Bland Over Bold: The Government's New Telecom and Spectrum Policy
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Thursday March 15, 2012
The government's vision of fostering new competition is somewhat limited. The primary goal appears to be the creation of a strong, national fourth carrier in the market. The spectrum caps and foreign ownership changes are both geared toward giving a fourth player the necessary spectrum and capital to compete with Bell, Telus and Rogers. That suggests consolidation of the current smaller players in the hope of a single, stronger competitor - possibly foreign owned - challenging the incumbents. Given the current environment, it is not clear that this generates significant new consumer choice.
While the headlines have focused on changes to the foreign ownership rules, the new changes are rather timid. There is an opening for a foreign competitor to enter the marketplace by buying some of the smaller players or aggressively bidding on spectrum, but there is no vision of throwing the market open to full-scale competition that might include a major international player entering the market by buying an incumbent. That would shake up the competitive landscape far more than the incremental, go-safe approach in this policy.
The last spectrum auction included a set-aside, which opened the door to a handful of new competitors such as Globalive, PublicMobile, and Mobilicity. A further set-aside may make sense since this round of new entrants may look to use the spectrum primarily for wireless broadband services, providing a potential alternative to the cable and telecom dominance. If another set-aside proves too unwieldy, a spectrum cap, which would limit the amount of spectrum any single company could hold, may emerge as the alternative. A spectrum cap might prove effective if combined with two additional conditions.
Industry Canada has indeed opted for a spectrum cap, limiting the number of blocks that can be held by an incumbent for the prime "beachfront" spectrum. The approach should ensure at least one new or smaller entrant in most, though not all, markets.
First, the implementation of a use-it-or-lose it principle that would require all bidders to use the spectrum within a defined period. The use-it-or-lose-it approach would help guard against the hoarding of spectrum, particularly for incumbents who may overbid in the hopes of keeping new competitors out of the market.
The policy includes a use-it-or-lose it principle, requiring the same usage requirements as previous auctions and adding certain build-out requirements within five years of licensing (with further requirements within seven years). However, not all carriers will be required to meet those requirements, particularly if they only acquire one 700MHz block in a single market.
Second, safeguards against opportunistic flipping of the spectrum with the prohibition on its sale within the first five years of the auction.
The spectrum caps put in place for the 700 MHz auction will continue to be in place for five years following licence issuance. No transfer of licences or issuance of new licences
will be authorized if it allows a licensee to exceed the spectrum cap during this period.
Another critical issue is who should be entitled to bid for the spectrum. The last spectrum auction featured Canadian ownership requirements, thereby limiting potential entrants. Given that Canada is one of the only developed countries that has retained significant telecom foreign ownership restrictions, the auction provides a tailor-made opportunity to eliminate the restrictions by opening the market to all bidders.
As discussed above, the government has opened the door to foreign investment, though not as widely as it could (or should). The foreign investment restrictions will be lifted for any carrier with less than ten per cent market share in the Canadian telecom market (effectively anyone other than Bell, Telus or Rogers). Restrictions remain in place for broadcasters and broadcast distribution companies. The government could have gone further. In my view, it should have removed telecom foreign ownership restrictions altogether and even considered removing restrictions on the broadcast side as well. As I argued last year, there is no reason to think that Canadian content rules cannot be applied to foreign-owned broadcasters or that Canadian-owned broadcasters are any more likely to prioritize Canadian content.
The spectrum policy decision will also determine which spectrum is available for auction and which is reserved for alternate purposes. The government has already indicated that it plans to grant some of the spectrum to law enforcement agencies, which intend to create their own emergency wireless network.
As the government had previously indicated, it has reserved some spectrum for public safety.
Many leading technology companies have recommended allocating some of the spectrum for unlicensed purposes. This spectrum, which would be free to anyone to use without the need for licence or government approval, could yield new services and technologies.
No word yet on the so-called "white spaces" issue. The policy rejects the inclusion of mandated open access for devices and applications, as the FCC established during its 700 MHz auction.
Beyond the technical details of the spectrum auction, the final billion-dollar question is what the government should do with the auction proceeds. While the $4 billion in proceeds from the last auction went into general revenues, this auction represents the best – perhaps only – opportunity to access billions of non-tax dollars for the digital economy. The money could be used to support broadband initiatives, digital content creation, and digital skills programs.
The 700 MHz auction will not occur until 2013, so proceeds will have to wait awhile. Moreover, indications are the government plans to use the moeny for deficit reduction, an unsurprising decision but yet another blow to the still-unreleased digital economy strategy.
The policy deals with several issues that I did not discuss in my initial post. Most notably, it promises changes to roaming and tower sharing policies that are designed to assist new entrants. It also has policies to encourage rural build-out, though the fine print suggests this may somewhat modest.
Thursday March 15, 2012