As the lobby onslaught from Bell, Telus, and Rogers bears some fruit – editorials from the Globe and Toronto Star calling for the government to reverse its position on a set-aside as well as support from the Canadian Council of Chief Executives and from a leading telecom union – it is worth considering whether the Canadian policy differs significantly from other developed economies. The Canadian policy boils down to the two issues: opening the door to telecom foreign investment after years of restrictions and creating a spectrum set-aside to ensure that new entrants (whether domestic or foreign) have a reasonable shot at winning sufficient spectrum to offer competitive wireless services in Canada.
While the big three argue for a “level playing field”, the reality is that Bell, Telus, and Rogers already enjoy enormous marketplace advantages. As I’ve previously discussed, these include restrictions on foreign ownership for broadcast distribution, extensive broadcast assets that Verizon could not touch, millions of subscribers locked into long term contracts, far more spectrum than Verizon would own, and shared networks that saves the companies millions of dollars. In the absence of a set-aside, the incentives for the big three would be to pay far above market price for the spectrum in order to keep competitors out of the market. In other words, Bell, Telus and Rogers will massively over-pay for the spectrum to keep out Verizon unless the government establishes a policy that precludes them from doing so.
The incumbent talking points might lead some to believe that the Canadian policy is dramatically different from other countries (Bell has been talking about how the U.S. would never grant equivalent access, while the Globe speculates that perhaps the policy is “the result of a drafting error”). Yet a review of recent spectrum auctions in other OECD countries indicates that the twin policy of encouraging foreign investment plus establishing set-asides to facilitate competition is very common. The biggest difference between Canada and many other developed economies is that Canada is late to opening its telecom market and is therefore doing both at roughly the same time. In other countries, foreign investment restrictions in the telecom market were removed years ago.
The table below takes data from the 2013 OECD Communications Outlook which has charts on telecom foreign investment rules and spectrum auction policies that highlight how many countries have removed foreign ownership restrictions in telecom and used spectrum set-asides to create advantages for new entrants. Policies include setting-aside spectrum, reduced costs, and limits on incumbent spectrum (including favouring foreign companies over domestic ones).
||Open to Telecom Foreign Investment?
||Spectrum Set-Aside or Prioritization for New Entrants?
|Belgium||Yes. No foreign ownership restrictions||Yes. Priority has been given to a new entrant at 2.1 GHz for the fourth license.|
|Czech Republic||Yes. No foreign ownership restrictions||Yes. A continuous frequency segment 2 × 15.6 MHz within the frequency band 1 800 MHz is designated for new applicants only (via a spectrum cap defined for this purpose).|
|Germany||Yes. There are no restrictions on the operations of foreign affiliates resident in Germany.||Yes. For the 2010 frequency award the spectrum cap in the 800 MHz band was set at 2 x 20 MHz, with existing assignments in the band at 900 MHz counting towards this. This resulted in the following spectrum caps at 800 MHz:
Deutsche Telekom max. 2 x 10 MHz at 800 MHz.
Vodafone max. 2 x 10 MHz at 800 MHz.
E-Plus (KPN) max. 2 x 15 MHz at 800 MHz.
o2 (Telefónica) max. 2 x 15 MHz at 800 MHz.
Newcomer max. 2 x 20 MHz at 800 MHz.
|Hungary||Yes. No foreign ownership restrictions||Yes. In the first round the new entrants had the right to obtain frequency with special obligations|
|Italy||Yes. No foreign ownership restrictions||Yes. The described auction procedure included selection criteria for promoting market competition; in fact, many provisions were dedicated to favouring possible new entrants. A combination of caps between new and existing spectrum assignments was adopted to make available a maximum availability of spectrum for new entrants. Spectrum caps of 2 x 25 MHz (at 800 + 900 MHz), 2 x 25 MHz (at 1 800 MHz) and 55 MHz (at 2.6 GHz) were defined in detail. Possible new entrants were also able to declare their minimum total requirement of spectrum at the beginning of the auction. More favourable coverage obligations were also defined for possible new entrants and other provisions about roaming, site sharing and frequency sharing.|
|Netherlands||Yes. No foreign ownership restrictions||Yes. Blocks are reserved for newcomers and there are caps for some existing operators.|
|Portugal||Yes. No foreign ownership restrictions||Yes. For the 800/900/1 800/2 600 MHz bands, a whole set of measures were taken to promote market entry:
Lower bands (800/900 MHz): Spectrum caps; 25% discount on the final price of the 900 MHz lots; obligations of full MVNO and light MVNO agreements; obligation of national roaming agreements; coverage obligation only for the 800 MHz band.
Upper bands (1 800/2 600 MHz): spectrum caps were defined in order to set spectrum aside for new entrants.
Moreover, a reduction of 50% in the annual spectrum fees, during the first three years, was applicable for operators with less than 60 MHz in the bands assigned for electronic communication services.
|Spain||No restrictions for citizens of a European Union member state, or who hold other nationalities, when, in the latter case, it has so been established under international agreements binding the Kingdom of Spain. For any other physical or legal persons, general or particular exceptions to the former rule can be authorised by the Government.||Yes. Limitations on the participation of operators (Telefónica and Vodafone) in the beauty contest carried out for the 900 MHz band. Spectrum caps for spectrum over and under 1 GHz respectively (800 and 900 MHz bands considered together; and 1 800 MHz, 2.1 and 2.6 GHz bands considered together).|
|United Kingdom||Yes. No foreign ownership restrictions||Yes. In its July 2012 statement setting out the 4G auction process of 800 Mhz and 2.6 Ghz spectrum bands, Ofcom noted in its conclusion that UK consumers are likely to benefit from better services at lower prices if there are at least four credible national wholesalers of 4G mobile services. Therefore, in the interests of competition, Ofcom decided to reserve a minimum amount of spectrum in the auction for a fourth operator. This could be either the UK’s current fourth MNO, Three (Hutchison 3G), or a new entrant altogether. Ofcom also considered it appropriate and proportionate to impose limits on the amounts of spectrum that each bidder can acquire in the auction, such that their overall holdings of â€œmobile spectrumâ€ in general, and sub-1 GHz â€œmobile spectrumâ€ in particular, do not exceed certain safeguard caps. This is in order to mitigate the risk of highly asymmetric spectrum holdings after the auction leading to lower competitive intensity|
In addition the countries listed above, South Korea have excluded incumbents from some spectrum to “foster a fair competition environment”, while many countries without foreign investment restrictions have used spectrum caps to encourage greater competition and prevent dominance by the established incumbents. These include Denmark, Estonia, Finland, France, Norway, Slovak Republic, Sweden, Switzerland, and Turkey.
The UK’s experience is particularly instructive as the head of Ofcom, the UK regulator, described it as “one of the most ‘intense’ lobbying battles” he had ever seen and there were threats of lawsuits as part of the process. The UK stood its ground, however, with a policy position that sounds strikingly similar to the current Canadian approach (which now even includes a lawsuit launched by Telus):
Ofcom has concluded that UK consumers are likely to benefit from better services at lower prices if there are at least four credible national wholesalers of 4G mobile services. Therefore, in the interests of competition, Ofcom has decided to reserve a minimum amount of spectrum in the auction for a fourth operator.
The three Canadian incumbents, whose reaction to the prospect of genuine marketplace competition is telling, are waging a similar lobbying battle but clearly hoping for a different outcome.