A decade after we first debated the appropriateness of setting spectrum aside to foster the emergence of new wireless players, it seems the federal government hasn’t learned anything about the perverse effects of such a policy.
The consultations on the framework of the upcoming 600MHz auction (likely to take place in 2019) ended earlier this month. Ottawa has once again proposed to reserve 40% of available licences for smaller players. In effect, this means that Shaw’s Freedom Mobile, Videotron, SaskTel, and Eastlink will not have to bid against the Big Three—Bell, Rogers, and TELUS—for these licences, and will therefore be able to acquire them at a cheaper price.
According to Innovation Minister Navdeep Bains, this preferential treatment is warranted in order to promote more competition in the wireless sector. But government intervention that favours some players at the expense of others is the antithesis of real free-market competition.
Experience has shown that such measures essentially constitute public subsidies that are either lost to weak new entrants that consistently fail, or wasted on established regional players that would have had the means to bid for the full value of the spectrum.
The spectrum set aside in the 2008 AWS auction led to the emergence of three pure-play new entrants (WIND, Mobilicity, and Public Mobile) that did not have a strong business case and ended up being acquired by other players. It also allowed three strong regional players (Videotron in Quebec, Eastlink in Atlantic Canada, and Shaw in Western Canada) to acquire licenses, even though they did not need such subsidies to enter the wireless market. They already offered cable, Internet, and wireline services, and had a clear incentive to bundle wireless services with their legacy offerings.
The biggest beneficiaries of the federal government’s interventionist rules have been the shareholders of some of these companies which arbitraged their government-subsidized spectrum acquisition to secure a windfall.
The federal government’s rules have also delayed the use—or the more efficient use—of spectrum frequencies that were wasted on the failed companies or were simply unused by the license holders. Inefficient usage of spectrum has been one of the most damaging unintended consequences of this flawed policy. It made spectrum scarcer and more expensive, the exact opposite of the government’s stated intention of adopting policies conducive to lower consumer prices.
Granted, the proposed rules for the 600-MHz auction will not create as much distortion as those of previous auctions. Regional players will only be able to bid on reserved spectrum in areas where they already offer wireless service, which will curtail speculation. But the set-aside policy is even less justified today than it was ten year ago.
Ottawa has now achieved its goal of ensuring there is a well-established fourth player in every region of the country, except in Manitoba. And these players are not small, poorly capitalized new entrants that need to be protected.
Minister Bains contends that the set aside is necessary because the Big Three have the means to stop smaller players from acquiring spectrum in an open auction. This argument bizarrely assumes that the large players’ incentives to make life difficult for regional competitors far outweigh the incentives of the latter to buy spectrum. It also assumes that the Big Three are willing to waste hundreds of millions of dollars on frequencies they do not need just to achieve this. These assumptions make no economic sense.
Smaller players for their part argue that they have less of the valuable low-frequency spectrum than the Big Three and that restoring some kind of balance justifies the set aside.
But isn’t an open auction precisely the best way to determine to what extent they really need those licences, and what prices should be paid by each participant for this scarce resource so that they can execute their business plans? Why have an auction if you’re going to rig the rules in order to ensure a specific outcome?
Open, competitive auctions are supposed to lead to a more optimal allocation of resources than arbitrary decisions by politicians and bureaucrats. The proposed set aside defeats that purpose. If the government really believes we need more competition in the wireless sector, it should let it happen, plain and simple.
Martin Masse est rédacteur et réviseur principal à l’Institut économique de Montréal. Il signe ce texte à titre personnel.