Regulator takes steps to increase competition, but are they enough?
Following a delay caused by the Covid-19 pandemic, the auction of licences for 3.5 GHz spectrum in Canada was finally concluded in late July, with the top three Canadian carriers emerging as the biggest spenders. The licences will allow holders to offer 5G services using the much-prized mid-band frequency, which offers an attractive blend of coverage and capacity.
Of the total 1,504 licences up for grabs, 1,495 were awarded, netting the Canadian government C$9 billion (US$7.2 billion). Unsurprisingly the biggest spenders were the “big three”: Bell, which paid C$2.13 billion (US$1.7 billion) for 271 licences, Rogers, which paid C$3.4 billion (US$2.7 billion) for 325 licences, and Telus, which paid C$1.9 billion (US$1.5 billion) for 142 licences. Collectively, these three were responsible for more than 80% of the price tag.
The Canadian government is keen to open the telecommunication market to new players in the hope that it will increase competition and bring prices down. Consumers in the US and Canada pay some of the highest data costs worldwide, and Prime Minister Trudeau’s government has threatened to take action if service providers do not cut their bills by 25%.
As a result, the spectrum auction was subject to specific conditions in a bid to increase the number of carriers and help with the spread of services into rural areas. For example, up to 200 MHz of spectrum was on offer under the proviso that 50 MHz would be available to Canadian carriers other than the big three. But although this gave smaller regional players an opportunity to participate, most of this spectrum was predictably snapped up by Videotron and Xplornet, the largest of the regional carriers, with the fourth-largest carrier, Shaw, out of the picture pending its C$20 billion (US$16 billion) acquisition by Rogers.
It looks like Videotron is set to claim fourth place as a result of the acquisition. Its purchase of 294 licences at a cost of C$833 million (US$666 million) heralds the spread of its mobile service beyond Quebec. And in a similar move, Xplornet, which received 263 licences for C$305 million (US$244 million), has affirmed its commitment to expand fast reliable services in rural Canada.
Ahead of the auction in April 2021, the Canadian regulator announced that smaller, regional carriers with existing Canadian networks can become mobile virtual network operators (MVNOs) in locations where the regional carriers own spectrum. The idea is that qualifying regional carriers such as Eastlink in Atlantic Canada, Ice Wireless in northern Canada and Tbaytel in Ontario, in addition to Videotron and Xplornet, will be able to use the networks of the big three.
On the surface, this sounds like a great deal for the smaller regional carriers that lack sufficient spectrum to offer a competitive 5G service at the provincial level. It would also be good for consumers, owing to the introduction of more price-based competition. But the requirement for a physical network prompted many to criticize the ruling, as it shut out potential new entrants, which would have to invest huge sums in a licence and network equipment.
One of the big advantages of operating as an MVNO is that you can offer competitive services without paying for the overheads associated with network deployment, maintenance and upgrades. For a smaller player looking to enter the market, this could be a big financial hurdle.
In addition, the new sharing agreements exclude pure-play MVNOs, so the big three can continue to refuse access to entrants capable of offering cheaper services because of their reduced overheads. The lack of new entrants will stifle competition and limit consumer choice, critics argue.
However, the decision that has provoked some of the strongest criticism has been the regulator’s announcement that it would not significantly lower the rates smaller players must pay to access the high-speed broadband networks of the big three. The regulator has argued that these decisions will encourage competition, but given the large sums paid in the recent auction, it’s hard to see how any carriers apart from the big three can survive, let alone thrive, in this market.
In a press statement, Darren Entwistle, CEO of Telus, argued that 5G services might not have a positive effect on the Canadian economy because of the high upfront costs involved. He pointed out that in the recent auction Canadian carriers paid an average of US$3.28 per MHz-POP (a measure that multiplies the spectrum bandwidth by the potential population coverage). This sum is almost three times the US$1.19 per MHz-POP that US carriers paid at the recent C-Band auction.
We applaud the initiatives to push Canadian carriers to cut their prices, but the government must realize that stronger regulation will be needed if it wants to truly cultivate competition and offer people more choice in mobile networks. This 5G auction may have been successfully concluded, but if the regulator doesn’t take further steps, the country may end up with fewer 5G services than anticipated, which could push prices up even further.
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