competitor absolutely makes complete and total 100 percent sense,” he said in an interview.
Lee said that for decades, Canada has allowed oligopolies in key industries to ensure stability of service delivery. However, this approach has downsides.
“Industries that are highly concentrated—while they are more profitable for the companies in that industry—they lead to sub-optimal outcomes for consumers because of two reasons: [Consumers] pay higher prices and they get reduced options and choices and services.”
Michael Trebilcock, a professor of law and economics at the University of Toronto, believes the merger betrays the government’s intentions.
“Both Conservative and Liberal governments in recent years have committed themselves to more competition in the Canadian internet and cellphone market, where our rates are above international norms, so allowing this merger would be sharply at odds with this consensus policy,” Trebilcock told The Epoch Times.
Rogers has pledged to spend $2.5 billion to build 5G networks across Western Canada, creating up to 3,000 new jobs, as well as spend $1 billion to provide rural, remote, and indigenous communities across that region with high-speed internet access.
The board members of both Shaw and Rogers voted unanimously for the merger. The Competition Bureau, the Canadian Radio-television and Telecommunications Commission (CRTC), and the Ministry of Innovation, Science and Economic Development must approve the deal for it to become final.
A report by Rewheel Research in October 2019 found that the median price of a 4 GB smartphone plans was 3.25 times higher in Canada than that in the OECD. The same report found that the median price of a 1 GB smartphone plan was 18 times higher in Canada than the median prices in “4-MNO competitive large European markets,” referring to countries that have three incumbent mobile network operators (MNOs) challenged by one or more new entrants.
The report cited a September 2019 Rewheel report that said the Canadian wireless market—with its three main operators Rogers, Bell, and Telus—is fragmented rather than being national in scope, and “probably anti-competitive,” consisting of “a stack of provincial mobile network duopolies and monopolies stitched together.”
Michael Geist, a law professor at the University of Ottawa, where he holds the Canada research chair in internet and e-commerce law, says the Rogers-Shaw deal won’t help Canada’s ranking and will result in higher prices and less competition.
He says a promise by Rogers that it will not increase wireless prices for Shaw’s Freedom Mobile customers for at least three years following the close of the transaction “is effectively committing to raising them as soon as the clock runs out on that timeline.”
“Simply put, this deal would not have happened under a government and CRTC that signalled its commitment to more robust competition and better consumer pricing above all else. Instead, … the government seems to think that meeting its illusory 25 percent wireless reduction cost target is good enough, even if prices in other countries are declining at a faster rate.”
Since 2015, Ottawa has made $6.2 billion available toward expanding broadband internet coverage. The goal is to connect 98 percent of Canadians across the country to high-speed internet by 2026, and to connect all Canadians by 2030.
Rogers made around $2 billion of net income in 2019, compared with around $700 million for Shaw. The companies expect synergies of over $1 billion annually within two years of the deal closing. Lee said that this amount is necessary to satisfy the government’s broadband goals.
“They need the additional money to fulfill these government-imposed mandates that are going to be frightfully, frightfully expensive. They’re rolling out rural high-speed broadband of the same speed and quality as downtown Toronto to rural and remote communities with very small numbers of people.”
Konrad Von Finckenstein, a former head of the CRTC, said in an interview that higher cellphone costs are a “danger” and regulators would find it difficult to penalize Rogers if it jacks up prices for Freedom Mobile customers.
“Things are pretty hard to enforce. If the Competition Bureau will say no, you can’t, you have to divest, who’s going to buy it? I don’t see that there’s a market from anybody wanting to get into the cellphone business and taking Freedom off Rogers’ hands.”
Finckenstein suggests that there is no perfect solution.
“The government is in a classic position of having competing needs they’re trying to reconcile,” he said, namely low prices for consumers alongside coverage for everyone.
“There’s a trade-off to be done between those two. And where do you come out? We’re maybe [approaching] an election, and so this deal could become a flashpoint in the next election.”
