Consultation on a Framework to Auction Spectrum in the 2 GHz Range including Advanced Wireless Services
Part II: Further Consultation on the Auction
1. Telecommunications Policy Considerations
The wireless industry structure expanded from two cellular telephone carriers in 1984 to four PCS wireless carriers with the licensing of two new entrants in 1995. An important goal in opening the spectrum at that time was: "the stimulation of competitive and comprehensive service offerings, provided through the utilization of both existing and new facilities, through, among other measures, the non-discriminatory access by third parties to networks, thereby also promoting value-added services and content." Footnote 5 The wireless cellular industry has experienced consistent growth since the licensing of PCS in the 2 GHz band in 1995.
According to Statistics Canada's latest survey, the number of wireless telephone subscribers has now surpassed local access lines and the annual revenues for wireless telephony have exceeded those derived from the local wireline telephone service. According to the Canadian Radio-television and Telecommunications Commission (CRTC), Canada has a wireless infrastructure that serves 97% of the population with coverage along most primary highways and to about 20% of its geography.
Technology convergence is occurring where spectrum can be used for a variety of applications including voice, data (broadband Internet access) and video (multimedia). Demand for spectrum has been expressed from various companies for a variety of markets including: wholesale and retail, public and enterprise and national, regional and local markets. The Department has a mandate to respond to demand for spectrum from small and large businesses from all areas of Canada. Spectrum is a fundamental resource for facilities-based wireless carriers, enabling them to exist and grow.
2. Fostering a Competitive Wireless Market
2.1 Telecommunications Objectives
In the issuance of radio authorizations, the Minister may have regard to the Canadian telecommunications policy objectives set out in the Telecommunications Act. The licensing of new spectrum provides a unique occasion to give regard to these objectives as the government controls access to the underlying resource (spectrum) needed for market entry.
Among the objectives in section 7 of the Telecommunications Act, the following are particularly relevant in licensing new spectrum resources:
- to render reliable and affordable telecommunications services of high quality accessible to Canadians in both urban and rural areas in all regions of Canada;
- to enhance the efficiency and competitiveness, at the national and international levels, of Canadian telecommunications;
- to promote the ownership and control of Canadian carriers by Canadians;
- to foster increased reliance on market forces for the provision of telecommunications services and to ensure that regulation, where required, is efficient and effective; and
- to stimulate research and development in Canada in the field of telecommunications and to encourage innovation in the provision of telecommunications services.
2.2 Telecommunications Policy Review Panel (TPRP)
On March 22, 2006, the Telecommunications Policy Review Panel released its final report, which contained over 120 recommendations aimed at improving Canada's telecommunications policy and regulatory framework and ensuring that Canada has a strong, internationally competitive telecommunications industry.
Some recommendations that are particularly relevant to this consultation include:
- 5-9 (a) availability of adequate spectrum to meet demand for deployment of fixed and mobile broadband networks across Canada;
- 5-9 (c) reliance on market-based approaches to spectrum management as much as possible;
- 5-9 (h) continued use of regulatory mechanisms such as spectrum caps (spectrum aggregation limits) where spectrum is scarce in order to provide an opportunity for new entrants to acquire spectrum and for Canadians to have an expanded choice of service providers.
The entire text of the TPRP's recommendations can be found on the Internet at: http://www.telecomreview.ca/eic/site/tprp-gecrt.nsf/Intro.
2.3 Competition Principles
Auctions have the ability to award spectrum in a transparent and economically efficient manner. However, to ensure that economic benefits are maximized, it is important that potential licensees will indeed be operating in a competitive marketplace. In the document entitled Framework for Spectrum Auctions in Canada, Issue 2 dated October 2001, the Department described the assignment of spectrum via an auction process and the two guiding principles the Department intended to follow to promote a competitive post-auction marketplace. These principles are as follows:
"Principle 1: Restricting Participation
With regard to restricting participation, it is the view of the Department that an entity that currently provides telecommunications services should be restricted from holding certain licences if:
- that entity possesses significant market power in the supply of one or more telecommunications services in a region covered by the licence to be auctioned;
- a new entrant is likely to use the licence to provide services in competition with that entity's existing services; and
- the anti-competitive effects of that entity acquiring a licence are not outweighed by the potential economies of scope arising from the integration of the spectrum in question into that entity's existing network.
Principle 2: Spectrum Aggregation Limits
With regard to applying spectrum aggregation limits, it is the view of the Department that when multiple licences for the use of spectrum in a given geographic area are auctioned, and these can be used to provide closely substitutable services, limits on the amount of spectrum that any single bidder is allowed to acquire may be required to ensure competitive markets. Spectrum aggregation limits may be imposed in the following circumstances:
- a bidder that acquires an amount of spectrum beyond a certain level would not face effective competition from providers of closely substitutable services provided by firms that use infrastructure other than the spectrum being auctioned; and
- the anti-competitive effects arising from the acquisition of an amount of spectrum beyond a certain level by a single bidder would not be offset by lower costs or higher valued services resulting from having a single entity hold this amount of spectrum."
In the analysis of the above noted competition principles, it is appropriate to consider the current Canadian market, activities of other regulators who deal with the wireless industry, and the experience of other countries.
2.4 The Canadian Market
The existing Cellular/PCS carriers have built networks reaching 97% of the population. After 23 years of operation, these networks are considered mature, with well established infrastructure, maintenance, marketing and customer service presence across the country, including the ability to roam between networks thereby enhancing their productivity.
The mobile telephone industry has consolidated into three national mobile carriers with a few regional mobile operators. Recently some Mobile Virtual Network Operators (MVNOs) have emerged that resell existing facilities from wireless carriers. The wireless industry is composed for the most part of the original 1985 cellular mobile operators affiliated with wireline carriers.
The incumbents have purchased virtually all the mobile spectrum that was made available through the 2001 PCS auction process, and they have acquired significant amounts of spectrum in recent auctions for Fixed Wireless Access spectrum.
Other frequency bands have recently been the subject of new spectrum allocations or licensing activity that may have an effect on the spectrum capacity requirement for AWS services, including:
- the bands 2300 MHz and 3500 MHz for WCS and Fixed Wireless Access were auctioned in 2004 and 2005. See http://www.ic.gc.ca/eic/site/smt-gst.nsf/eng/h_sf06076.html;
- the band 2500-2690 MHz, previously allocated to fixed and broadcasting on an exclusive basis, was made available for flexible use, including mobile services, in a policy statement on March 30, 2006. See DGTP-002-06 at: http://www.ic.gc.ca/eic/site/smt-gst.nsf/eng/sf08551.html;
- the band 3650-3700 MHz is currently the subject of a consultation process where flexible use is proposed. See DGTP-006-06 at: http://www.ic.gc.ca/eic/site/smt-gst.nsf/eng/sf08674.html.
2.4.1 CRTC Regulation of Wireless Carriers
In considering the current Canadian regulatory framework we must recognize the complementary roles of the CRTC and Industry Canada in the licensing and regulation of wireless operators. Industry Canada has responsibility for licensing the underlying spectrum resource, radio spectrum, including the awarding of licences along with their associated terms and conditions of licence. The Commission has responsibilities under the Telecommunications Act for the regulation of carriers including rates, facilities and services.
In exercising its mandate, the Commission forbore from rate regulation of mobile carriers in Telecom Decisions 94-15, 96-14 and 98-18, on the basis that such services were sufficiently competitive to protect the interests of users. In these decisions, the complementary role played by Industry Canada was recognized in the licensing of competitive services.
At the time when those decisions were made, mobile telephony was the main service provided by wireless carriers. In fact, in Decision 96-14, fixed wireless telecommunications was found to be outside the scope of the proceedings. According to the latest CRTC report, basic voice and long distance revenues currently account for 81% of total wireless revenues.
2.4.2 CRTC Telecommunications Monitoring Report
The CRTC has issued five monitoring reports on the status of competition in Canadian telecommunications markets and on the deployment and accessibility of advanced telecommunications infrastructure and services. These are entitled Status of Competition in Canadian Telecommunications Markets Footnote 6.
The CRTC collects information related to Canadian telecommunications markets in order to monitor the status of competition, and notes that there is no single or simple way of assessing the state of competition in a market. The Commission examines various elements or factors, including among others: (i) the market size and market share according to criteria such as revenues and number of subscribers, lines and minutes; (ii) the number and description of service providers in the market; (iii) lists of available services, pricing levels and trends; and (iv) corporate financial conditions.
In its July 2006 report, the CRTC summarized the Canadian wireless market as follows:
"The wireless market continued to display strong growth and remained competitive in 2005. Wireless revenues increased from $9.5 billion in 2004 to $11.0 billion in 2005, a $1.5 billion or 16.2% increase. This strong growth made the wireless market the largest sector in the telecommunications market, accounting for 32% of the industry's revenues. The number of wireless subscribers increased from 15.0 million subscribers in 2004 to 17.0 million in 2005, an increase of 2.0 million subscribers or 13.3%. Three major wireless service providers accounted for over 90% of the wireless market, with no provider dominating in terms of either revenues or subscribers. The average monthly revenues per subscriber increased from $48 in 2001 to $53 in 2005." Footnote 7
"Wireless service providers experienced continued growth in EBITDA in 2005. These providers registered an 18.9% increase in EBITDA from $3.7 billion in 2004 to $4.4 billion in 2005, increasing their share of the industry EBITDA from 32% in 2004 to 35% in 2005." Footnote 8
"Wireless capital expenditures, excluding spectrum, remained relatively unchanged at $1.1 billion in 2005. Spectrum related capital expenditures in 2005 were minimal at less than $10 million.
while wireless capital expenditures have trended downward since 2002, declining from $1.6 billion in 2002 to $1.1 billion in 2005, most of the decline in wireless capital expenditure can be attributed to sharing agreements and roaming arrangements among the wireless service providers which tend to minimize the need for expanding their networks." Footnote 9
"The wholesale market has been relatively small and has essentially consisted of wholesale roaming services as the major service providers have generally relied on their own facilities. More recently, they entered into agreements with each other which enabled them to share each other's facilities, thereby maximizing their coverage while minimizing capital expenditures. As MVNOs enter the market, the wholesale market is expected to grow." Footnote 10
"The wireless footprint covers approximately 20% of Canada's geographic area. However, it encompasses approximately 97% of Canadians.
Mobile coverage did not expand significantly in 2005. This is reflective of the extent to which the wireless footprint has evolved and the various roaming and sharing agreements among the providers. As the wireless market evolves, it is expected that new technologies such as third-generation wireless (3G) will be the focus of capital expenditures to enable the industry to offer additional, as well as, enhanced services." Footnote 11
2.4.3 Competition Bureau Wireless Market Oversight
On September 26, 2006, the Competition Bureau issued a draft bulletin for public comment that describes its approach in reviewing abuse of dominance complaints in deregulated telecommunications markets. The draft bulletin supplements the Bureau's Enforcement Guidelines on the Abuse of Dominance Provisions, which provide general guidance on its approach to abuse of dominance. The draft bulletin explains that when investigating an abuse of dominance matter, the Bureau inquires as to whether a firm is dominant in a relevant market and has engaged in a practice of anti-competitive acts (i.e. conduct that is predatory, exclusionary or disciplinary) that has resulted, or is likely to result in, a substantial lessening or prevention of competition.
The Bureau will review the comments received on their draft document and will subsequently publish a final document. Footnote 12
The competition principles involved in a discussion of set-asides and aggregation limits are more closely associated with the goals of merger review policy, that is, preventing the creation or maintenance of market power (i.e. the ability of a single firm or group of firms to profitably maintain prices above the competitive level for a significant period of time) and the attendant inefficiencies that could follow. In this regard, the Competition Bureau has published Merger Enforcement Guidelines that provide general guidance on its analytical approach when assessing the likely competitive impact of a proposed merger.
Although the goals of merger policy are similar to those underlying set-asides and aggregation limits, there is a fundamental difference between the two that needs to be recognized. The goal of using set-asides and aggregation limits is intended to address concerns that new entrants have the opportunity to bid, as part of the competitive process, for the spectrum necessary for entry as a facilities-based carrier. In a review of a merger matter, the Bureau inquires into whether the merger is likely to cause a substantial lessening or prevention of competition relative to the circumstances that would be expected to prevail in the absence of the merger. In particular, a Bureau decision not to challenge a transaction should not be interpreted as a conclusion that the merging parties, or other firms in the affected industry, did not possess market power or that further profitable entry into the industry was not possible. It simply means that the Bureau determined that the merger would not likely increase the level of market power sufficiently to cause a competition concern relative to the pre-merger situation. As such, a Bureau decision not to challenge a merger should be viewed independently from a Department policy decision of using set-asides, aggregation limits or other measures designed to provide an opportunity for new entry to facilitate a more competitive market over what may currently exist.
The current spectrum licensing process recognizes the complementary nature and the division of responsibilities among Industry Canada, the CRTC and the Competition Bureau. This consultation paper is without prejudice or inference as to the future determinations or findings by the Commission or the Bureau.
2.4.5 Other Competitive Analysis - European Commission Guidelines
The Department notes that the European Commission has also issued guidelines on a wide variety of competition related matters including a description on market dominance and joint dominance. Footnote 13
2.5 Barriers to Market Entry
New facilities-based wireless operators have several barriers to market entry. Spectrum is a finite resource that can only be accessed periodically subject to changes in international and national allocation plans and technical standards. Network investments are characterized with risk, as the high capital investments necessary to fund the extensive and location-specific mobile networks may lead to long payback periods and technological obsolescence with the possibility of stranded assets. Furthermore, incumbents typically control many of the existing facilities, including access rights, tower sites, rights of way, customer premises, spectrum and interconnection arrangements. The high fixed cost of building a wireless network presents challenges for facilities-based entrants seeking to replicate it. Further, the economies of scale that a wireless incumbent enjoys, may prevent a competitive entrant from being able to match the incumbent's incremental costs of serving each additional subscriber. Consequently, new entrants must have sufficient access to capital to compete in a capital-intensive industry where the most lucrative customers demand wide-area or nationwide service. The wireless industry must also consider the balance between innovation and the risk of obsolescence for existing assets.
2.5.1 Foreign Investment Restrictions
Canadian ownership and control requirements impose certain restrictions on foreign investment in facilities-based telecommunications carriers in Canada including wireless carriers. The spectrum considered in this consultation process will eventually be licensed under the Radiocommunication Act subject to Canadian ownership and control requirements and therefore subject to foreign investment restrictions. Foreign investment restrictions have the effect of limiting potential entry in the telecommunications market thereby reducing the competitive discipline that the threat of entry can provide. It is important to consider the effect this may have on the free operation of the market and the ability to rely solely on market forces in the forthcoming auction.
Recent policies have contributed to greater flexibility in the market for the Canadian wireless industry. Wireless industry consolidation was facilitated by the removal of the general mobile spectrum aggregation limit by Industry Canada. The CRTC has forborne from rate regulation of mobile carriers. The wireless industry in Canada has seen consistent growth with average revenue per unit (ARPU) among the highest in the world.
As the Department is now releasing additional spectrum for flexible use, it is timely to consider long term competition issues in a broad context. This consideration may include the current state of convergence of telecommunications and broadcasting, as well as of mobile, fixed services and multimedia on the same infrastructure. Consideration of the broader context may also include the market forces and competitive characteristics currently found in this market as described above. Among other issues are the potential for market entry, the types of barriers to entry that such new entrants might encounter and whether spectrum incumbents have the incentive and means to acquire additional spectrum for the purpose of preventing access to prospective competitors.
In considering the competition principles discussed in Section 2.3, the preceding issues need to be assessed. In a dynamically competitive market characterized by rapid technological change, competition and the threat of market entry are generally sufficient to discipline market behaviour and protect consumer interests. However, where the number of competitors is limited and there are significant barriers to entry, market forces may not yield the same results.
A further consideration is the efficient use of spectrum, particularly in view of the considerable demand. Some parties have noted that the existing national PCS/Cellular wireless operators currently have considerable spectrum to operate their wireless networks. There are a number of fixed service operations that are being relocated from the AWS bands as described in the transition policy section in Part I of this paper. In the AWS consultation, these operators commented on the adverse impact resulting from their displacement to accommodate AWS use. On the one hand, the Department is predisposed not to identify specific services for this spectrum as it wishes to afford as much flexibility as possible so that the spectrum, once auctioned, can be used subject to market demand. On the other hand, following an auction, it would not be in the public interest for valuable AWS spectrum, which was cleared of existing incumbents at their cost, to lay fallow or otherwise be put to inefficient use. Such a result also prevents potential competitive entry, thus denying competition and use of the spectrum to provide a range of new AWS services.
In summary, from a spectrum resource perspective, the Department will take into consideration a range of issues including: the risk of inefficient use of spectrum which could arise from an excess concentration of wireless access spectrum beyond the needs of current operators for the foreseeable future; restricted availability of new spectrum to meet the needs of potential new users, including competitive entry; and the pressure to open up new frequency bands for next generation mobile services when existing mobile bands are not being used efficiently. These concerns are also reflected in the spectrum utilization policy (Part I) and conditions of licence (Part II, Section 5.4) dealing with implementation.
The objectives of regulation also include providing incentives for innovation; and encouraging investment in and construction of competing telecommunications network facilities. Access to spectrum is required for wireless networks to meet these objectives.
2.7 Addressing the Potential for New Entry
Given expressed interest in this spectrum and the preceding discussion, an important consideration is whether it is appropriate to take measures intended to enable entry in a situation where the government controls access to the spectrum needed for market entry. The unavailability of spectrum also constitutes a barrier to market entry.
In the past, policy measures designed to assist market entry by promoting access to spectrum, such as spectrum aggregation limits, have been used to enhance the variety and quality of services and other benefits for consumers, thus increasing the level of competition in the marketplace and promoting positive trends for consumers.
In the responses to the AWS consultation, views were expressed that it may be possible for some of the incumbent carriers to dominate the market by purchasing all or a majority portion of the spectrum being auctioned. Such an outcome could have the effect of lessening potential competition by preventing market entry of new AWS service providers and may be contrary to the public interest.
This situation calls for the assessment of countervailing risks: the risk of government intervention to enable market entry (i.e. reducing barriers to entry) assessed against the risk of further concentration of the spectrum among incumbent companies. In the current context of licensing new spectrum, consideration for setting aside spectrum for new entrants is proactive and could reduce the exclusive reliance on ex post regulation to address competition issues. Creating an opportunity for new entry at the time of auction is, in many respects, the only time to introduce further competition in the wireless market. That is, once market power is obtained through the aggregation of spectrum, the simple exercise of that market power in the absence of any abusive conduct (i.e. conduct that is disciplinary, predatory or exclusionary) would not raise an issue under the Competition Act. Reducing barriers to entry may assist new licensees in providing services in competition with existing services as described in the competition principles. Potential adverse impact (i.e. unviable entry) can be corrected by market forces should a new entrant fail. The risk of having the spectrum bought by all the incumbents is that the opportunity of having further competitive entry into the market would be prevented. Also, recent experience of regulators from other countries indicates that ex post solutions to wireless competition issues present a number of difficulties.
Not taking explicit action to enable entry may therefore have the consequence of preventing entry while taking explicit action runs the risk of potentially enabling uneconomic entry. Since there is no way to forecast market forces at play with accuracy, the Department must consider on a balance of probabilities, which approach is most in the public interest. This could take into account factors such as: current market structure; market rivalry; pricing; expressed demand for the spectrum in question; and the potential for incumbents to preclude market entry by acquiring all of the spectrum available.
In consideration of the present circumstances, the Department seeks comments on whether there is a need for measures intended to enable market entry in the AWS spectrum auction.
2.7.1 Spectrum Set-aside
Without prejudging the previous question, should a decision be made to restrict participation of certain companies from holding certain licences, one method is to set aside a certain amount of spectrum for which only new entrants would be eligible to bid.
A spectrum set-aside is intended to restrict the participation of incumbents on a specified frequency block thereby facilitating new entrants who must still bid competitively among themselves to obtain spectrum in the auction. The size of the set-aside block or blocks must be established as well as the geographic dimension of the licence or licences. By having a specific frequency block(s) identified as set-aside, it becomes contiguous both spectrally and geographically and only qualified bidders can bid on it. The contiguous nature of a set-aside may make it more attractive than using other measures such as spectrum aggregation limits. The size of the set-aside is also a consideration in that it should be a sufficient amount of spectrum so that a potential new entrant could consider competing with incumbents since they have no other similar spectrum.
A new entrant could be described as one who does not operate, or does not have an affiliate that operates, a national wireless PCS/Cellular network that offers high mobility phone services.
Due to the characteristics of the various bands being opened in this auction process, it is contemplated that a potential set-aside would apply to the AWS core spectrum band 1710-1755 and 2110-2155 MHz.
A set-aside does not obligate the Department to take other measures to ensure the viability of a new entrant nor imply any guarantee of success in the marketplace by a successful bidder.
The Department seeks comments as to whether a certain amount of spectrum should be set aside for new entrants. Comments should include a precise description of those who should or should not be entitled to bid.
Comments are sought on the amount of spectrum that could potentially be set aside. Comments should include whether a single block should be set aside or if the set-aside could be broken up into 2 or more blocks.
Comments should stipulate how such provisions would be in the public interest, and provide supporting evidence or rationale.
Comments are sought on the implementation of the set-aside post auction and the duration of any conditions of licence specific to the set-aside that may affect the licence such as divisibility and transferability.
2.7.2 Spectrum Aggregation Limit on Auctioned Spectrum
Another method of assisting market entry that has been used successfully is spectrum aggregation limits or spectrum caps.
Spectrum aggregation limits prevent the concentration of spectrum by any single entity. Under a spectrum aggregation limit, the various bidders may conclude the auction with different frequency blocks across the country. There is a possibility that an incumbent bidder could block a new entrant from acquiring the same spectrum block region-wide or Canada-wide. In the past, spectrum aggregation limits have been placed on services over various bands such as the mobile spectrum aggregation limit imposed on operators in the Cellular, PCS and other high mobility bands.
The mobile spectrum aggregation limit was removed in 2004, due in large part to the opening of a number of other mobile bands and the convergence occurring with similar services and technologies. Footnote 14
Auction-specific aggregation limits have been used to ensure there is wide distribution of spectrum at the time of opening new bands for competitive services. Such an aggregation limit was used in the auction of the bands 2.3 GHz and 3.5 GHz. Footnote 15
For the 2.3/3.5 GHz auction, the spectrum aggregation limit was applied for a period of 2 years following the close of the auction. Some views have been expressed to the Department that this time period is too short. Others view this period as adequate. In the case of 2.3/3.5 GHz, there was unsold spectrum following the auction in 2004, and there was a residual auction held in 2005. The duration of the spectrum aggregation limit should take into account the possibility that all of the spectrum may not be assigned in one auction, while recognizing the policy objectives that the spectrum aggregation limit is attempting to achieve.
A spectrum aggregation limit would place a limit on the amount of spectrum that may be acquired by a single bidder and its affiliates in a particular market in the upcoming auction. The AWS auction, as proposed, consists of a total of 90 MHz of spectrum in the bands 1710/2110 MHz, 5 MHz paired in the extension spectrum to the PCS band (10 MHz total), and 5 MHz unpaired in the band 1670-1675 MHz. Due to the characteristics of the various bands being opened in this auction process it is contemplated that a potential spectrum aggregation limit would only apply to the AWS core spectrum band 1710-1755 MHz and 2110-2155 MHz.
The Department seeks comments as to whether an auction spectrum aggregation limit should be placed on the amount of spectrum that can be acquired by a single wireless service provider and its affiliates. Comments should include the amount of spectrum for the auction spectrum aggregation limit, to which bands it should apply and the duration.
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