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Why the Canadian Plan to Encourage Wireless Competition Is Consistent with Many Developed Countries

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Tuesday July 30, 2013
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).

Country
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 “mobile spectrum” in general, and sub-1 GHz “mobile spectrum” 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.
Comments (11)add comment

Ross said:

...
Thanks for this. Do you believe Canada should lift all foreign ownership restrictions on telecommunications?
July 30, 2013

Cynic said:

...
Open it right up, no restrictions! Let Verizon or Vodaphone buy whichever carriers they want, don't just restrict them to the new kids.
July 30, 2013

Sheep#69 said:

It's only a matter of time...
...before the Telcos throw some money in the CPC's hidden offshore bank accounts and then the Harper Gov. will give them exactly what they want, like ditching reserved spectrum space for new affordable competition for Canadian consumers.
July 30, 2013

Harry Lime said:

Yes!... Now keep refining the right question to ask
Why not rearrange the game, as is now possible with IP networks?

100% Canadian ownership and operation of everything physical: infrastructure, spectrum licenses, radio sites

Forbid any owner/operators of the physical infrastructure from participating in the service level: retail outlets, customer service, billing, business sales consultants, marketing, promotions, content, partnerships, handset sales

Allow anybody and everybody -- big and small, domestic and foreign -- to lease network bandwidth. Wholesale bandwidth could easily be priced at regulated rates, auctioned, long term purchase agreements -- just like any other commodity.

This avoids:
- hoarding of spectrum to maximize profit and minimize use of the scarce resource
- additional competitive barriers from a handset's supported frequencies clashing with who owns those frequency bands in Canada
- larger than necessary barriers to entry
- even the suspicion of foreign espionage or control of essential infrastructure
- chaotic government windfalls from spectrum auction revenue, and then ratcheting up of private taxation by telecom monopolies
- vacillation between excessively detailed government meddling, and citizen protests
- crazy M&A, marketing spending, and other executive level waste unrelated to providing better quality to more clients

The problem to date has been economists and lawyers only looking to adapt or optimize the most recent past practice, forgetting the field is both young and predictable if they step back to look at the history of it.

We keep getting the answer we ask for. It is time to start asking a different question to the marketplace.

What good did record spectrum auction revenues bring us last time? We citizens only want to get on with our lives so that we can stop paying attention to the turbulence the telecom situation in Canada forces upon us, where apparently not even the CEOs of the Big 3 are happy.
July 30, 2013

Harry Lime said:

In summary
Separate the capital intensive component that is supported by very safe forecasts of aggregate demand, from the low startup cost, mostly current operating cost, but frequently unpredictable whims of the end user who can have as many preferences as is profitable to service.

Some people legitimately want expensive sales people to give them a concierge style service. Some might just want as much data for as low a price as possible. Others might be interested in bundling a group of monthly services like a landline and television. Letting people pay for a phone over a 5 year contract might be nice for someone that couldn't get a bank loan but is significantly more like to pay on time when their phone service is attached to repayment.

There is no single answer, because you can profitably provide many answers when you frame the game right.

Let the telecom CEOs and the consumers each have their freedom. There is only one chokepoint that we need to watch, and we can offer it low but guaranteed rates of return. For the bargain, every actor in the play can be a global leader since we'd move faster without so much money being spent on preventing others from doing what they wish to do.
July 30, 2013

Eric L. said:

Break up the "conglomerate" part
I think the first step in a more competitive environment that has been not addressed in quite awhile (it seems )is to split the big 3's completely inflexible media conglomerate structure. That is, them being joint-media/telecom/cable corporations. It should be common sense that corps that have oligopolies or monopolies on supply of the medium of transmission should *not* also be in control of the media providers and their data within that transmission. It would be a step forward towards making the big 3 compete only on the transmission medium grounds without simply resorting to yet more monopolies on media works.
July 30, 2013

Russell McOrmond said:

Travelling a great way to see the future
I've travelled to a few European countries in recent years, and it has shown me what we could have if the incumbent welfare cases (BellUsOgers) are finally put in their place. I simply don't buy the geography/population arguments, as I got better coverage in Ireland.

Think of the population of Toronto(2.6M), Vancouver(2.4M), Calgary(1.097M), and Ottawa(.88M) and you have Ireland, except they are spread out far more than these Canadian urban centers are. According to the arguments from the incumbents the prices in Ireland should be much higher than in those centers where there is WIND/etc, and yet Ireland was better service for less money. (Oh, and I'm comparing WIND to Three.ie given the Canadian incumbents are so out-of-touch to not be fair to compare).
July 31, 2013

Cynic said:

...
@Russell

I too have travelled to Europe and while there are certainly some carriers that offer cheaper plans than you can find in Canada, the networks are far, far less advanced than we have here. There is barely any 4G to be found anywhere, including the big centers like London and Paris. Some might argue that you get what you pay for. I also noticed on my last trip (June) that very few Europeans are carrying smartphones. Most people are still carrying the basic flip style phones we used to have here 5 years ago. Perhaps its the dire state of their economy that prevents people from upgrading, perhaps its the poor state of their networks that render smartphone less useful, or perhaps it's the less generous subsidies they get on smartphones. Whatever the reasons, the smartphone craze hasn't caught on in Europe like it has here. I'm not saying it's good or bad, it's just different.
August 01, 2013

HJ said:

@Cynic
Your evidence of smartphone penetration is anecdotal. According to actual data I've seen, penetrations rates of smartphones are roughly the same. Some EU countries are a fair amount higher (UK, Spain), some are a bit lower (France, Germany), but more or less comparable.

You are right about 4G penetration in Europe, but they led us in 3G as far as I remember, so I think part of it is a "leap-frog" effect. Of course the economic meltdown in Europe has also had a huge effect.
August 01, 2013

Cynic said:

...
@HJ You are right, I should provide properly sourced stats instead of just my own personal observations.

The KPCB Internet Trends 2013 report shows that global smartphone penetration is:

Global average = 21%

Canada = 63%
Germany = 29%
Spain = 33%
France = 46%
UK = 53%
USA = 58%
Russia = 12%
India = 6%
etc.
August 01, 2013

Smartphone penetration said:

@HJ
Or you could look at Comscore's numbers, which places Canada behind both Spain and the UK.

http://www.comscore.com/Insights/Presentations_and_Whitepapers/2013/2013_Mobile_Future_in_Focus
August 01, 2013

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