Mobile Future

Lessons Learned: Canada’s Experience with Set-Asides and Caps in Spectrum Auctions

(Washington, DC) – Today, Paul Beaudry and Martin Masse released a new paper “Lesson’s Learned: Canada’s Experience with Set-Asides and Caps in Spectrum Auctions,” sponsored by Mobile Future, examining the result from using exclusionary auction rules in the two most recent Canadian spectrum auctions. As the FCC prepares to release rules governing the upcoming 600 MHz auction, a look north to Canada’s auction experiences helps illuminate the U.S. debate over how to craft spectrum auctions to best promote competition and innovation in the wireless market.

The analysis concludes that exclusionary auction rules, such as spectrum set-asides or caps, prevent efficient competition and hinder investment in the state-of-the-art wireless networks and services that consumers are demanding. The report finds that the competitive handicapping of incumbents has done little to foster sustainable competition in the Canadian wireless market, instead leading to lost revenues and wasted government resources.

The report highlights several issues with regard to the 2008 AWS spectrum auction:

  • It is highly doubtful that well-established regional providers would not have been willing to pay the fair market price for spectrum they needed to upgrade their networks.
  • Similarly, regional cable players had compelling market incentives to bid (the ability to extend their triple play offering to a quadruple play that includes wireless).
  • Of the three new entrants who secured licenses, none were successful.
    • Public Mobile was acquired by incumbent TELUS for nearly five times the purchase price of its spectrum licenses, essentially arbitraging its government-subsidized spectrum acquisition to secure a windfall;
    • Mobilicity filed for bankruptcy after the Canadian government rejected its similar acquisition by TELUS; and
    • WIND Mobile’s European backer has written off its investment.
    • The 2008 set-aside spectrum sold at a discount of about 30% compared to the spectrum open to bidding by all parties.

Moving on from the failed auction set-aside in 2008, the Canadian government instead opted to impose a spectrum cap in the 2014 700 MHz auction, barring all incumbents from acquiring more than one of the “prime” blocks up for auction. It is still too soon to fully assess the outcomes of this auction, but the report cites early cause for concern.  The Canadian government has touted as a victory the fact that Quebecor secured licenses not only in its home market of Quebec, but also in Ontario, Alberta and British Columbia, all markets with no established fourth player.  Yet Quebecor has made clear the spectrum, which had no other significant bidder, was acquired for its “advantageous price,” with the CEO publicly stating that it remains uncertain if it would “sit” on the spectrum or “do something with it.”  At this stage, few analysts expect Vidéotron, which is owned by Quebecor, to develop a network outside of Quebec.

Looking forward, the report emphasizes that when designing rules for its 600 MHz auction, U.S. regulators must keep in mind they cannot bring about actual competition beyond what the market can support. “Asymmetric rules regarding the acquisition of spectrum such as set-asides or spectrum caps prevent efficient competition and the optimal allocation of resources. Some players that might not otherwise have entered the market will be enticed to do so when offered privileged access,” writes Beaudry and Masse, “Even a faulty business plan can become promising when it is enabled by subsidies worth hundreds of millions of dollars. The misallocation of resources only becomes evident further down the road, when the business ventures hit a breaking point and cannot be artificially sustained any longer.”

In examining the real-world outcomes of preferential auctions, exclusionary rules tend to suppress investment in network infrastructure and create a business culture of regulatory dependency. “As the mobile market continues to evolve in unexpected ways, making more spectrum available for wireless use is critical to fueling groundbreaking innovation, investment and adoption,” said Mobile Future Chair Jonathan Spalter. “It is American consumers, not government regulation, which have driven the mobile revolution. This should remain a guiding principle as we move forward to encourage the ongoing strength and growth of our wireless innovation ecosystem.”