Consumers and businesses are exasperated by high cellphone prices and low adoption, which critics say are putting Canada at a competitive disadvantage with other countries. (AP Photo/Manu Fernandez)

For Greg Petkovich, high cellphone prices aren't just something to grumble about, they're hurting his business.

A visitor walks past Chinese brands of 3G mobile phones displayed at an exhibition in Beijing, Oct. 24, 2007. (Teh Eng Koon/AFP/Getty Images)

Over the past four months, Atticus Interim Management has helped clients move into China and India, as well as work through the challenges of the higher Canadian dollar. The small, Toronto-based firm, which provides companies with temporary executives to help manage through expansions, is expecting a busy month in December when it will help several clients cope with the Christmas rush and another set up shop in Europe.

Because of its nature as a high-level, executive temp agency, Atticus's employees are very mobile — they travel the world extensively and always need to stay in touch with clients and the home base.

That doesn't come cheaply, says Petkovich, the company's president. His cellphone plan from Rogers Communications Inc. gives him 1,500 minutes of talk time, but he usually runs up around 3,000. Together with expensive roaming charges, his monthly bill often comes to more than $400. His 16 managers run up an average of $375 a month each, bringing the firm's annual total to almost $77,000.

That's a "ridiculous" expense that puts Atticus at a competitive disadvantage with companies in the United States and elsewhere, he says. While it is an accepted practice to bill clients for expenses, extraneous costs such as photocopying, couriers and cellphone bills are usually what put clients off, more so than fees for actual professional services.

SPECTRUM AUCTION

The Canadian government has set in motion an auction of wireless airwaves — known as spectrum — to be held in 2008. A public consultation on what the rules of the auction should be was held earlier this year.

The incumbent providers — Rogers, Bell and Telus — argued there should be no special rules, and that the spectrum should go to the highest bidders.

Would-be cellphone providers, including Shaw and Quebecor, as well as MTS Allstream, which wants to expand outside of Manitoba, said some spectrum should be set aside for new entrants because the incumbents got most of theirs for free. They said the existing players would bid up the price of the spectrum to keep newcomers out of the market.

They also asked that the incumbents be forced to sign roaming agreements at reasonable rates with any new entrants because they would have no reason to do so otherwise. Not having the ability to roam on networks around the country would make it difficult for new providers to attract customers.

Industry Minister Jim Prentice has said the auction is on track and the rules will be announced this fall.

"The clients we work with look to us to reduce costs and to save them money," Petkovich says. "Billing for costs is an accepted practice, but it is one of the few things that can truly aggravate a client. It's a cost of doing business."

The solution, he says, is for Atticus to swallow some or all of its phone bills — something his rivals in other countries don't have to do. After all, not eating the costs would drive customers into the arms of his competitors.

While cellphone bills are something the average Canadian likes to complain about, Atticus is an example of how the country's high rates are having a negative effect on business and the economy as a whole. Critics of Canada's big cellphone companies — Rogers, Bell Canada Inc. and Telus Corp. — say their rates are harming the country by raising costs for companies, limiting business productivity and holding back innovation.

"It's not only a matter of consumers, it's a matter of national interest," Quebecor Inc. chief executive Pierre Karl Péladeau says. "Why would we not have advanced wireless services where other countries do? If you start late, you're going to arrive late — there's no issue there to debate."

Canada is, in fact, a world laggard in cellphone adoption. Among developed nations, only Mexico fares worse. According to 2005 statistics from the Organization for Economic Co-operation and Development, Canada had 51 subscribers for every 100 inhabitants, placing it second last out of 30 member countries.

That poor adoption is more than just a national embarrassment; it affects the quality of life for all Canadians, according to economists. A June report by consultancy S. Melamed Associates Inc. found that if Canada had begun to accelerate cellphone adoption in 2002, the economy would have benefited by $56 billion, or 5.1 per cent, in additional gross domestic product by 2006.

A 2001 study sponsored by Vodafone Group PLC, the largest cellphone provider in the world outside of China, said the real effect of investment in cellphone services "generates a growth dividend because the spread of telecommunications reduces the costs of interaction, expands market boundaries and enormously expands information flows."

Patrica Mohr, vice-president of economics at Scotiabank, says more cellphone usage results in more productive workers, which leads to increases in GDP, which translates into a higher standard of living for everyone.

"If you have a gain in overall GDP, it usually translates into higher employment growth and/or higher personal income growth," she says. "If cellphones are improving productivity in the business sector, then I assume that that will translate into higher GDP growth and income gains."

Many reasons for poor adoption

The industry, however, puts forward a litany of reasons for why Canada's mobile adoption is so low. One of the most common arguments is that Canada has historically had an excellent landline network where local calls have been free, which has deterred Canadians from taking up wireless services. Europe, in contrast, has had shoddy landlines and calls have typically been expensive, hence the faster uptake there.

QUOTES

"If cellphones are improving productivity in the business sector, then I assume that that will translate into higher GDP growth and income gains." - Patrica Mohr, vice-president of economics at Scotiabank

"The lifeline aspect of cellphone service has become much more important. We're privileged in Canada to be relatively isolated from those kinds of issues." - Peter Barnes, CEO of the CWTA

"Canada has a reputation as being a challenging place for non-Canadians to carry on business." - Maura Lendon, chief counsel for AT&T; Canada

"I know when I first immigrated [to Canada from Britain] in 1981, the difference between the telephone service in the UK and the telephone service that I got in Vancouver was night and day," says David Neale, senior vice-president of products and services for Telus. "You might have argued that the desire to pick up wireless telephony in Canada would be quite a different set of motivations. In many countries, it took place quickly because, frankly, it replaced something that didn't work."

That doesn't explain why countries with similarly good and cheap landline networks — such as the United States, which had 71 subscribers per 100 inhabitants in 2005 — are significantly ahead of Canada.

The industry says it's because the U.S. launched cellphone services about 18 months ahead of Canada. But in 1996, U.S. and Canadian cellphone use was fairly close, at 13 and nine subscribers per 100 inhabitants, respectively, and some analysts were predicting Canada would soon leapfrog its neighbour because of its faster rate of uptake at the time. In fact, the opposite happened, particularly in the last few years, where the United States has pulled away from Canada. The Canadian Wireless Telecommunications Association says this may have to do with the airplane hijackings on Sept. 11, 2001.

"U.S. society is much more concerned, particularly since 9/11, about personal security and being able to reach friends and family," says Peter Barnes, CEO of the CWTA. "The lifeline aspect of cellphone service has become much more important. We're privileged in Canada to be relatively isolated from those kinds of issues."

The industry also says adoption rates in other parts of the world, particularly in Europe, are exaggerated because of the high incidence of multiple device ownership. Many Europeans have multiple phones, as well as subscriber identity module (SIM) cards that they swap into their devices when crossing borders to avoid paying roaming charges. This explains how countries such as Luxembourg and Italy can have adoption rates of 157 and 122 per 100 inhabitants, respectively.

While multiple SIM cards are certainly a factor, Canada does not look good even when that effect is stripped out. A 2001 report by Britain's telecommunications regulator estimated 17 per cent of Italy's cellphone customers had multiple SIM cards, which, if taken out of its overall adoption rate, meant the country had 61 subscribers per 100 inhabitants — still better than Canada's OECD showing four years later.

Canadians also have multiple devices, with many using a BlackBerry for business and a second phone for personal affairs. IDC Canada, using more recent figures than the OECD, estimates about 20 per cent of the country's 19 million subscribers have more than one device, which means our actual adoption rate is lower.

High prices the real cause

Critics say Canada's big cellphone companies blame our poor adoption on everything but the real cause — high prices. While rates are difficult to compare across countries because of the multitude of plans available and different local variations — Europeans do not pay for incoming calls, for example — a host of studies have found Canadian prices to be high by international standards.

BY THE NUMBERS

• 19 million: Number of cellphone subscribers in Canada.
• 20: Percentage of subscribers estimated by IDC Canada to have more than one phone.
• 29: out of 30. Canada's rank in the OECD in cellphone adoption.
• 8: out of 30. Canada's rank in the OECD in revenue per subscriber.
• $75.15: Average monthly revenue Rogers earned from each contracted cellphone customer in its most recent quarter.
• $91.63: Annual cost of cellphone service to a medium user in Denmark.
• $521.99: Annual cost to a medium user in Canada.
• 46: Percentage of foreign ownership of telephone providers allowed by regulations.
• 0: Number of foreign companies with significant stakes in major Canadian providers.
• 2: Number of foreign companies with significant stakes in major U.S. providers.
• 27: Number of countries Vodafone operates in.
• 12: Number of countries T-Mobile operates in.
• 0: Number of major Canadian cellphone providers that don't also sell landline service.

According to the Canadian Wireless Telecommunications Association, a typical American uses about 800 voice minutes a month, double that of a typical Canadian. In 2006, the government-mandated Telecommunications Policy Review Panel found this is because of "a persistent and growing gap between the rates between the two countries."

A report earlier this year by telecommunications consultancy the SeaBoard Group found that heavy cellphone users in Canada pay about 56 per cent more than their U.S. counterparts, while average users shell out about 33 per cent more. The OECD also says the average Canadian user is paying more, with Canada the 25th-most expensive out of its 30 members.

Those high rates are translating into a direct windfall for Canadian carriers, the OECD says. Canada's cellphone companies extract about $41.50 a month from each customer, enough to rank eighth in revenue per subscriber.

That figure itself is low compared with results reported by the big carriers in November. Rogers said that, for customers on contract during the third quarter, its average revenue per user, a key industry measure known as ARPU, was $75.15. Telus, which reported a combined ARPU for contract and prepaid customers of $64.80, says the measure is not necessarily indicative of prices. ARPU can be skewed by a minority of heavy-using customers, senior VP Neale says.

But the high prices are the result of a lack of competition between the carriers, critics such as Quebecor's Péladeau say. While newspapers are full of ads promising deals, the carriers are really trying to lure customers in only to hit them with hidden fees and additional invisible charges.

"At the end of the day, it is what it is," he says. "If the prices were lower, the penetration rate would be higher."

The solution, he says, is to encourage new companies such as Montreal-based Quebecor's Videotron subsidiary to enter the market through a government auction of radio airwaves to be held next year. Potential entrants, including Calgary-based Shaw Communications Inc. as well as Winnipeg-based MTS Allstream Inc., which is looking to expand its existing cellphone offerings outside of Manitoba, have asked Industry Canada to set special rules on the auction that will spur new competitors (see sidebar).

The problem is deeper

Other market observers say the problem goes deeper. Poor cellphone adoption is the result of high prices caused by lack of competition, which ultimately exists because Canada's telecommunications market is largely closed to foreign players.

Canadian regulations limit foreign companies to owning 46 per cent of any operation that controls telecommunications infrastructure, which translates to a relatively small market offering even less. International players such as Vodafone, which has equity interests in 27 countries around the world, and Germany's T-Mobile, which is in 12 countries including the United States, have thus far given Canada a pass. That has made for a cozy competitive environment for the likes of Rogers, Bell and Telus, observers say.

U.S.-based AT&T; Inc., the largest telecommunications company in the world, has been urging the government to lift those restrictions so that it can compete in Canada on a playing field that is level with Canadian carriers. The company services large business clients in Canada, but cannot own infrastructure and instead must lease lines from the likes of Bell and Telus.

"The [investment] restrictions are a very real barrier to entry. They circumscribe how we carry out our business," says Maura Lendon, chief counsel for AT&T; Canada. "If you don't have a truly competitive, healthy and robust industry, you're not going to have the benefit in the growth of your economy more broadly."

AT&T; is spending $750 million US on international expansion this year and has purchased wireless spectrum in India with plans to offer cellphone services there. The company is in the process of doing the same in Qatar, which recently liberalized its foreign-ownership rules.

AT&T; would like to have the same options in Canada, but the government has dragged its feet in getting its investment rules in line with the rest of the world, Lendon says.

"The world is global and countries are in the process of liberalizing if they haven't already. Canada has historically been at the tail end of that liberalization trend," she says. "Canada has a reputation as being a challenging place for non-Canadians to carry on business."

Observers say the foreign-ownership restrictions are unlikely to change any time soon, as it is a political issue that stirs up nationalist sentiment. When U.S. interest in Bell emerged this summer, opposition parties called for a moratorium on foreign takeovers to prevent the further "hollowing out" of Canada. The Conservatives, who analysts say are in favour of loosening the restrictions, are unlikely to do so without a majority government.

The result, says James Milway, executive director of the Institute for Competitiveness and Prosperity, is that companies such as Atticus are going to be forced to continue with the competitive disadvantages brought on by high cellphone prices.

"We should be leaders in this area because we're such a big country and we have so few people spread across such lots of geography. Usually it's that kind of adversity that drives you to succeed in that area," he says. "If we're worried about this [hollowing out] and are going to stand in the way, what goes around comes around."