Canada’s October election is having a considerable impact on the telecommunications industry. Leader of the Liberal Party Justin Trudeau will remain prime minister of Canada for another term. The Liberal Party has a platform on telecom regulation, where it aims to reduce the cost of your cellular service by 25%.
In response, Canada’s telecommunications giants have decided to increase spending on government lobbying activities and reduce rural broadband expansion. Shareholders have not come out to voice their opinions yet on this news. Canadian shareholders should consider how they feel about the corporations in their retirement portfolio, spending revenue on lobbying activities in the government.
5G telecommunications stocks are still great investments regardless, but there is a war heating up between corporate interests and those of everyday Canadians. Here’s a breakdown of the significant issues surrounding telecom regulations.
CRTC aims to prevent oligopolistic price setting
Canada’s telecommunications industry is an oligopolistic market where BCE, Rogers Communications, and Telus control 90% of the entire market. Because it is an oligopolistic market, it is susceptible to price setting from the lack of competition.
To protect consumers, the Canadian government gave the Canadian Radio-Television and Telecommunications regulatory authority over these organizations. The CRTC regulates wholesale fees to prevent monopoly pricing on your wireless plans. Even with the added regulations, the telecommunication giants do not suffer financially.
The Big Three telecommunication giants boast very high margins. BCE and Rogers, for example, each report a profit margin higher than 13%. The smaller Telus reports a slightly lower profit margin of 11.98%.
High-profit margins indicate that telecoms still charge an amount above the competitive equilibrium. In a perfectly competitive market, prices should equal marginal cost, and the profit margin should be low. As firms gain market power as in Canadian telecommunications, the lack of competition keeps prices high — above the competitive market price.
CRTC aims to prevent oligopolistic price setting
Canadian shareholders in telecommunications stocks do not just represent investor interests. They are also consumers. Thus, the political issue is one of which group would you prefer the government serve. Some constituents may feel that the gain from protecting consumers will outweigh the impacts on their capital gains and dividend payments.
More importantly, Canadian shareholders need to consider whether they feel, as investors, that additional lobbying is a good use for corporate assets. The money used for this purpose belongs to every Canadian investor who owns stock in the telecom companies. Thus, shareholders should take a position on this issue as constituents and voice it to the company leadership.
Foolish takeaway
Canadian telecommunications stocks are a fantastic investment, and part of the reason for this is the lack of competition in the industry. The regulatory environment plays a role in reducing the profit margin, but the margins are still high, allowing the telecom companies to return dividend payments to shareholders and invest.
Every Canadian should already own stocks in telecom corporations. If you don’t, now is the time to buy because 5G will send the shares up further in the next year. More importantly, these are stocks with significant market power and political clout, and they will still be active players in the next 20 years when you plan to retire.
