OTTAWA – Due to the “flawed” overall structure of last year’s advanced wireless spectrum auction, Canada’s wireless companies collectively paid over two billion dollars too much, and that is sorely needed cash which could have been put to far better use than just being handed over to car companies, says Telus.
In time for its reply comments to Industry Canada’s spectrum auction consultation which were due in yesterday, the number two wireless carrier filed a report by NERA Economic Consulting which examined at the structure of the 2008 AWS auction (comparing it to others around the world and past Canadian ones) as well as certain companies’ actions during the process which took months instead of weeks and raised over three times what was expected by analysts prior to the auction.
(Ed note: The report says the number of rounds this auction went for – 331 – is likely some sort of global record.)
NERA concluded that the way Industry Canada built the rules prior to the auction (where 46% of the spectrum was set aside for new entrants who can also rely on mandated tower-sharing and mandated roaming rules, too), coupled with the way some companies used those auction rules to bid up spectrum costs, caused the wireless industry (incumbents as well as newcomers) to overpay on a massive scale.
“Industry Canada adopted an auction design that incorporated specific regulatory measures, most of which favoured regional players, cable operators, and new entrants,” reads the report. “First, it implemented spectrum set-asides – 40 MHz of AWS spectrum in frequency blocks B, C, and D were reserved for ‘new entrants.’
“Second, Industry Canada’s licensing terms included unprecedented mandatory roaming provisions that were retroactive to all existing mobile spectrum licenses. Thus, the incumbents are required to make roaming available to an entrant inside the entrant’s license area ‘at commercial rates for a period of 5 years while the licensee builds out its network’ and for the term of the license outside the entrant’s license area,” it continues.
“Third, it mandated ‘antenna tower and site sharing.’
“Finally, the licenses auctioned were flexible; they carry an initial 10-year term, and they can be transferred, resold, or partitioned. The only restriction in this respect was that set-aside spectrum could not be sold to incumbents for a period of five years. As shown above, this particular auction design resulted in an overpayment of approximately CAN 2.4 billion by the auction participants, the incumbent wireless providers in particular.”
The NERA report goes into some detail about suspected “fake bidding” on the part of Bragg Communications and Globalive where the companies, in certain markets, bid on the more expensive, non-set aside blocks of spectrum, but not the less expensive blocks set aside for newcomers. That, the report’s author writes, makes it look like they were just bidding to drive up the cost of the blocks in certain markets.
Such a strategy was costly for everyone, but within Industry Canada’s rules, said Telus senior vice-president, government and regulatory affairs, Michael Hennessy, in an interview with Cartt.ca. “What Industry Canada failed to take into consideration when they did their set aside what that their auction design had been constructed for an open auction where if one party gains, the other party can respond back to them and that tends, after a certain number of go-arounds, to certain disciplined behaviour,” he said.
“What you ended up with was that the cable companies were able to continue to bid things up at virtually no cost to themselves… and it’s obviously in their interests to drive up competitors’ costs as much as possible.”
This new round of industry consultation is meant to inform the structure of the next auction (likely the 700 MHz spectrum to be taken back from analog television in 2011), which Hennessy hopes will be built differently.
Supposing the industry did overpay by $2 billion last year, he added, “that is money that the wireless industry won’t otherwise spend on building. The industry is likely to build out as much as ever in cities. But they may not push out in rural areas as much.”
And, pointing to the rather paltry $250 million the federal government has set aside to try and stimulate spending on broadband with its stimulus package, “the structure of that auction sucked 10 times that amount out of the industry,” said Hennessy.
“And it went right to General Motors, is the point we make often.”
