Incumbents, others disagree over reserving spectrum for new entrants to market
Industry Canada’s consultation on the upcoming advanced wireless spectrum (AWS) auction is pitting incumbent cell carriers against potential new entrants over the issue of reserving spectrum for new bidders.
At Rogers Communications Inc.’s annual general meeting last month, CEO Ted Rogers said supporters of the special auction were looking to “rip off the system,” the Canadian Press reported.
The meeting came a few days after the deadline for comments on the upcoming auction. Almost 50 organizations, from the Assembly of First Nations to the Vancouver Board of Trade, made submissions to Industry Canada.
While there’s also some disagreement over mandated roaming, spectrum-hoarding and other issues, it’s shutting the incumbents out of “set-aside” auctions that’s the most contentious. Critics say the set-asides distort the competitive framework. Rogers spokesman Ken Englehart, the company’s vice-president of regulatory affairs, says the country doesn’t need set-aside auctions.
“We think we should have an open auction,” Englehart said. “There’s lots of money chasing opportunities in the telecom industry these days – $40 billion apparently chasing after BCE (Bell Canada Enterprises). So we’re not at all sure that that kind of financial clout needs any favours to give them spectrum set aside from anyone else.”
Lawson Hunter, executive vice-president and chief corporate officer with Bell, also said there’s no need to reserve spectrum for new entrants. “We don’t think it is necessary to have a set-aside for new entrants,” he said. “If there are new entrants, then they should bid like everyone else, and if they’re successful in the auction, they get spectrum. This is basically what happened in the States in their auction for this spectrum.” A consortium of cable companies in the U.S. bid for spectrum with Sprint and won it, “but they put their money where their mouth was….The question is, why would one not follow the same route here,” Hunter said. “This is a valuable asset that the people of Canada own, and to constrain the auction more than it is already constrained by the foreign ownership restrictions would really make it an unusual auction and, in our view, would likely result in a lower price for something the people own, and the government shouldn’t be doing that.”
Wireless is an established business now, with revenue opportunities drawing interest from many companies, “but what they’re really doing is trying to get [spectrum] on the cheap,” Lawson said.
But Seaboard Group analyst Kevin Restivo, who co-authored a report that called Canada’s wireless adoption rate “a national disgrace,” said the way to rectify that problem is to reserve spectrum for new entrants. “It is a hurdle like any other to get into the business,” Restivo said. “There is the ability…to drive up rates so competitors can’t afford it, and thus prevent the new entrants from getting access to it.”
Those who argue for an unfettered auction forget that the incumbents were handed spectrum in various ways over the years. “[Spectrum] was effectively granted at subsidized rates,” Restivo said. “Government intervention has been the way of the world with respect to Canadian spectrum since wireless spectrum was granted by the Canadian government. This is not a new thing.
“Let’s not paint this as an issue of government getting in the way of free enterprise.”
Chris Pierce, vice-president of regulatory affairs at Winnipeg-based carrier MTS Allstream, agrees. “Let’s remember, the bulk of the cellular spectrum held by Bell, Rogers and Telus was all set aside or designated for them. They didn’t get it by way of auction. They got it with no upfront fee whatsoever.”
In 1984, spectrum was allocated to the Bell alliance and new entrant Cantel, which was eventually purchased by Rogers. Bell couldn’t enter the market for a year, until Cantel had the opportunity to build out its network. In 1995, more spectrum was put aside for each of the incumbents and two new entrants, Microcell and Clearnet. “The government clearly took steps to ensure entry,” Pierce said. “We all paid money,” Hunter said. It might not have been in the form of upfront spectrum costs, but fees were paid and considerable investment made. Hunter’s analogy is that of the Canadian Pacific Railway: The government gave land grants to build the railway, but does that mean a company that wants to build one now is entitle to free land?
A question of competition
Which side you take on the set-aside issue seems to come down to whether you believe the Canadian wireless market is competitive enough. The three incumbents say it is. Others say it’s not. Each side has figures they say prove their point.
“It’s certainly the most competitive part of the Canadian telecom sector,” Englehart said. “Wireline, cable, long distance, none of these things are as competitive as wireless. We’ve got prices falling all the time, we’ve got tons of plans, tons of new technologies, three full facilities-based carriers, other resellers and MVNOs (mobile virtual network operators) like Virgin. It’s as competitive as it gets in telecom.”
“There’s been a lot of misleading information going around, but Canadian prices are quite low. If you look at average revenue per minute, we’re the third lowest in the G8. We’ve got good pricing and great technology and I just don’t know how you can say that’s not a competitive market.”
Restivo said that just isn’t so. “Where industry derives these minutes of use and lowest revenue amongst developed nations is beyond me,” he said. “The market isn’t competitive right now. There is a narrow scope of choice with respect to plans. Canadians pay significantly more if you’re a heavy user or an average user, 56 and 33 per cent more than Americans respectively.”
“There is no incentive to drive price competition with the current market structure, hence the need for new competitors.”
“We know that users in Canada are paying the highest prices in the developed world for mobile services,” said David Dobbin, president of Toronto Hydro Telecom. “We also know we have the lowest penetration in the developed world for cellular and wireless services.”
Dobbin said that while the incumbents rely on paid consultants for the figures in their submissions to Industry Canada, THT went to independent sources like the Federal Communications Commission in the U.S., which reports that in 2005, the average revenue per PCS minute in U.S. dollars was four cents in Hong Kong, eight cents in Singapore, and seven cents in the U.S. Canadians paid 11 cents.
Absolutely true, said Englehart, “but every other country is paying more,” and very heavy users at the top of the heap are dragging the U.S. average down. “If you are a typical Canadian with a typical Canadian phone plan, you’re not going to pay less in the U.S.”
For penetration rates, THT consulted the International Telecommunications Union, which says Canada’s cellular penetration is 52.5 per cent, and growing at 14 per cent. In comparison, Italy’s penetration is 123 per cent, and it’s growing at 11.3 per cent. “We will never catch up. It’s a mathematical and statistical impossibility,” Dobbin said.
The incumbents often argue that Canada’s size and large stretches of remote land, combined with its relatively small population, mean that the Canadian market won’t support more than three national carriers, according to Dobbin.
Australia, though, is also large and mostly remote, and its population is two-thirds of Canada’s, yet its market supports five national carriers, with 91 per cent penetration and prices 70 per cent lower than Canada’s, he argues. “Is it that Australians are just incredibly more intelligent than Canadians? I don’t think so. It’s because they have competitors,” he said.