Optimal Policy Relative to Spectrum Auction

Marcel Boyer, Vice president and Chief Economist of the Montreal Economic Institute and holder of the Bell Canada Chair in Industrial Economics at the University of Montreal

Everyone agrees that more competition in the telecommunications sector is a laudable objective. However, can it really be achieved through government intervention and privileges? The impending release of additional spectrum for advanced wireless services use raises a host of questions concerning regulatory and competitive oversight of the Canadian wireless industry. Industry Canada plans to proceed through an auction, which is rightly considered an economically efficient way to allocate spectrum. Key considerations for the government include market entry and competition, as well as the structure, term and implementation of the spectrum licences.

Although the capital requirements and challenges to entry in the wireless industry are significant, the industry appears sufficiently competitive to allow entry of new innovative players with superior products. The current competition level favours efficiency through a process of creative destruction that directly benefits the consumer.

The government is best suited to the role of regulator basing its policies on competitive processes rather than on the traditional measurement of market shares and concentration ratios. Upfront subsidies are not likely to favour entry by efficient firms, their ability to compete once in the market or their long-term viability. Entry, prices and quantities must emerge from the pressures of a competitive environment. A proper level of competitive pressures is the only way to encourage efficient entry and the only way to induce firms to really minimize their costs.

In the current case, Industry Canada is considering a spectrum set-aside, that is, “a certain amount of spectrum for which only new entrants would be eligible to bid.” A new entrant is defined as “one who does not operate, or does not have an affiliate that operates, a national wireless network that offers high mobility phone services.” This set-aside is equivalent to an upfront subsidy. Rather than directly giving money to entrants, the government creates the same effect by limiting the potential range of bidders and hence manipulating the price of the licence downwards.

This measure can create a serious regulatory risk that may cause investment chill in the industry and socially costly and inefficient distortions in the development of the telecommunications network infrastructures. It will generate significant losses for the public treasury by limiting the competitive intensity in the auction process. It is simple good governance that the public resource that the spectrum represents be allocated efficiently and responsibly. More efficient means are available to ensure that competitive processes are at work in the industry.

Research and empirical analysis of spectrum auctions suggest that the allocation of spectrum is just as important as the methods for its assignment. Allocation defines the licence in terms of geography, the frequency size, and length of time that the bandwidth may be used. It is particularly important that licence terms are designed to discourage speculation, where a “new entrant” firm could bid successfully on a licence and then turn around and re-sell the licence at profit to an incumbent that may have been prevented from participating in the auction in the first place.

The further exploration of exclusive market-based spectrum rights is a promising avenue of research. To date, no country has fully commoditized their spectrum resources. The current regime effectively locks spectrum away in blocks of bandwidth licensed to but a few companies, while not all spectrum is fully put to use. In a sense, the current regulatory regime makes spectrum an artificially scarce resource. One can argue that viable commodity markets for spectrum would drive down price and encourage innovation in bandwidth-dependent industries. An interim step could be shorter licensing terms with rights for the current licence holders to renew, along with the establishment of secondary markets for spectrum that would put unused spectrum to better use. If constructed correctly, there would then be no need for “use it or lose it” provisions in licensing agreements; firms with licences would have sufficient incentive to put spectrum to best possible use, either internally or on the spectrum market.

Spectrum as a resource will only grow in importance as wireless technologies continue to evolve. The Telecommunications Policy Review Panel was right to recommend replacing the presumption of regulation with one of deregulation, and to move “away from before-the-fact regulatory prescriptions to approaches that place greater reliance on after-the-fact regulatory intervention, based on verified complaints of significant market problems.” These general principles can be applied in the upcoming advanced wireless services spectrum auction to help increase competition, encourage innovation and improve the welfare of the Canadian consumer.

Marcel Boyer is Vice President and Chief Economist of the Montreal Economic Institute.