How Canada’s wireless spectrum policy drives up mobile rates

How Canada’s wireless spectrum policy drives up mobile rates

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The practice of reserving spectrum for regional carriers at auction increases costs and consumer prices, and is unlikely to lead to more competition.

by Robert W. Crandall. Originally published on Policy Options
October 19, 2021

The federal government’s recent auction of much-needed electromagnetic spectrum, the airwaves through which mobile communications flow, has once again resulted in very high prices for the three national carriers – Bell, Rogers and TELUS. These high prices translate into higher costs for the carriers and, therefore, elevated consumer prices for mobile service.

These high prices for consumers and carriers are the direct result of the government’s decision to allocate much less of the wireless spectrum for new mobile services than have most other countries, and to withhold a substantial amount from the three national carriers, setting it aside for less efficient use by smaller regional carriers.

Because of similar government policies in earlier auctions, Canada’s three national carriers have had to charge their subscribers an average of $74 per year – equal to 9.4 per cent of the average bill – just to cover the cost of acquiring these spectrum rights, which are long-term investments that must earn a return for their shareholders. The prices paid in July’s auction could add another 3.1 percentage points to the average bill, or $25 per subscriber per year, raising the total cost per subscriber to almost $100 per year.

The electromagnetic spectrum

An enormous variety of wireless communications is transmitted through the electromagnetic spectrum at different frequencies. Early wireless telegraphy, radio broadcasting, television broadcasting, and remote control of devices such as garage-door openers, Wi-Fi and satellite broadcasting are just a few examples. National governments co-ordinate the allocation of broad swaths of spectrum (“frequency bands”) through the International Telecommunications Union to minimize interference problems, and to allow the manufacture of equipment – television sets, mobile phones, Wi-Fi routers – that can operate around the world on the same frequencies.

Individual governments then decide how much of each frequency band to allocate for various uses and how to allocate it among competing users, such as mobile telecommunications carriers. The most common method for allocating the frequencies for mobile communications is a government-managed auction.

The auction

This year’s mobile spectrum auction once again used “set-asides” – the practice of reserving a set amount for smaller mobile carriers – with predictable results: the three national carriers paid an average price that was 3.5 times that paid by the smaller, regional carriers. This was exacerbated by the government’s decision to allocate too little spectrum for the auction. The auction provided only 50 to 62 per cent of the spectrum the GSMA, the international industry association, recommended  countries allocate per national carrier for the new, advanced 5G services. (5G is the fifth generation of mobile technology that offers speeds up to 100 times faster than most current services and facilitates a vast new set of applications, particularly in vehicles, appliances and other devices.) Many countries, including China, Japan, Austria, Finland and Germany, have auctioned at least twice as much spectrum as Canada has for new mobile services.

The result of the Canadian government’s failure to provide enough spectrum for its national carriers is obvious: much higher prices. In the recent auction, the three national carriers paid an average of US$2.61 for one unit of capacity per capita (a MHz/pop in industry parlance). By contrast, carriers in most other developed countries have paid only a fraction of this amount (see figure 1). In many European countries, auctions of similar spectrum have resulted in prices of less than US$0.20 per capita for a unit of spectrum capacity, because they have freed more of it for mobile services and have not set aside large portions for smaller carriers. Thus, the national wireless carriers in Canada are forced to pay more than 15 times the prices paid by carriers in Germany, France or the United Kingdom.

(The countries shown in figure 1 have chosen a variety of specific frequencies, generally in the range of 3.5-3.7 GHz, and have allocated different amounts of it to mobile services.)

Mobile carriers’ investment in spectrum

The carriers’ expenditures for spectrum, acquired through government auctions, are no different from other capital outlays in that they must earn a return on invested capital to survive. In the recent Canadian auction, the three national mobile carriers spent $7.3 billion, a very large investment that adds to the $22 billion in spectrum purchases that were already on their balance sheets at the end of 2020. As a result, they now have almost $30 billion invested in spectrum, which can only be recouped from charges to their mobile customers. This investment is more than the $25 billion they have spent on physical equipment in the last decade, to build one of the highest-speed networks in the world over Canada’s vast and often difficult terrain. Indeed, because telecommunications equipment must be depreciated over time as it wears out or is overtaken by new technology, and because spectrum does not depreciate, the national carriers now have more net investment in spectrum than in their physical network plant.

The results of the recent spectrum auction are similar to those of earlier Canadian auctions. The three national carriers have spent much more on spectrum, which is recorded as an asset on their balance sheets, than have comparable carriers in Europe (see table 1). The average value of spectrum assets per subscriber reported on European carriers’ balance sheets at the end of 2020 was only 25.8 per cent of the average value reported by the three national Canadian carriers. Only U.S. carriers have spent more on spectrum, in part because of similar set-aside policies.

These large spectrum investments are largely a result of the Canadian government’s mobile competition policies. Canada has used set-asides in spectrum auctions purportedly to encourage the expansion of the smaller regional carriers into larger entities that can compete with Bell, Rogers and TELUS. This policy is based on an erroneous belief that one or more of the smaller carriers could become national in scope and, eventually, drive down mobile rates. But in spite of these implicit government subsidies, there is little prospect that any of the smaller carriers will blossom into a national mobile carrier. Canada’s modest population and vast geographical expanse will likely not support four national mobile services. Deploying telecommunications facilities – poles, wires, transmission towers and associated equipment – is much more expensive per subscriber in Canada than it is in more densely populated countries like the U.S. and most European nations.

Moreover, the three major national carriers provide an extremely high-quality service at such reasonable prices given Canada’s low population density and topography that further entry is likely to prove unprofitable. Despite the government’s attempt to subsidize the smaller carriers through spectrum set-asides, these carriers have shown little inclination to expand beyond the larger population centres. The spectrum set-aside policy simply drives up mobile rates by increasing carrier costs; it will not offset this upward pressure by increasing competition in the future.

High spectrum prices increase mobile rates

In 2020, the three national carriers realized $787 in revenues per subscriber. The average value of spectrum on their balance sheets per subscriber was $689. I estimate that these carriers must earn $74 per subscriber per year to cover the cost of their spectrum investments, an amount equal to 9.4 per cent of their 2020 revenues. Without this investment in spectrum, competition among the carriers would have driven down the price that subscribers pay by 9.4 per cent. The prices paid in the recent 5G auction could add as much as 3.1 percentage points to this premium.

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If Canadian auctions were to offer more spectrum without set-asides, they would drive down the cost of mobile services. For instance, if the government had pursued a spectrum policy that generated spectrum costs as low as that paid by the average European carrier, the cost to the national Canadian carriers of carrying this spectrum investment in 2020 would have been 74 per cent lower, reducing the annual cost per subscriber by $55. With these lower costs, competition among the carriers would have reduced subscribers’ monthly bills by $4.56 per month. Put another way, the excess cost of spectrum to Canada’s national wireless carriers, relative to the cost to European carriers, was equivalent to a hidden tax on Canada’s mobile users of $1.76 billion in 2020. The 33 per cent increase in the cumulative cost of spectrum that resulted from this year’s auction will surely add to this implicit tax, perhaps by as much as $580 million annually, as the carriers deploy their faster 5G networks.

This article first appeared on Policy Options and is republished here under a Creative Commons license.

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