MONTREAL – Advanced wireless spectrum auction rules that favour new entrants would certainly drop cellular prices in the short term – but such rules may also damage Canadian consumers in the long run, says a new paper published by the Institute for Research on Public Policy in Montreal.
The rules for the 2008 auction are expected to be released by Industry Canada before Christmas, with the auction to happen early in the new year.
The paper’s authors, University of Toronto economics professor Frank Mathewson, and associate principal at CRA International, Andrew Tepperman, say that any company wanting to play in the wireless space in Canada should compete for spectrum with no special favours like spectrum caps on incumbents, set-asides for newcomers or mandated roaming. All of those are items potential new entrants say they need in order to get into the market.
“(W)ithout a clear demonstration that market failure exists or is likely to arise, the unneeded ‘cure’ could be worse than the ‘disease’ it was meant to remedy,” say the authors.
Lobbying on both sides has been intense all this year (and all sides have now been told any direct lobbying of Industry Canada and the Prime Minister’s Office on this issue is strictly out of bounds now) where the incumbent operators, Rogers, Telus and Bell, insist the wireless market in Canada is functioning well and any newcomers would be welcome, as long as the auction rules deck isn’t stacked against them.
The potential newcomers, the loudest of whom have been MTS Allstream and Videotron, say Canadian rates are far too high when compared to other nations, that there aren’t enough competing wireless carriers in Canada and that incumbents could come to the table with the biggest spectrum cheques, pricing entry for any newcomer out of the market.
The paper, on the other hand, says “the number of competitors and costs associated with entry are poor indicators of market failure in modern industries such as wireless service provision.”
It argues that new competitors, if given a leg up into the industry at this stage of the game (with wireless penetration in Canada nearing 60%) would inevitably cause lower consumer prices in the short term (Ed note: To which Canadians would obviously say “Yippee!”) but also cause existing firms to earn less revenue. Plus, the new entrants would take far longer to reach profitability. All of which means investment and innovation in the wireless industry in Canada would slow, “to the detriment of consumers,” says the research.
“In an otherwise competitive market, it is fundamentally inconsistent to subsidize entry for the purpose of driving down prices, while at the same time acknowledging that entry is extremely costly; this creates artificial entry where none would be expected to occur naturally.”
Further, write the authors, “If the profits generated by sales to consumers once entry occurs are expected to be insufficient to justify the investment costs required to enter, particularly relative to the risk-adjusted profits that can be earned by making similar investments elsewhere, a rational firm would choose not to enter.
“It is difficult to imagine why this private decision process would be any different from society’s point of view; inducing a firm to enter a market where in the absence of special provisions (in the form of subsidies or the equivalent) entry would not occur is tantamount to sponsoring inefficient entry. This is neither an efficient allocation of society’s resources nor a good use of government resources.”
Finally, any fears of overbidding by incumbents for the new spectrum, pricing newcomers out of the auction, is such bad business and would be so unprofitable, are simply unfounded, says the paper.
“(I)t is not clear that the current level of competition is inadequate and yields supra-competitive returns to incumbents, a necessary element for any hoarding strategy to succeed. Given this, the burden to prove that hoarding is profitable rests with those advocating such views.”
The paper also mentions other factors that the incumbents and newcomers often cite – that there are only three large carriers in Canada. The incumbents say that’s just right, because most western countries have whittled themselves down to three national players while those who want in say three is an oligopoly in need of shattering.
As for the paper’s authors: “(I)ndeed, wireless service has historically been left unregulated precisely because the degree of competition was deemed sufficient,” they write.
“In Canada’s current wireless market, if entry is efficient then it should arise through the normal auction process. Should entry be induced unnecessarily, it may lead to lower prices in the short term, but this would be at the cost of future disincentives to invest. As a result, subsidized entry could result in redundant and duplicative network costs, an unstable period of competition and ultimately further consolidation.”
– Greg O’Brien
