THE ONLY EXISTING facilities-based wireless player advocating that Industry Canada come up with a different formula for auctioning off wireless spectrum than an open auction is MTS Allstream.
The company is the dominant player in Manitoba, but it seems clear the company has designs on growing beyond its friendly borders to offer wireless service.
Lumped in as a "scallywag" by Ted Rogers, MTS is attempting to get into the national wireless game as cheaply as possible, asking for certain spectrum blocks to be set aside and for mandated roaming until its towers are constructed.
On the other side, the incumbent wireless companies want a wide open auction, which would make it exceedingly difficult for a company like MTS – even with backers – to purchase enough good advanced wireless services spectrum to make it worth their while.
Since we recently ran a speech by Rogers Wireless chief Rob Bruce outlining the incumbents’ point of view, we thought it only fair to hear out the other side too.
What follows is an edited transcript of a conversation between Cartt.ca editor and publisher Greg O’Brien and MTS Allstream chief regulatory officer Chris Peirce (pictured below).
Greg O’Brien: When is all this regulatory stuff going to slow down so I can take a break from writing about it?
Chris Peirce: Oh man.
GOB: I don’t think it’s going to happen.
CP: You don’t have to tell me. We’ve got this submission, last week we had 200 interrogatories to answer on the essential facilities proceeding, and we’ve got something like 100 forbearance applications to respond to, so…
GOB: Yeah, I don’t think it’s going to slow down any time soon.
CP: No. This is like what they meant by deregulation, you know.
GOB: It takes a long time to untie all the strings I guess. So, I’ve seen your submission and release and know where you stand on the (wireless auction), but your release said that Canada is falling behind the rest of the world when it comes to wireless innovation. And I was wondering if (MTS has) any research that says Canadians or Manitobans feel disadvantaged that they don’t have services or that they’re paying too much?
CP: We’ve not commissioned a public opinion but we have spoken to the consumers associations… and certainly, pricing is a real concern. In terms of our take on the rollout of new services is that first of all as we go around and talk to other providers about what’s going on in the rest of the world… it’s ju
st undeniable that the rollout of new services is slower here. And I think there’s a similarity here when you look at the pricing issue. Because as you’ll see from our expert report, when you look at pricing between here and the United States for instance, as you get down to the lower end, pricing gets to be a lot closer. So, the price differential between Canada and the United States is the least for the smallest package of services.
But all that that’s about really is that our whole market, whether it’s in terms of rollout of services or in terms of pricing… if anything you would have to say its designed to suppress usage.
So if you’re asking someone if they feel like they haven’t got access to a variety of new services and they don’t know about the new services, well you know I think public opinion can be a bit of a false signal in that regard.
It’s like asking someone in North Korea what they think of HDTV, you know?
GOB: I’ve used this same analogy before but I always say nobody ever asked for barbeque potato chips before they were invented.
CP: And I think what the message is from other jurisdictions, and from Canada when things are rolled out is that you have a hungry appetite there for whatever innovative new service is offered. And if it’s offered in a way that is accessible, people will take it up. I mean that’s been true across any other piece of the economy, why would it not be true in terms of wireless services?
We know the new services, when they are finally offered here are popular – if they’re priced in a way that reinforces that usage.
GOB: Now, how do you engage Canadians in this particular battle? Is it possible to do that?
CP: Well, most things around telecom get pretty detailed and weedy pretty quickly. But, this is one where it obviously plays right to the consumer. I mean we’ve all got kids; I’ve got a son who’s 26 who’s living on his own who doesn’t have a wire line phone anymore, and you know what? It’s a real concern to him how much it costs him to SMS and why is that cost is going up and why can’t he move to another provider because he’s got a contract. And why does that handset only come with a three year contract?
So, this is something that I think pretty quickly trickles down to the real experience of Canadians and I think its hard to get over the fact that… (Canada) ranked just above last in a number of international metrics around wireless. Would you like to see more competitive choice? Do you think it’s strange that there’s no international provider in any way present in the Canadian market? Do you find it odd that a country like Canada – as prosperous and is economically developed as we are – has such a few number of providers offering service in any sort of widespread way?
GOB: Right. Is there any way that MTS can go into a wide open auction and win enough spectrum to make it worth your while?
CP: No.
GOB: No?
CP: What we (are) telling government is that there are only two results here. You have an approach that will allow new entry, or you have an approach that won’t. And the reason it won’t is because the national wireless providers are throwing off over $3 billion in free cash flow annually now. So, that is quite a kitty. And if you are those players and you have the opportunity to prevent anyone else – if the rules let you prevent anyone else from coming to that party – your only rational behavior is to spend whatever it takes to make that happen.
GOB: Sure.
CP: And you’d certainly do it for less than three-and-a-half billion dollars.
GOB: But is there any way to form some sort of joint venture company with Videotron, for example, to get together if the auction ends up open?
CP: The problem is in terms of the business case when you’re entering into an auction. For any new entrants… first of all there’s the cost of the spectrum, and then there’s the cost of rolling out in a facilities-based way… And all of the analysts have pegged that with some saying in the order of one, one-and-a-half billion dollars, depending on where you’re going. So, there’s what your investors have to see as the cost.
And what are the revenues that are going to be set against that? Well, you’re a start-up, you’re carving out a place in the market, so there’s your value equation going into action. Now, what’s the value equation for the guy that has been there for 20 years? That value equation is three-and-a-half billion dollars of cash flow from a market that you already control. So, you can afford to throw that at the auction proceeding – a whole bunch of cash just to price (newcomers) out of the market.
So it doesn’t matter how many of those new entrants come together, (because) no investor would invest in it. It harkens back to where we were with the metrics around CLECs (competitive local exchange carriers) when they were first getting into the business. (At that time) you could get investors to invest solely on the basis of the fibre you’re putting down, rather than the number of customers and revenue and we know what happened to that equation. It didn’t work and the bubble burst. And we also know that there’s no investor that’s going to come to that party today.
GOB: Does MTS plan to bid for enough spectrum to become a national player then?
CP: What we are going to argue… is that you know you should stop talking about a fourth national entrant. What we’re going to say is you should take the D and the E blocks (of spectrum) and designate those blocks as new entrance spectrum. And the E one, we will suggest, should be a national license.
… So, by taking the D and the E block, we’re saying you would designate 50 megahertz in total for new entrants to bid on and then the rest of the spectrum, you would allow both incumbents and new entrants to bid on.
The other thing in our submission is that approach which ensures new entry, that’s the approach that has been taken at pretty much every stage of the game in Canada, and its also the approach that has been taken in the U.K. and through most of the EU. You think about 1985 when the government first granted spectrum here, they insisted on a new entrant, Cantel. They set aside license for the incumbent for the Bell alliance (of companies) and they insisted on one new entrant, Cantel.
Then, coming forward to 1995 when they again issued new spectrum, again without an auction, they issued some new spectrum to the incumbents, but they also insisted on granting spectrum to new entrants, Clearnet and Microcell.
And then in 2001, arguably, they were trying to achieve new entry as well, because they set a spectrum cap within that auction. It’s just that the way that cap operated it let the incumbents purchase all of the spectrum. And as I said to you earlier, if you give them the chance to purchase all of the spectrum, they will – and they did there. So, in Canada the practice has been, as it should be, to ensure that there is new entry as you put out this scarce public resource for use by private entities. And in the UK, when they had their 3G auction and their most recent auction, in both cases they only issued national licenses there, putting out more national licenses than there were incumbents to make sure that when they got through the auction there would be the incumbents but there would also be new entrants.
GOB: Now, we’ve got a minister though that says he’s a free market minister and has been hell bent on deregulation. How are you going to sell this to him?
CP: He’s spoken often and frequently about the need for a greater degree of competition to benefit Canadian consumers and businesses… What they’re doing here by definition is deciding what to do with a public resource. That spectrum is the property of the government of Canada. And so it’s the property of the people of Canada.
So, it’s the government deciding what to do with that public resource. And what he wants to do with it, obviously, given his ideology, is he wants to ensure there are competitive market forces, right?
GOB: Yes.
CP: Well, the way you do that in auctioning wireless spectrum is you make sure that you set the table for competition, and that means you have more than the existing entrants who have a shot at going after that spectrum.
You can’t have an unfettered auction in Canada, remember. We’ve got foreign investor restrictions. We’re already limiting. So now are you going to say that we know that the marketplace has let these existing big three players gobble up the market share and create the kind of free cash flow they have, we’re going to leave out the rest of the world in this auction process, and we’re going to make sure no new entrants have a shot at it either? I don’t see how you argue that that’s letting competitive market forces operate.
The second thing is this minister has embraced the Telecom Policy Review Report which was clear: We need more entry in wireless. We are lagging internationally in wireless. And the way the government facilitates new entry in wireless is to make sure its auction rules permit that to happen.
GOB: How do you address that criticism that (if the auction sets aside spectrum), it’s somehow a subsidy paid for by Canadians?
CP: Have you read the Telecom Act?
GOB: Yes.
CP: In it, the test for the government of Canada is what benefit can it derive from the deployment and use of this spectrum? And I think that even if you were to measure the value to the treasury of the use of this public resource, it’s not the dollar amount you get from the auction. You’re not giving it out for free, which of course they did in the first instance to the big three, but now you’re auctioning it, so you’re going to find out between competitive bidders how much they can offer up to pay for that spectrum.
But then, we all know how connected wireless activity in the country is to GDP, to competitiveness, to innovation. That’s the economic benefit to the public purse – that kind of competitive activity going on in the marketplace. That’s going to yield more competitive Canadian businesses. It’s going to yield more tax dollars being paid to the government. But to suddenly come up with the notion that actually the measure of the effective use of spectrum is a simple measure of dollars at the point of action, that’s absurd!
GOB: It’s "the biggest cheque wins argument", which isn’t the most compelling argument to me.
CP: Really, the logical extension of that argument is that we should only put out one national license and have everybody bid for that – and then we’d see that cabal of the big three break up, perhaps.
GOB: What are your thoughts on getting to a faster auction rather than waiting until 2008?
CP: It would be nice. We certainly argue that you need to do it sooner rather than later, but I think given the time frame we’re on now, if they could get it done before the end of the year, that would be fine, but the horizon we’re looking at is that they get it done early in 2008. I think the danger would be we certainly don’t want it delayed beyond that.
