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You've spent a lot of time on this subject but, frankly, your analogies are absurd. The spectrum auction has nothing in common with a sale of an Inn in Maine -- or anything to do with innovation in the hotel industry.

Simply put, there are no barriers to entry preventing anyone from acquiring land and building a hotel/ motel with any of the features you mention. (Automatic check-in has existed in France for close to two decades, but I've never sen it anywhere else. That doesn't mean every other country has something -- beyond customer acceptance -- preventing it.) Also, there has been steady stream of new hotels -- with innovative business models -- opening in cities like Toronto for years.

Wireless, on the other hand, has one huge barrier to entry -- you can't even try to compete without a government licenced monopoly on a segment of spectrum. (The pure "free market" is lost right there.)

The spectrum set aside issue is fairly simple. If the auction is completely open to incumbents, it may be in the interest of the incumbents to buy up all the spectrum purely to keep out new entrants. (By limiting competition to the existing three players, they reduce the risk of a new entrant challenging existing business models and reducing their profitability going forward.) This "oligopoly protection" value for the incumbents may exceed the value to the new entrants from acquiring the spectrum. Hence, not having a set aside can effectively serve to block market entry -- to the detriment of consumers and , ultimately, the economy as high costs and limited innovation allow Canada to fall further behind.

(Remember, this is all speculation until the auction actually occurs. If the set aside wasn't needed, having one won't matter and will still produce a new entrant. If it is needed, not having one will block the opportunity for a new entrant for the foreseeable future.)

Keep in mind: no Canadian operator has entered the market without being granted spectrum (generally, at very modest licencing rates). Any spectrum auction represents a tougher challenge than Bell, Telus or Rogers faced.

There are reasons to be concerned about how a set aside is managed. The goal should not be to give new entrants cheap spectrum, but to prevent the incumbents from blocking new entrants. (This could be done, for example, in a way that links two blocks of spectrum -- reserving one for a new entrant, but ensuring both sell for the same price.)

There is no question the Canadian market does not currently have "free and unfettered" competition -- the pressure on all three players to "play nice" and be "rational" prevents that. It may well be that new entrants will fail (although, that would be a market, not a government, decision). As long as market entry is constrained and controlled by government regulation, the government has an obligation to design that regulation to encourage new entrants and competition -- it's the best thing for the free market.
 

C'mon anonymous Bruce: Isn't spectrum just another form of real estate? It is a slice of air sold or leased for the exclusive use of a service provider.

How is spectrum different from land? Some is cheap (or free), some is expensive.

Some spectrum is even easier to access than land: there are unlicensed spectrum bands.

If you want to play in the 'big leagues', then you need to have deep pockets to pay the entry price. The same holds for many other businesses - airlines, auto manufacturing, downtown hotels. All of these are businesses that need massive investments.

There is an awful lot of spectrum coming up for auction - financial analysts are suggesting that it is more than Bay St would tolerate the incumbents acquiring for hoarding.

I'm not suggesting (as you allude) to "limiting the competition to the existing 3 players" (by the way, there are lots more - MTS Allstream is among the other incumbents).

I am saying that I don't want my tax dollars subsiding the new entrants, some of which are just looking to flip the asset when foreign ownership is liberalized.
 

I think both you and Bruce have it wrong with respect to the upcoming spectrum auction. Mr. Bernier hit the proverbial nail on the head and got it right in his speech at the Summit. The key issue isn't whether there should be a set aside, mandated tower sharing and roaming, etc., etc.

The key issue as Mr. Bernier said in his sppech is whether or not there is enough competition in the cellular market or should there be more players. As he said: "A good debate includes opposing views and new ideas. There are those who say we need...to guarantee more competition. Others say there is a lot of competition".

IF Industry Canada and the federal government determine in their wisdom that there is sufficient competition in Canada's cellular market and that Canada and Canadians are getting all the benefits that competition is supposed to produce for consumers, the economy and the industry, then there really is no need for specific measures to allow new players into the cellular market.

However, IF Industry Canada and the federal government determine in their wisdom that there isn't sufficient competition (by whatever factors they use) and that there ought to be more in order to bring more benefits to consumers, the economy and the industry, then they have to determine whether or not specific measures are needed to, presumably, get new players into the industry in such a way that they are able to stand a chance of succeeding and of introducing and entrenching the competition the government has determined is necessary.

IF they decide that specific measures are needed to achieve all of this, they have several measures from which to choose. Most of the possible measures, but especially the set aside, can be seen as a subsidy. Yes, the federal government will not maximize their revenues if they decide there should be a set aside. But this is the compromise the government will have decided is best for the country, the economy, the cellular market, consumers and the industry. This would not be the first time a government, federal or provincial, has introduced a subsidy in order to achieve a social or economic objective in Canada and it probably won't be the last. After all the government is mandated to determine what's best in the public interest.

So, it all comes down to whether or not Industry Canada believes it would be in the public interest to have more competition in the cellular market. IF they believe more competition is needed, then they have to determine if it would be in the public interest to introduce some specific measures into the auction process in order to give the competition they want a chance to succeed by allowing new players to have the ability to hit the ground running.

Stay tuned for the decisions from Mr. Bernier and his colleagues. Their task is not going to be easy but their decision and what follows will certainly be interesting.
 

Mark,

If there were as much spectrum available as you say, then this debate wouldn't be taking place. Anyone who wanted to take a shot at starting a new wireless company could buy themselves some spectrum and go into business. But, that's not what is happening.

You can't offer a cellular telephony service (at least not with current technology and regulations) using unlicenced spectrum. The last auction (and therefore entry point) for this market was 2001.

It is an interesting question whether the amount of spectrum being auctioned is more than the incumbents can acquire. In which case, the set aside wouldn't matter -- just as it isn't practical to acquire all the potential hotel space in Bangor and therefore there is always room for a new entrant with or without any regulation.

All the current incumbents received a "subsidy" as you've described it. (Yes, there are more than three if you include the regional incumbents, but there are no more than three in any individual market.) However, the goal of the auction is not merely to maximize government income from spectrum licencing. (The government could better exploit its monopoly, but doesn't do so for obvious policy reasons.)

However, you do have a fair point on people acquiring spectrum in order to flip it (either to the incumbents or to foreign owners). As I said in my original comment, the goal should be to ensure there is spectrum available to a new entrant, but not at a discount for the new entrant. (Yes, this will reduce the total government take because it removes the incentive for incumbents to pay more in order to hoard the spectrum.)

Brian accurately gets at the broader policy issue -- should the government go beyond steps that enable a new entrant to ones that specifically benefit a new entrant.

This is a more complicated issue. Such steps maybe viewed as necessary, but then they make Mark's concern about flipping even more relevant.
 

What's the concern about flipping it? So what if a foreign player ends up with spectrum? It's still a new entrant, isnt't it? And if they get a discount on the spectrum, that doesn't matter either - Bell, Rogers and Telus got large chunks of their's with no upfront fee. Any entrant is still going to have to spend hundreds of millions building and marketing. I thought investment in Canada was a good thing?
 

The hoarding and flipping of spectrum is a legitimate concern. Are there ways of preventing it? I think so and it’s not rocket science. In fact the solution was mentioned during the Q&A of one of the panel discussions – introduce a “USE IT OR LOSE IT” clause in the auction process.

This would work for both new entrants (whether there was a set-aside or not) and the incumbents. As far as hoarding is concerned, the government could identify a deadline by which the “winners” from the auction either had to use the spectrum they had purchased or hand it back. In order to avoid having parties sit on spectrum with no intent to use it just to hand it back (a delaying tactic), the government could also indicate that if the spectrum was not used in the identified period and handed back, the offending party would lose 33% (or some other amount that would be significant enough to impact on shareholders) of what they had paid for the spectrum. If they had only used part of what they had purchased, then the hold-back would be pro rated accordingly.

With respect to the possible flipping of spectrum, the government could extend the “USE IT OR LOSE IT” principle to include a provision that would say that spectrum acquired in the AWS spectrum auction process could only be used by the “winners” and that spectrum could not be flipped or acquired by other parties through takeovers, mergers or acquisitions. Remember we’re dealing with a public resource that parties are bidding on to use for a specific licence period. Doesn’t or shouldn’t the government, therefore, be the one that determines who is going to use a specific block of spectrum if a “winner” isn’t going to use it because it no longer exists or is it ends up in the hands of another party?

All of this would go some way to ensure that the spectrum that is acquired is used and, if it isn’t used, the parties pay a penalty for delaying the opportunities lost by not having the spectrum used. Remember, Mr. Bernier indicated when they AWS spectrum auction process was first announced that the government was looking for innovation in services and technology along with other public policy objectives being achieved as a result of the auction. If parties act against the achievement of the government’s intentions, they should pay a penalty.

Going back to the set-aside concept for a minute, the incumbents, at the Summit, tried to derail the arguments of the potential new entrants for a set-aside by saying “Yes, we didn’t have to go through an auction to acquire the spectrum we have today but, we’ve been paying substantial licence fees ever since”. Pardon me, but unless I’ve missed something, I haven’t seen anything that says the AWS spectrum “winners” are not going to have to pay an ongoing licence fee for the spectrum they acquire. If they are going to have to pay such a fee on an ongoing basis, then the “no set-aside” proponents are basically saying that any new entrants should be treated differently than the incumbents were when they got started. Whatever happened to the principle of “what’s good for the goose is good for the gander”?

Fun and games, eh?