Mobile Future

The Cautionary Tale of Canadian Spectrum Auctions

As the U.S. government prepares to auction spectrum in the 600MHz band, those supporting set-asides and other exclusionary measures that would restrict some bidders from full participation while specifically benefiting certain of their competitorshave pointed north to recent spectrum auctions in Canada to make their case. They claim, in a nutshell, that the Canadian government helped stoke competition by resorting to “thumb on the scale” auction rules that effectively allowed government regulators – rather than the marketplace – to pick the winners and losers in the spectrum auction.

A new Mobile Future white paper written by Paul Beaudry and Martin Masse, “Lesson’s Learned: Canada’s Experience with Set-Asides and Caps in Spectrum Auctions,” takes a deeper and more detailed look at the outcomes of the two most recent Canadian spectrum auctions.  And the key take-aways paint a sobering, though not surprising, picture of the restricted auctions as harming, not helping, competition, spectrum allocation and consumers.

The paper also provides a useful playbook for how U.S. regulators and outside auction designers at the FCC can avoid the missteps of the Canadians and instead craft spectrum auction rules that can best ensure pro-consumer and pro-innovation outcomes.

The authors, both former policy advisors to Canada’s Minister of Industry, conclude 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. These asymmetric rules essentially add up to public subsidies that are either wasted on established players who would have bid vigorously at full market value, or lost to new entrants that consistently fail.

Beaudry and Masse point to the 2008 Canadian AWS spectrum auction regarding the implications of exclusionary auction design. They assert it is highly doubtful that well-established regional providers like MTS and SaskTel would have been unwilling to pay the fair market price for spectrum they needed to upgrade their networks. Regional cable players Vidéotron and EastLink also had compelling market incentives to bid (the ability to add wireless services to their triple play customer offerings).

Of the three new entrants who secured licenses, none were successful in their own right.  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. Mobilicity filed for bankruptcy after the Canadian government rejected its similar acquisition by TELUS, and WIND Mobile’s European financial backer has written off its investment.

As a result of Canada’s exclusionary measures, the 2008 set-aside spectrum sold at a discount of about 30 percent compared to spectrum open to bidding by all parties.

The authors also probe the Canadian government’s 2014 decision to use a spectrum cap for its 700 MHz auction, barring all national and regional incumbents from acquiring more than one of the “prime” blocks of capacity up for auction.  These auctions took place in January and February of this year, so it would be premature to declare them successful, as some have.  In fact, there are early reasons for concern.

The Canadian government has touted the fact that Quebecor (Vidéotron’s parent company) 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 was acquired for its “advantageous price.” The CEO has since publicly stated that it remains uncertain if the company would “sit” on the spectrum or “do something with it.”  Few analysts expect the company to deploy another network outside Quebec.

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. This misallocation of resources only becomes evident further down the road, when new business ventures hit a breaking point and can no longer be artificially sustained.

While regulators can use auction restrictions to help increase the number of companies that have access to spectrum, experience proves time and again that regulators cannot bring about actual, sustainable competition beyond what the market can support.  As shown by the Canadian experience, subsidizing the entrance of new players into the mobile market while hampering the growth of existing providers does not lead to more competition.  On the contrary, it wastes resources and delays the use of spectrum at a time when companies need more and more of it to meet consumer demand.