Wireless Spectrum Allocation –Implications for Industry Players, Policy Makers and the Consumer?

Michael HennessyVice-PresidentWireless, Broadband and Content Policy

International Institute of Communications

Telecommunications and Media Forum

Washington DC

18 November 2008

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What lessons are we learning from recent and upcoming spectrum auctions?

As was the case in the US PCS auction of 1996 and European auctions for 3G, government handicapping can result in negative outcomes

Early in 2008 Canada held an auction to allocate spectrum for AWS

In order to “promote more entry” Industry Canada set aside 40 MHz of 90 MHz allocated to AWS for new entrants and mandated national roaming and tower site access to incumbent networks

The auction resulted in record returns to government coffers and resulted in price per pop 2 to 3 times US price for its AWS auction

To what extent did Canadian AWS auction design lead toanomalous bidding behavior?

And will the additional costs of acquisition lead to a lower rate of investment?

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AWS Auction Spectrum Comparison

Historically Canadian spectrum had gone at discount to similar U.S. spectrum Canadian AWS auction countered trend as carriers paid 2 to 3 times more than U.S.

Note: Canadian auction values quoted in CAD and US auction values quoted in USD.

Auction Comparisons

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Canadian AWS(2008)

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Design analysis

While a portion of the high prices may be explained by increasing perceptions of value since the US AWS auction, the fact remains that open spectrum sold at a 41% premium relative to the set aside

Industry Canada was concerned with precluding incumbents from preventing entry or raising the entrants’ costs; however, Industry Canada may have failed to assess the design for the possibility of entrants raising the incumbents’ costs

There is significant evidence that “new” entrants bid constantly on spectrum for which cheaper alternatives were available

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Design analysis

TELUS submits that regulated asymmetric treatment of bidders explains much of the overpayment and anomalous behavior

“New entrants” included regional cable companies and regional wireless carriers if they had less than 10% national market share

Yet ironically no spectrum blocks were auctioned on a national basis

Entrants were provided cost reducing benefits in terms of roaming and tower sharing thus providing more room to bid up spectrum costs

Regional new entrants were already aggressive competitors in related markets and had extra incentives to game up price

Unlike other auctions new entrants could park points in unrestricted blocks without facing the usual consequences of reprisal in set-aside blocks where incumbents could not bid

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Peak to ending spend ratio provides some indication of gaming by new entrants

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Is future intervention required to force competition and lower prices?

The rationale for intervening in an open auction process to create more entry is questionable

While the threat of entry can result in short term pressure on price, its cost must be measured in terms of longer term efficiency and investment

In the lead up to the AWS auction, Canada already exhibited low voice RPM relative to other OECD countries but substantially lower penetration and higher data rates

Much of this concern will have been addressed bynormal market evolution before any AWS serviceis launched

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Is future intervention required to force competition and lower prices?

Continued investment in and penetration of 3G networks has led to a radical decline in data rates that likely would have occurred in any event

$15 unlimited e-mail $30 unlimited e-mail and web surfing on device

So the question is, does a transfer of hundreds of millions of dollars from incumbents to Treasury contribute to more investment, innovation and choice?

TELUS continues to support auctions but considers it’s time to rethink old models (set asides, resale, unbundling) to “stimulate” competition

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Challenges going forward Countries are actively pursuing wireless/wireline industrial

strategies to incent the rollout of ultra fast broadband networks to stimulate economic growth

As we move to Web 2.0 and beyond the Internet including mobile is increasingly seen as a potent and viable vehicle and enabler for economic and cultural activities throughout the information, entertainment and information value chain

3/4G mobile networks are part of the broadband equation

Building next generation advanced broadband networks will require billions of dollars of new investment at a time when capital is severely restricted

That investment will only come from the private sector

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Challenges going forward TELUS and other carriers have already committed billions of dollars

and are ready to continue to risk billions more of new investment to build next generation networks

This type of continued investment requires a willingness of government to support scale and an opportunity to earn a reasonable return on investment

Costly regulation to create some theoretical number of competitors will only increase consumer costs and reduce investment and job creation

Governments priority in a period of economic crisis must be to encourage investment and create jobs

We believe that the very nature of broadband will guarantee competition in downstream markets

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End game Old paradigms like set asides, unbundling and resale do

not build networks and may create uneconomic entry

The development of IP-based broadband networks is leading to a very different model for innovation and choice in downstream markets

IP is more conducive to an open applications environment where diversity and choice is delivered at the application layer in the network

With the deployment of 3G networks and smart-phone penetration, there is clearly an increased emphasis on open source in wireless as well (e.g. Android)

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End game As evidenced by the BlackBerry and iPhone there is an

increasing abundance of carrier independent applications

There are a number of convergent phenomena that have accelerated this trend

3G technology on both GSM and CDMA platforms has taken off

A combination of broadband wireless penetration and robust data plans is contributing to a data renaissance

Consumers are looking for a single Internet experience across fixed and mobile platforms shifting emphasis away from walled-gardens

In this type of environment new applications and services will deliver more innovation and diversity than old style intervention has ever delivered