Yes and no. That is a rationale that is often cited. There is some truth to it. More accurately it is a sliver of justification that is blown out of proportion (at least in Canada's case). Canada both proves and disproves it based on population density. I described it above as the small market with a very long tail. That tail isn't waging the dog though. Canada is in the unique demographic position to have both high density, and low density. So it's reasonable to segment parts of Canada to compare to other relevant parts of the world. When you do that, Canada still sucks across the board.
Canada is a huge country with a pop density of less than 1 person per square km for most of it. However most live in the same long thin band along the south. Where a country with a pop distribution like the USA needs a web of communication, Canada needs more of a vine.
If population density was the deciding factor for RoE on internet infrastructure, then there would be very clear divides in cost in Canada between urban and rural internet. And there is! Like I said there is truth to it. If that explained it entirely then the difference in price and bandwidth would be a lot greater. As it is they are at least an order of magnitude off. Canada's cities are not slouches
. Internet in say Toronto should be excellent and cheap. It's neither. The average internet everywhere in Canada sucks. Including Toronto and Montreal which are both densely populated and major internet hubs for all of North America. (Plus there's Waterloo when you want to talk internet backbone. It has the University of Waterloo, a major engineering school and one of the original internet Hubs, home to Blackberry... and shit internet for everyone.)
In terms of pure backbone infrastructure, Canada is probably best positioned historically and geographically out of all countries to make it cheap (excluding tiny ones like Hong Kong). The population hugs the Great Lakes. You know what's cheaper than digging up all of Europe to run fibreoptic? Running subsea cable through the Lakes. That's what we've already got for telecommunications now... but not internet. They are finally just now running dedicated fibre from Toronto to Buffalo this year. We should have had that years ago. The rest of the country is the same in the rural/urban divide and the surprising lack of differences in internet. The Prairies are big, flat and empty except for the cities. Sure, rural areas should be screwed but the cities should be fine. Nope. The cities have bad internet and the rural areas have worse. There is no economic or geographical justification for the cities in Canada to have shit internet compared to Europe. There is plenty of reason for Europe to be more expensive.
Above I mentioned small companies that attempt to make a go of it in Canada. There's been no shortage of them over the past 2 decades. They all felt comfortable enough putting big dollars behind that they could make good/fast/cheap internet in Canada and be economically viable. Some fail. Some succeed
. They *all* get gobbled up by the big companies that are really good at protecting their turf. These small companies do the smart thing and go after the high density pop centers that have shit service. The problem they all run into is that they have to deal with the big existing companies on both ends that squeeze them until they give up or give in.
Oh and for comparison, I pay $80/month for 5M/1M up/down and a 80Gig cap. It is overpriced and pathetic. That's max too. My average is often less than half that. There's simply no pressure in Canada to keep the price down and the quality up.
(BTW Canada paid for telecoms to run phone lines back in the day too. I still remember the urban surcharge to cover it on rural phone bills.)