Spectrum Auctions: A Canadian Viewpoint


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Michael Hennessy of TELUS discusses Canadian experience in spectrum auctions.

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Spectrum Auctions: A Canadian Viewpoint

  1. 1. Wireless Spectrum Allocation –Implications for Industry Players, Policy Makers and the Consumer? Michael Hennessy Vice-President Wireless, Broadband and Content Policy International Institute of Communications Telecommunications and Media Forum Washington DC 18 November 2008
  2. 2. What lessons are we learning from recent and upcoming spectrum auctions? <ul><li>As was the case in the US PCS auction of 1996 and European auctions for 3G, government handicapping can result in negative outcomes </li></ul><ul><li>Early in 2008 Canada held an auction to allocate spectrum for AWS </li></ul><ul><li>In order to “promote more entry” Industry Canada set aside 40 MHz of 90 MHz allocated to AWS for new entrants and mandated national roaming and tower site access to incumbent networks </li></ul><ul><li>The auction resulted in record returns to government coffers and resulted in price per pop 2 to 3 times US price for its AWS auction </li></ul><ul><li>To what extent did Canadian AWS auction design lead to anomalous bidding behavior? </li></ul><ul><li>And will the additional costs of acquisition lead to a lower rate of investment? </li></ul>
  3. 3. AWS Auction Spectrum Comparison Historically Canadian spectrum had gone at discount to similar U.S. spectrum Canadian AWS auction countered trend as carriers paid 2 to 3 times more than U.S. Note: Canadian auction values quoted in CAD and US auction values quoted in USD. Auction Comparisons 4.37 1.29 1.55 0.54 1.11 9.19 3.38 3.90 1.59 13.43 - 2 4 6 8 10 12 14 US PCS (2001) Canadian PCS (2001) US AWS (2006) US 700 MHZ (2008) Canadian AWS (2008) $/MHz/POP National Average Metro Peak
  4. 4. Design analysis <ul><li>While a portion of the high prices may be explained by increasing perceptions of value since the US AWS auction, the fact remains that open spectrum sold at a 41% premium relative to the set aside </li></ul><ul><li>Industry Canada was concerned with precluding incumbents from preventing entry or raising the entrants’ costs; however, Industry Canada may have failed to assess the design for the possibility of entrants raising the incumbents’ costs </li></ul><ul><li>There is significant evidence that “new” entrants bid constantly on spectrum for which cheaper alternatives were available </li></ul>
  5. 5. Design analysis <ul><li>TELUS submits that regulated asymmetric treatment of bidders explains much of the overpayment and anomalous behavior </li></ul><ul><ul><li>“ New entrants” included regional cable companies and regional wireless carriers if they had less than 10% national market share </li></ul></ul><ul><ul><li>Yet ironically no spectrum blocks were auctioned on a national basis </li></ul></ul><ul><ul><li>Entrants were provided cost reducing benefits in terms of roaming and tower sharing thus providing more room to bid up spectrum costs </li></ul></ul><ul><ul><li>Regional new entrants were already aggressive competitors in related markets and had extra incentives to game up price </li></ul></ul><ul><li>Unlike other auctions new entrants could park points in unrestricted blocks without facing the usual consequences of reprisal in set-aside blocks where incumbents could not bid </li></ul>
  6. 6. Peak to ending spend ratio provides some indication of gaming by new entrants Peak Bid to Ending Spend $- $100 $200 $300 $400 $500 $600 $700 $800 $900 $1,000 Rogers TELUS Bell Videotron Globalive DAVE Shaw SaskTel MTS Bragg $M 0% 100% 200% 300% 400% 500% 600% 700% 800% 900% 1000% Peak Bid to Ending Spend Ratio Peak Bid Ending Spend Ratio
  7. 7. Is future intervention required to force competition and lower prices? <ul><li>The rationale for intervening in an open auction process to create more entry is questionable </li></ul><ul><li>While the threat of entry can result in short term pressure on price, its cost must be measured in terms of longer term efficiency and investment </li></ul><ul><li>In the lead up to the AWS auction, Canada already exhibited low voice RPM relative to other OECD countries but substantially lower penetration and higher data rates </li></ul><ul><li>Much of this concern will have been addressed by normal market evolution before any AWS service is launched </li></ul>
  8. 8. Is future intervention required to force competition and lower prices? <ul><li>Continued investment in and penetration of 3G networks has led to a radical decline in data rates that likely would have occurred in any event </li></ul><ul><ul><li>$15 unlimited e-mail </li></ul></ul><ul><ul><li>$30 unlimited e-mail and web surfing on device </li></ul></ul><ul><li>So the question is, does a transfer of hundreds of millions of dollars from incumbents to Treasury contribute to more investment, innovation and choice? </li></ul><ul><li>TELUS continues to support auctions but considers it’s time to rethink old models (set asides, resale, unbundling) to “stimulate” competition </li></ul>
  9. 9. Challenges going forward <ul><li>Countries are actively pursuing wireless/wireline industrial strategies to incent the rollout of ultra fast broadband networks to stimulate economic growth </li></ul><ul><li>As we move to Web 2.0 and beyond the Internet including mobile is increasingly seen as a potent and viable vehicle and enabler for economic and cultural activities throughout the information, entertainment and information value chain </li></ul><ul><li>3/4G mobile networks are part of the broadband equation </li></ul><ul><li>Building next generation advanced broadband networks will require billions of dollars of new investment at a time when capital is severely restricted </li></ul><ul><li>That investment will only come from the private sector </li></ul>
  10. 10. Challenges going forward <ul><li>TELUS and other carriers have already committed billions of dollars and are ready to continue to risk billions more of new investment to build next generation networks </li></ul><ul><li>This type of continued investment requires a willingness of government to support scale and an opportunity to earn a reasonable return on investment </li></ul><ul><li>Costly regulation to create some theoretical number of competitors will only increase consumer costs and reduce investment and job creation </li></ul><ul><li>Governments priority in a period of economic crisis must be to encourage investment and create jobs </li></ul><ul><li>We believe that the very nature of broadband will guarantee competition in downstream markets </li></ul>
  11. 11. End game <ul><li>Old paradigms like set asides, unbundling and resale do not build networks and may create uneconomic entry </li></ul><ul><li>The development of IP-based broadband networks is leading to a very different model for innovation and choice in downstream markets </li></ul><ul><li>IP is more conducive to an open applications environment where diversity and choice is delivered at the application layer in the network </li></ul><ul><li>With the deployment of 3G networks and smart-phone penetration, there is clearly an increased emphasis on open source in wireless as well (e.g. Android) </li></ul>
  12. 12. End game <ul><li>As evidenced by the BlackBerry and iPhone there is an increasing abundance of carrier independent applications </li></ul><ul><li>There are a number of convergent phenomena that have accelerated this trend </li></ul><ul><ul><li>3G technology on both GSM and CDMA platforms has taken off </li></ul></ul><ul><ul><li>A combination of broadband wireless penetration and robust data plans is contributing to a data renaissance </li></ul></ul><ul><ul><li>Consumers are looking for a single Internet experience across fixed and mobile platforms shifting emphasis away from walled-gardens </li></ul></ul><ul><li>In this type of environment new applications and services will deliver more innovation and diversity than old style intervention has ever delivered </li></ul>