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How best to lower cost of wireless?: Eliminate foreign restrictions

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The federal government's upcoming auction of 700 MHz spectrum on Jan. 14 has created an unlikely public policy firestorm. The primary reason is the possibility the large U.S.-based wireless carrier, Verizon, will participate in the auction after completing its proposed acquisition of Wind Mobile, a small, domestically owned wireless carrier.

The controversy primarily surrounds the imposition of a limit on the blocks of spectrum that can be acquired by the three large incumbent carriers -- Bell, Rogers and Telus, as well as other rules affecting the acquisition or transfer of existing spectrum, and roaming and tower sharing arrangements that have been imposed by the government, ostensibly to facilitate the emergence of an additional large wireless carrier in Canada to compete against the "Big Three." In short, the rules for the upcoming auction can be seen as part of a broader government strategy to lower the costs of building out a national network by a would-be challenger to the Big Three.

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The stated goal of the government's strategy is to increase competition in the wireless sector by reducing the market shares held by the Big Three. In fact, the risk is that by indirectly subsidizing the emergence of a fourth national wireless carrier, the government will impose industry-wide inefficiencies that end up harming consumers in the long-run.

Rules that limit the amount of spectrum that the Big Three can bid for at auctions, or acquire from other companies, effectively lower the prices that would-be rivals, possibly including Verizon, need to pay for spectrum.

Besides contributing to a loss of auction revenue, limits on how much spectrum the Big Three can acquire will thwart the goal of spectrum being acquired by the most efficient users, since efficient users should be willing to pay more than less efficient rivals for spectrum, but may be prohibited from doing so.

Since the goal of competition is to encourage efficient production, rules that handicap the acquisition of spectrum by the incumbents, either at auction or by licence transfers, are not in the consumers' best interests.

Proponents of limits on spectrum acquisition by the Big Three argue they will outbid rivals for spectrum because they can pass the added costs onto their customers, since they are cosseted from competition behind barriers to entry. In fact, recent studies suggest Canadian wireless carriers are as efficient in delivering services to customers as are carriers in a number of other countries, including the United States, where competition is deemed by observers to be quite "workable."

This is not to say increased competition in Canada would not call forth improved performances from incumbent carriers. Rather, it is to say that handicapping the ability of the Big Three to acquire spectrum and restricting them from charging a competitive price for access to their networks is not the way to improve the performance of the sector. The most direct and effective way would be to eliminate all foreign ownership restrictions on telecommunications carriers and broadcasting entities. Doing so would introduce a credible threat to managers of Canadian wireless carriers that they might lose their jobs if their companies are not at least as efficient as their foreign-owned counterparts. The threat of takeover by a rival is a powerful market mechanism to discourage corporate inefficiencies.

While eliminating foreign ownership restrictions for broadcasters and cable distributors is obviously highly controversial, it is a needed complement to a similar policy for telecommunications carriers, since Bell and Rogers hold broadcasting licences. It is also a complementary policy initiative given the ongoing convergence between telecommunications and broadcast distribution. In particular, Internet-based Wi-Fi is an increasingly robust substitute for cellular services, and entry into wireless by foreign-owned companies can increasingly be indirectly accomplished through cable and other broadcast distribution assets.

The emergence and growth of technological alternatives to cellular networks owned by the Big Three highlights the inappropriateness of the government's targeting some minimum number of large wireless carriers as the basis of its competition policy for the sector.

Combined with foreign ownership restrictions, this policy amounts to government determining how many competitors there will be in wireless, as well as the national identities of the carriers. This is more like central planning than market competition.

 

Steven Globerman is the Kaiser Professor of International Business at Western Washington University and is a senior fellow of the Fraser Institute. His latest study, An Assessment of Spectrum Auction Rules and Competition Policy, can be found at fraserinstitute.org.

Republished from the Winnipeg Free Press print edition August 28, 2013 A9

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