A telecom compromise

Is the federal government shooting itself in the foot by refusing to modify the rules for the coming spectrum auction in the context of Verizon’s possible entry into the Canadian market?

Whether Verizon buys one of the small Canadian players or decides to participate in the auction on its own, it will be considered as a small player in Canada, despite having four times as many clients as all the Canadian telecom firms combined. Among other privileges, it will be able to bid on two of the four prime spectrum blocks on auction. The big three players (Telus, Bell and Rogers) will only be able to bid on one. Verizon could thus end up controlling half of the coveted 700 MHz frequencies.

While the big three are rightly focusing their campaign on the unlevel playing field created by this policy, and the government’s response is based on the benefits that more competition would bring to consumers, there is another dimension to the problem that could cause trouble for the government: the threat to the small regional players who were favoured with a spectrum set-aside in the previous auction in 2008.

The government’s rationale to welcome Verizon’s arrival is to have at least four players in each of Canada’s regional markets. But it is often forgotten that the three struggling small players (Wind Mobile, Mobilicity and Public Mobile) are not the only ones competing with the big three. There is already a well-established fourth player in Quebec (Videotron), in Atlantic Canada (EastLink), in Saskatchewan (SaskTel), and in Manitoba (MTS).

If Verizon decides to buy two prime spectrum blocks (and it has the means to do so), there will only be two left in each region for the big three and for the smaller players. These regional players are thus even more likely than the big three to end up empty handed if current rules are maintained. How will it promote greater competition and lower prices if they are pushed aside in favour of the American giant?

It would be certainly be counterproductive if, in order to promote the arrival of a national fourth player with deep pockets, Ottawa were to jeopardize the future of those smaller fourth players already well-established in several regions.

At the outset, let’s make one thing clear: The policy of “micro-managed competition” pursued by this government has nothing to do with real free-market competition. If Ottawa had fully opened the market to foreign competition years ago and set up a level playing field, there would be no need today to take additional measures to favour some companies and disfavour others in order to get to what the government believes is an optimal level of competition.

Moreover, contrary to popular perceptions, Canada’s telecom industry as it is today is far from being a laggard in terms of technology deployment and services, and prices are in the middle range of what is found in other developed countries, as several recent studies have confirmed. The government is playing a populist game with unneeded interventions in a market that’s working rather well.

This said, it’s obvious that the government is not going to simply reverse its policy of artificially encouraging competition in the next couple of weeks. Both the prime minister and his industry minister, James Moore, seem to have ruled out any change in policy. Politics being what it is, a face-saving solution has to be found. Here is what it could look like.

First, if the government wants to encourage a fourth player in every region, it should at least do so in a way that is consistent with what it did five years ago. To that aim, one of the four prime spectrum blocks should be set aside in each region for the small players under Canadian ownership. For the sake of fairness, this block could not be obtained at a price inferior to the average price of the three other blocks.

Second, all large players — including a large foreign player, or a small Canadian player controlled by a foreign firm with resources at least comparable to those of the big three — should only be able to bid on one prime spectrum block. In this way, Verizon could still enter the Canadian market, but only if it has a truly workable business plan, not because it benefits from subsidies and privileges.

My proposed compromise would obviously not solve all problems. One unavoidable fact is that there isn’t enough spectrum for everyone, so it is very conceivable that one large Canadian wireless player would be left out. Some other solutions would have to be found, such as industry consolidation or network sharing. Furthermore, it is not nearly as market-friendly as I would like it to be.

But we are here practicing the “art of the possible.” That compromise would at least get rid of the most absurd and potentially damaging aspect of the current situation for almost all the industry players in Canada, while preserving the government’s stated objective to encourage competition. It’s a compromise that I believe most players would be willing to accept, even if it means again postponing the auction for another couple of months. Will Harper and Moore show flexibility and leadership by considering it?

Michel Kelly-Gagnon is President and CEO of the Montreal Economic Institute. The views reflected in this column are his own.