Bad wireless policy won’t die

Adecade after we first debated the appropriateness of setting spectrum aside to foster the emergence of new wireless players, it seems the federal government hasn’t learned anything about the perverse effects of such a policy.

The consultations on the framework of the upcoming 600-MHz auction (likely to take place in 2019) ended earlier this month and Ottawa once again proposed to reserve 40 per cent of available licences for smaller players. In effect, this means that Shaw’s Freedom Mobile, Videotron, SaskTel, and Eastlink will not have to bid against the Big Three — Bell, Rogers, and Telus — for these licences, and will therefore be able to acquire them at a cheaper price.

According to Innovation Minister Navdeep Bains, this preferential treatment is warranted in order to promote more competition in the wireless sector. But government intervention that favours some players at the expense of others is the antithesis of real free-market competition.

Experience has shown that such measures essentially constitute public subsidies that are either lost to weak new entrants that consistently fail, or wasted on established regional players that would have had the means to bid for the full value of the spectrum.

The spectrum set-aside in the 2008 Advanced Wireless Services auction led to the emergence of three pureplay new entrants (Wind Mobile, Mobilicity, and Public Mobile) that did not have a strong business case and ended up being acquired by other players. It also allowed three strong regional players (Videotron in Quebec, Eastlink in Atlantic Canada, and Shaw in Western Canada) to acquire licences, even though they did not need such subsidies to enter the wireless market. They already offered cable, internet and wireline services, and had a clear incentive to bundle wireless services with holders. Inefficient usage of spectrum has been one of the most damaging unintended consequences of this flawed policy. It made spectrum scarcer and more expensive, the exact opposite of the government’s stated intention of adopting policies conducive to lower consumer prices.

Granted, the proposed rules for the 600-MHz auction will not create as much distortion as those of previous auctions. Regional players will only be able to bid on reserved spectrum in areas where they already offer wireless service, which will curtail speculation. But the set-aside policy is even less argument bizarrely assumes that the large players’ incentives to make life difficult for regional competitors far outweigh the incentives of the latter to buy spectrum. It also assumes that the Big Three are willing to waste hundreds of millions of dollars on frequencies they do not need just to achieve this. These assumptions make no economic sense.

Smaller players, for their part, argue that they have less of the valuable low-frequency spectrum than the Big Three and that restoring some kind of balance justifies the set-aside.

But isn’t an open auction precisely the best way to determine to what extent they really need those licences, and what prices should be paid by each participant for this scarce resource so that they can execute their business plans? Why have an auction if you’re going to rig the rules to ensure a specific outcome?

Open, competitive auctions are supposed to lead to a more optimal allocation of resources than arbitrary decisions by politicians and bureaucrats. The proposed set-aside defeats that purpose. If the government really believes we need more competition in the wireless sector, it should let it happen, plain and simple.