Reply Comments by QUEBECOR MEDIA INC. June 27, 2007

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Reply Comments by

QUEBECOR MEDIA INC.

To Industry Canada

As part of the Consultation

Canada Gazette Notice DGTP-002-07,

"Consultation on a Framework to Auction Spectrum in the 2 GHz Range including Advanced Wireless Services"

June 27, 2007

Table of Contents

1. Executive Summary...... 4 2. The upcoming spectrum auction: a call for action from Canada’s government to ensure entry by new mobile carriers...... 11 2.1 The need for special measures and a set aside...... 17 2.2 If no set aside for new entrants, hoarding spectrum by incumbent mobilecarriers will become a major pastime ...... 19 2.3 The future of Canada’s competitiveness in mobile is at stake, not the past! . 22 2.4 The presence of MVNOs and resellers does not make the Canadian market competitive; the actual level of success (or lack thereof) achieved does matter ...... 23 2.5 The last chance for facilities based entry but not for incumbent mobile carriers...... 26 2.6 The critical requirements for the spectrum auctions to be a success for all Canadians...... 29 3. Lies, damned lies and statistics: The Myth promoted by the Big 3 Canadian incumbents that there are only 4 mobile players in the US ...... 31 4. Prices in Canada are much higher than in the US: A situation that should not be tolerated...... 35 5. Level of innovation and new technology deployment in Canada vs the US: we have fallen behind and fast action is required to catch up...... 40 5.1 3G network technology deployment...... 40 5.2 The penetration of Blackberrys® in Canada vs the US ...... 42 5.3 Concluding remarks on the question of new wireless technology development in Canada...... 45 6. Mandated Seamless Digital Roaming...... 46 7. AWS Band plan ...... 51 8. AWS Service Areas...... 52 9. Licence terms and conditions ...... 54 10. Appendix A – Leveling the Playing Field: Efficiency and Revenue Arguments for License Set Asides...... 56 11. Appendix B - DGTP-002-07 AWS – QMI Reply Comments June 27, 2007 – Licence Conditions in Other Countries ...... 70 12. Appendix C – Position Papers ...... 73 12.1 Analysis of the status of competition in wireless by Professor Abraham Hollander, Université de Montréal...... 74 12.2 Analysis of the status of competition in wireless by Professor Yves Rabeau, Université du Québec à Montreal ...... 82 12.3 Analysis of the status of competition in wireless by Mr. Réal Gauthier, Consultant ...... 94 13. Appendix D - Letters of support for new mobile carriers in Canada ...... 98

14. Appendix E - Letter from Bell Mobility highlighting the productivity gains with Blackberry® service ...... 103 15. Appendix F - Robert Dépatie, President and CEO of Vidéotron Ltd, Speech, Telecom Summit, Toronto June 13, 2007...... 105 16. Appendix G - Pierre Karl Péladeau, President and CEO of Quebecor Inc., Speech April 17 2007, Canadian Club of Ottawa ...... 110 17. Appendix H - Selected diaporamas from Third generation mobile telecommunications services –A need for Vidéotron, an opportunity for Canada, by Pierre Karl Péladeau , President and CEO of Quebecor Inc...... 116 18. Appendix I - Selected diaporamas from Reflections, by Robert Dépatie, President and CEO of Videotron Ltd, Telecom Summit, Toronto, June 13, 2007 ...... 124 19. Appendix J - The admissions: Selected recent articles...... 132

About Quebecor. Quebecor Inc. (TSX: QBR.A, QBR.B) is a communications company with operations in North America, Europe, Latin America and Asia. Quebecor Inc. has operations in 18 countries. It has two operating subsidiaries, Quebecor World Inc. and Quebecor Media Inc. Quebecor World is one of the largest commercial print media services companies in the world.

Quebecor Media inc. (QMI) owns operating companies in numerous media related businesses: Videotron Ltd., the largest cable operator in Québec and a major Internet Service Provider and provider of telephone and business telecommunications services; Sun Media Corporation, Canada's largest national chain of tabloids and community newspapers; TVA Group Inc., operator of the largest French-language over-the-air television network in Québec, a number of specialty channels, and the English-language over-the-air station Sun TV; Canoe Inc., operator of a network of English- and French- language Internet properties in Canada; Nurun Inc., a major interactive technologies and communications agency with offices in Canada, the United States, Europe and Asia; companies engaged in book publishing and magazine publishing; and companies engaged in the production, distribution and retailing of cultural products, namely Archambault Group Inc., the largest chain of music stores in eastern Canada, TVA Films, and Le SuperClub Vidéotron Ltd., a chain of video and video game rental and retail stores.

Videotron Ltd is the largest cable television network in Quebec with close to 1.6 million cable TV subscribers. Videotron is also the largest High-Speed Internet service provider in Quebec and a leading provider of VoIP services in Canada, with more than 450,000 VoIP customers in early 2007. Vidéotron has achieved more than 25% penetration of its customer base with telephony in approximately 2 years, a significant success when compared to any of its peers. Vidéotron is a renowned technology leader and innovator among Canadian and North American cablecos. Other examples of Videotron’s technology and service innovation leadership among Canadian telecommunications carriers are: • Videotron was the first cableco to implement bi-directionality on its local network to 97% of its subscribers;

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• Vidéotron offers the fastest high speed Internet service to its residential customers in Canada. In July 2006, Vidéotron upgraded its Extreme Plus Internet Service from 16 Mbps to 20 Mbps, without changing the price of the service. Vidéotron offers this service across its entire addressable market of 2.4 Million homes passed in Quebec. No other cableco or telco in Canada offers such high-speed Internet service to its entire subscriber base. • Videotron launched High Definition Video on Demand in March 20071, another first in Canada. • Videotron is conducting technology trials with Cisco to bring up to 100 Mb/s of bandwidth to its subscriber base, a first in North America. In February 2007, Videotron announced positive results of the trials started in December 2006 and potential launch of the new service in 20072.

Videotron has been a participant in the Canadian mobile communications market since launching its mobile service in August 2006, first in Quebec City and then to other cities including Montreal later in the year. This service is being offered via an agreement with Rogers Wireless. As per the latest quarterly results released, Videotron had captured more than 20, 000 wireless subscribers among its addressable market.

QMI perceives mobile as a natural extension of its existing service offering to the consumer market and as an important competitive tool in the rapidly evolving Canadian telecommunications services industry. QMI vies to become a mobile broadband operator, leveraging its fixed network as well as future mobile operations. QMI also views mobile telecommunications as a critical tool to foster the development and distribution of Canadian and Quebec content on this rapidly emerging media platform.

1 Un dimanche à Kigali en HD sur Illico sur demande, March 14, 2007, Press release of Videotron Ltee. 2 A first in North America, Cisco Wideband Technology provides capacity to handle explosive downloading capabilities; Videotron positioned to deliver fastest Internet speeds in Canada, February 1, 2007, Press release of Videotron Ltee. 3 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

1. Executive Summary

This submission is provided to Canada’s Minister of Industry by Quebecor Media Inc. (QMI), as Reply Comments to Canada Gazette Notice DGTP 002-07 entitled “Consultation on a Framework to Auction Spectrum in the 2GHz Range including Advanced Wireless Services”.

First of all, it should be acknowledged that, simply owing to the foreign investment restrictions, the Canadian market is protected, and the upcoming auctions can never be conducted in a manner that would be totally ‘free and unfettered’. Hence, the government should lift these rules immediately if it wants to realize the full value of mobile spectrum in the upcoming auctions.

If for some reason the Canadian government cannot lift foreign investment restrictions in a very short timeframe well before the auction, then it has no choice but to set in place special measures to stimulate entry, namely a set aside, to counter the very negative effects of this restriction on potential Canadian new entrants.

The mere hypothesis, which is definitely not far fetched, that there can be a merger of Telus and Bell Canada should be more than sufficient for the Department to take action now and move forward as quickly as possible to initiate the process for the upcoming auctions with a spectrum set aside to ensure new entry. QMI reiterates its recommendation to the Canadian government that the schedule for the upcoming auctions should be advanced, especially in light of the proposed Telus/Bell merger, for the sake of ensuring competition in mobile in Canada.

Mr. Darren Entwistle, CEO of Telus, has publicly acknowledged3 that a spectrum set aside would be required to ensure the entry of a new third mobile carrier in Canada,

3 During conference calls with analysts on June 21, 2007 4 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

should the Telus/Bell merger become a reality, and that this new carrier could in fact be comprised of many new regional entrants across the country.

Without a spectrum set aside, and even in the context of a Telus/Bell versus Rogers as incumbents, QMI argues that the motivation for spectrum hoarding would remain intact and new entry would not occur in the Canadian market.

QMI reiterates its view that new mobile carriers in Canada will be a key factor to contribute to the presence of Canadian content on the mobile web, the new and rapidly growing frontier of the Internet and of all telecommunications as well as of broadcasting.

Canadians cannot afford to remain complacent relative to the slower development of mobile broadband services in Canada compared to other countries.

Again, Mr. Darren Entwistle, CEO of Telus, has acknowledged the lag in penetration of mobile services in Canada compared to other countries4.

The future development and dissemination of Canadian culture is at stake in this debate as well as much needed enhancements to Canadian productivity.

QMI argues that the overriding consideration for the upcoming auction is the fact that Canada needs new carriers and more competition in mobile and that the auction rules and license terms and conditions need to be set out to achieve this objective.

Three is not enough competition in Canada in mobile telecommunications based on the following evidence.

• While Canada is at the top of the heap in terms of wireline metrics, such as wireline telephone and High speed Internet penetration and prices, when

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compared worldwide, we are at the bottom of the rankings for mobile. International benchmarking of mobile penetration achieved in Canada should not be tossed aside when it becomes an inconvenient truth. On the contrary, it is a call for action! • Canada has a GSM monopoly. Canada absolutely needs another GSM-based mobile carrier, the technology that has become a standard worldwide. • Canada needs a higher rate of capital investment in mobile telecommunications networks as a key economic enabler. The evidence submitted by QMI in its May 25 Report demonstrates that investment in mobile telecommunications networks has been lagging in Canada over recent years. • Mobile communications is definitely a key contributor to GDP. As noted by Waverman et al., in the period from 1996 to 2003, “All else being equal, we estimate that Canada would have enjoyed an average GDP growth per capita rate nearly 1 percent higher than it actually was, had the mobile penetration rate in Canada been more than doubled.5”

How do we ensure acceleration of mobile penetration growth in Canada? Canada needs to do what others have done: make sure there are more mobile carriers in each area of the country.

The following highlights the key conclusions demonstrated in the QMI Reply comments following the review of the submissions put forward to the Department by various parties on May 25th. Further details are provided in the remainder of this document.

4 Journal La Presse, Section Affaires, 22 juin 2007, p. 2, “ Selon le gestionnaire, le Canada a encore de six à huit ans de croissance dans le sans fil, puisque le pays a un retard de quatre points de pourcentage sur les autres pays en terme de pénétration’, article by Francis Vailles. 5 The Impact of Telecoms on Economic Growth in Developing Countries, Leonard Waverman, Meloria Meschi and Melvyn Fuss.

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1) The analyses presented in QMI’s May 25th submission and also in the current reply comments highlight without a doubt that each of the three largest Canadian mobile carriers, Bell, Rogers and Telus, has more or a similar amount of mobile spectrum before the upcoming auctions than their US counterparts enjoy now, after the AWS auction that took place in 2006. In final analysis, they do not need the AWS spectrum to fulfill their obligations to their customers and provide them with advanced mobile broadband services, as US carriers already do.

To illustrate this, the three Canadian mobile carriers enjoy 60MHz of spectrum each on average in the City of Ottawa to serve 1.1 Million population, before the AWS auction. Post the 2006 US AWS auction, six mobile carriers have 45 MHz each on average to provide service to a population of 19 million in New York City.

2) The QMI reply comments demonstrate that, contrary to their affirmations in their respective May 25th submissions, the three large national incumbent mobile carriers have : a. the motive, b. the means, well demonstrated in the 2001 auction, and c. the (upcoming) opportunity; to hoard spectrum, as a way to block entry to new carriers anywhere in the country.

3) Set asides do not necessarily result in lower auction revenue since overall higher revenues can be achieved via increased competition among the incumbents, for fewer licenses.

4) If no set aside is put in place for the upcoming auction, Canadian consumers will finance out of their own pockets for years to come the higher spectrum prices paid by the incumbents.

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5) QMI will commit in excess of $500 million in capital investment to build its state of the art 3G network in Quebec alone, an investment which will not take place if a spectrum set aside of 40 MHz at least is not implemented as well as the other critical conditions such as mandated seamless digital roaming and tower sharing. QMI has committed to an aggressive 3-year, 50% population coverage network deployment plan in its Tier 2 set aside license areas and to significant restrictions for a number of years on its ability to sell or transfer set aside spectrum to incumbents to ensure the rapid emergence and the sustainability of new competition.

6) The myth being promoted by the three biggest mobile carriers in Canada that there are only four mobile carriers in the US is only meant to dull our senses into false complacency that if 4 carriers is OK in the US, then three carriers in Canada must be more than sufficient. In reality, post the 2006 AWS auction, there are more than 6 mobile carriers per market in most US cities. An assessment of mobile carriers in 22 US cities is provided herein for cities similar in sizes to Montreal and Quebec City. The number of post AWS auction US mobile carriers in each of these cities ranges from 7 to 10. This excludes any resellers or MVNOs also active in these markets.

7) Only Canada’s government can resolve this issue and can prevent the hoarding of spectrum that is about to take place, if sufficient spectrum set aside is not implemented as part of auction rules and adequate license conditions not imposed on mobile carriers in Canada.

8) It is the future of mobile communications that is of concern to Canadian mobile consumers, not the past! We highlight the fact that the majority of analyses quoted by the incumbent mobile carriers to ‘prove’ that the Canadian mobile market is competitive and would thus not need special measures to stimulate entry were published before or in 2004, i.e. when Canada, as a matter of

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fact, did have 4 national mobile carriers and the level of competition was indeed much higher than it is now and prices were lower6.

However, it is now clearer than ever that since 2004, Canada’s mobile market has been operating as a cozy oligopoly… now possibly becoming a duopoly. This is why price increases are accelerating and why Canadian mobile carriers post operating profit margins so much better than those achieved by their US counterparts.

9) The incumbent national mobile carriers have pointed to the success of resellers and MVNOs to highlight the strong competitive rivalry in mobile in Canada. Based on estimates provided herein, the entire MVNO market in Canada represents less than 4% of all mobile subscribers and this, after 10 years of encouraging resale and MVNOs on a voluntary basis, i.e. without mandatory obligations to the incumbents. It is a dismal performance. As per Roger’s own reporting, its wholesale customer base has been growing on average by 8,000 subscribers per quarter, a statistic which belies the statements that the MVNO market has taken off in recent years.

10) QMI reaffirms its strong opinion that the upcoming auctions for AWS spectrum are the last chance to increase the level of competition in the Canadian mobile market, for the benefit of all Canadian consumers. The incumbent mobile carriers will have many opportunities to supplement their spectrum holdings in future spectrum award processes, including the 700 MHz spectrum. However, such is

6 As examples, some of the documents quoted are : • Competition Bureau, Acquisition of Microcell Telecommunications Inc, by Rogers Wireless, Backgrounder, Completed in 2004, Publicly released in April 2005 • CRTC Order from 1997, notably in the case of request for mandated and resale in the 1990s which was declined , notably in Telecom Order CRTC 97-1797 , when the telecom mobile market did not consist of 3 major incumbents, but actually had two emerging new entrants, Clearnet and Microcell. • Telecom decision CRTC 98-4, Joint Marketing and Bundling, March 24, 1998, again when the Canadian market was being developed by 2 new entrants in addition to incumbent carriers. • Telecom Decision CRTC 2003-26 on an Application by Microcell regarding alleged contraventions of Section 27(2) of the Telecom Act by Rogers Wireless and Bell Mobility

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not the case for potential new entrants to the upcoming auction. Owing to the level of maturity of the Canadian mobile market, the time for new entry is now or never.

11) It should therefore be expected that incumbent mobile carriers speak in unison against any measure that would bring more competitors into their protected gardens, such as mandated seamless digital roaming. Other Governments have faced similar onslaught from incumbent mobile carriers but have fortunately persevered. Mandated roaming was also a significant issue in the UK when it was imposed. It is however on the public record as a key criterion in leading to a decision to participate in the UK auction by Hutchison, the winning new entrant bidder. QMI’s recommendations to the Department to implement digital seamless roaming are: • Mandated access, • Negotiated pricing, and • Adequate arbitration measures via the Competition Bureau to ensure quick resolution of any disagreement.

Roaming needs to apply to all voice, data and video services.

12) No serious potential contender can consider the possibility of real and sustainable entry in this market, if spectrum cannot be awarded on reasonable terms and conditions to new carriers.

The Canadian government needs to heed this call for action now… before it is too late!

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2. The upcoming spectrum auction: a call for action from Canada’s government to ensure entry by new mobile carriers

Without a doubt, any independent review of the Canadian mobile industry, taking into account penetration, pricing, the rate and reach of new technology deployment as well as capital investment, will draw the conclusion that all of Canada would benefit from ensuring new mobile carriers and thus more competition in the marketplace.

This would lead to increased economic growth and to better services to Canadians, in all areas of the country.

Canadian mobile carriers have for many years been protected from competition by the current restrictions on foreign investment, which means that successful multinational mobile carriers cannot at this time enter the Canadian market.

Foreign investment restrictions in Canada have had many perverse impacts on the market. First of all, as already noted, Canadian mobile carriers have been operating for many years in a protected environment. This has resulted in higher prices, lower capital investment and slower market introduction of new services.

Furthermore, new entrants in the Canadian mobile telecommunications market are significantly disadvantaged by these foreign investment restrictions, which do not exist among our major trading partners, and among the vast majority of countries worldwide. This limits the ability of new entrants to attract international partners, expertise as well as financing.

The Department has recognized this fact by stating the following in DGTP-002-07, on p. 19.

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“Foreign investment restrictions have the effect of limiting potential entry in the telecommunications market thereby reducing the competitive discipline that the threat of entry can provide. It is important to consider the effect this may have on the free operation of the market and the ability to rely solely on market forces in the forthcoming auction’’.

It should be acknowledged that, simply owing to the foreign investment restrictions, the Canadian market is protected, and the upcoming auctions can never be conducted in a manner that would be totally ‘free and unfettered’. Hence, the government should lift these rules immediately if it wants to realize the full value of mobile spectrum in the upcoming auctions.

QMI highlights that the June 20, 2007 announcement of the potential acquisition of Bell Canada by Telus Communications raises serious issues and has significant implications for the upcoming auctions and for Canada.

To mitigate the obvious impact of increased concentration in all segments of the telecom industry as a result of this proposed transaction, Telus has now agreed to support spectrum set aside for new entrants, mandated roaming and tower sharing, among other things, as a solution presented to regulatory and competitive authorities in Canada.

This proposed transaction and the solutions proposed by Telus are an opportune and complete turnaround in the position of Telus regarding the upcoming conditions for AWS auctions and license conditions that should be imposed on new entrants.

Telus has suddenly become a strong defender of the view that the participation of cablecos in mobile, coupled with their resources, expertise and the strength of their 12 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

current customer base, will bring a better competitive dynamics in Canada than what we have ever had.

Even the hypothesis of a possible Telus/Bell merger should be enough to convince the Department that new carriers in mobile communications in Canada are more than ever a requirement in Canada. With or without an eventual Telus/Bell combination, new carriers are a must to ensure that Canadians continue to receive the mobile services they so much deserve at, and we stress, at reasonable prices.

The acquisition of Microcell by Rogers in 2004 and the consolidation of the Canadian market from four to three national mobile carriers resulted in significant price increases in mobile in Canada. We can hardly imagine what would happen were the market to consolidate further from three to a duopoly of two national carriers.

The mere hypothesis, which is definitely not far fetched, that there can be a merger of Telus and Bell Canada should be more than sufficient for the Department to take action and move forward as quickly as possible to initiate the process for the upcoming auctions with a spectrum set aside to ensure new entry.

Without a spectrum set aside, and even in the context of a Telus/Bell versus Rogers as incumbents, the motivation for spectrum hoarding would remain intact and new entry would not occur in the Canadian market.

Canadians cannot afford to remain complacent relative to the slower development of mobile broadband services in Canada compared to other countries.

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The future development and dissemination of Canadian culture is at stake in this debate as well as much needed enhancements to Canadian productivity.

Inasmuch as the Canadian government holds the key to unlock access to mobile spectrum for any entity vying for its use, it needs to be acknowledged that there can never be free and unfettered market access to wireless spectrum in Canada, as in any other country.

Bell, Telus, and Rogers operate in a protected environment and government intervention, via a spectrum award process and via the rules and conditions attached to it, is a requirement for any other organization to become a facilities-based player in this market segment.

This is corroborated by the Department in its background discussion on the issue of spectrum set aside in DGTP-002-07, as highlighted below.

“Given expressed interest in this spectrum and the preceding discussion, an important consideration is whether it is appropriate to take measures intended to enable entry in a situation where the government controls access to the spectrum needed for market entry. The unavailability of spectrum also constitutes a barrier to market entry.”7

Emphasis added.

The acknowledgement of this fact leads us to argue that the key elements which will shape the outcome of this consultation are the objectives pursued by the Department and the Canadian government.

In other words, the objectives pursued will dictate the type of rules that are required in terms of both rules for the auction, including eligibility criteria, auction rules and the terms and conditions that will be provided to all licensees, be they AWS only licenses or licensees with cellular, PCS or ESMR spectrum.

7 DGTP-002-07, P. 21, Section 2.7 Addressing the Potential for New Entry

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Very different rules and license conditions will be required if the Canadian government is looking to maximize revenues to the Treasury, or if, on the other hand, the government is more interested in increasing the level of competition for the benefits of Canadian consumers and businesses.

When faced with an environment with large barriers to entry and very few facilities based competition, market forces alone may not yield the best result to ensure vibrant competition in the Canadian telecommunications market for years to come.

The same arguments have been put forward by the Competition Bureau in its comments in the context of DGTP-002-07 submitted on May 25 (p. 4).

“The department has instituted au auction framework to allocate that spectrum, but as the Consultation Paper points out, where there are a limited number of competitors and large entry barriers, reliance on market forces may not result in the most efficient allocation of spectrum”.

QMI argues that the overriding consideration for the upcoming auction is the fact that Canada needs more competition in mobile and that the auction rules and license terms and conditions need to be set out to achieve this objective.

There is not enough competition with three facilities-based players in wireless telecommunications based on the following evidence.

1. While Canada is at the top of the heap in wireline metrics, such as wireline telephone and High speed Internet penetration and prices, when compared worldwide, we are at the bottom of the rankings for wireless. The Proof is in the pudding. All metrics are imperfect but all countries adhere to these metrics as a basis of comparison. These types of international comparisons have always been gladly used by Canadian telecom operators and government agencies to benchmark the performance of Canada in the past. International benchmarking

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of mobile penetration achieved in Canada should not be tossed aside when it becomes an inconvenient truth. On the contrary, it is a call for action!

2. Canada has a GSM monopoly. Canada absolutely needs another GSM-based mobile carrier, the technology that has become a standard worldwide. A second GSM carrier in Canada would be a significant contributor to accelerate the launch of new services across the country.

3. Canada needs a higher rate of capital investment in mobile telecommunications networks as a key economic enabler. The evidence submitted by QMI in its May 25 Report demonstrates that investment in mobile telecommunications networks has been lagging in Canada over recent years. Increased investment in mobile technology will be a major contributor to Canadian productivity, innovation and economic growth.

4. Mobile communications is definitely a key contributor to GDP. As noted by Waverman et al., in the period form 1996 to 2003, “All else being equal, we estimate that Canada would have enjoyed an average GDP growth per capita rate nearly 1 percent higher than it actually was, had the mobile penetration rate in Canada been more than doubled.8” How do we ensure an acceleration of mobile penetration growth in Canada? Canada needs to do what others have done: make sure there are more mobile carriers in each area of the country!

8 The Impact of Telecoms on Economic Growth in Developing Countries, Leonard Waverman, Meloria Meschi and Melvyn Fuss.

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2.1 The need for special measures and a set aside

The three largest incumbent mobile carriers have argued against the need for a set aside based on an assessment that the mobile market in Canada is already very competitive and thus does not require special measures to enhance its competitiveness. They also argue that hoarding spectrum by incumbents is not rational.

They could not be more wrong!

We highlight the fact that the 3 national mobile carriers in Canada have exhibited in the past (in the 2001 PCS auction), and still possess, substantial motive for blocking entry by bidding prices much higher than what any new entrant could reasonably sustain.

To investigate these issues further, QMI commissioned a Position Paper by Dr. Dan Vincent of the University of Maryland discussing the implications of set asides for spectrum auctions. Dr. Vincent is a recognized expert in this field. The key conclusions of Dr. Vincent are reproduced below.

• “For an incumbent firm, the opportunity cost of failing to acquire a license and enabling new entry in its market includes, in addition to the operating profits, the lost incremental profits that it had enjoyed from competing in an oligopoly with a smaller number of firms.

• This extra effect generates an incumbent “preemptive incentive” that can enable incumbent wireless bidders to outbid entrant bidders even when operating profits minus build-out costs of the entrants exceeds that of the incumbents.

• Economic theory tells us that rational agents make their decisions by considering incentives at the margin. Thus, even potential entrants with sufficient financing would be subject to these effects – if the marginal profitability of acquiring a license is lower for entrants than for incumbents, then we should expect incumbents to outbid even deep-pocketed entrants unless the entrants are significantly more efficient than the incumbents.

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• Without measures to level the playing field at an auction, entrants are likely to find it extremely difficult to outbid incumbents for spectrum.

• Generally, when firms with higher valuations acquire scarce resources, the outcome is socially desirable. However, this conclusion is reversed if the source of these higher valuations is the higher profits derived from preempting competitive entry to a market. In imperfectly competitive industries, the fewer the firms, the more likely that incumbent firms have the ability and incentive to raise prices and reduce output (in the wireless industry, this could mean either fewer minutes per subscriber or lower penetration or both). …. Set asides serve as a way to limit the distortionary incentives that incumbent license holders have for preempting entry.

• Governments may also wish to override the natural advantage incumbents enjoy if when this advantage results in too little entry and, therefore, too little competition in the downstream market. Set aside licenses are a way to counterbalance the incumbency advantage.

• Furthermore, the use of this tool does not obviously come at the cost of lower auction revenues since set asides can promote greater price competition among incumbents for the licenses they are eligible to acquire.”

In short, Dr. Vincent agrees with the statements that incumbent mobile carriers have the motivation and the means to block entry by new carriers in an auction process and that set asides do not necessarily result in lower auction revenue since overall higher revenues can be achieved via increased competition among the incumbents.

The full text of Dr. Vincent’s position paper entitled “Leveling the Playing Field: Efficiency and Revenue Generation for License Set Asides”, as well as his resume, are provided as an appendix to the QMI reply comments.

Three additional position papers discussing the pros and cons of set aside spectrum (from professors Abraham Hollander and Yves Rabeau of Université de Montréal and of Université du Québec à Montréal; Also Réal Gauthier- Consultant) are provided in Appendix C to the QMI Reply comments. They conclude as to the positive benefits of a spectrum aside.

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If no set aside is put in place for the upcoming auction, Canadian consumers will finance out of their own pockets for years to come the higher spectrum prices paid by the incumbent mobile carriers as a way to prevent entry.

2.2 If no set aside for new entrants, hoarding spectrum by incumbent mobile carriers will become a major pastime

If this were not enough, it is also important to consider that Canadian mobile carriers pre- AWS auction already enjoy as much spectrum as US mobile carriers, post AWS auction. So why do they need more spectrum now? The obvious answer is they do not need AWS spectrum, which is to be auctioned in the current process, for their own needs, but to block any potential new entrants.

This also explains their vehement opposition in total unison to a spectrum set aside.

We highlight a comment from Mr. Joe Church9, President of Wispra Inc., in its Submission to the Department on May 25th.

“In 2001, where there was no set aside, W2N Inc. bid over $300M for just 10 MHz of PCS spectrum in the Toronto area alone and was outbid by all three of the incumbent carriers. In a subsequent conversation with an executive of an incumbent carrier, the President of W2N Inc. was told that they would have bid double $300M to keep out a new entrant.”

The Commissioner of Competition alludes to this type of behaviour in her Submission of May 25th when discussing the set aside. “Are the incumbents capacity constrained, in which case they may need additional spectrum in order to add new services? Do they have existing excess capacity, suggesting additional spectrum would be put to inefficient use? In other words, do they have a business justification for acquiring additional spectrum, or in the absence of such as justification, do they have an anti-competitive purpose (such as hoarding to prevent entry) for acquiring one?”

9 Wispra Inc. (“Wispra”) was the founder and a shareholder of W2N Inc. (“W2N”), an unsuccessful bidder for nationwide PCS spectrum in the 2001 PCS auction.

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We reproduce below the Table presented in QMI’s May 25th submission which clearly indicated that Canadian incumbent mobile carriers already own similar amounts of spectrum pre AWS auction as their US counterparts did post AWS auction.

Table 1- Canada/US Comparison of mobile spectrum holdings, prior to and post AWS auction

Spectrum Holdings in Major Cities Mhz In Canada, prior to AWS auction Bell Canada 40 to 55 Telus (1) 50 to 55 Rogers 75 to 85

In the US, post AWS Auction AT&T 45 to 90 Verizon 30 to 85 Sprint Nextel/SpectrumCo (2) 43 to 63 T -Mobile 40 to 70 (1) Counting ESMR spectrum as an average of 10 Mhz. (2) SpectrumCO is a different corporate entity than Sprint Nextel. Their spectrum holdings have been combined for this Table as the two companies are launching new services in cooperation. SpectrumCO obtained 20 MHz of AWS spectrum in the latest US auction.

We also note with much interest that incumbent carriers all stressed their significant needs for more spectrum but without a single on of them actually willing to state on the public record how much spectrum they do really need. In its place, generalities were provided as to the total amount of bandwidth consumed by new services .One such example is Rogers Communications inc. which states the following, p. ii in the Executive Summary, “new broadband services including video and high speed mobile data which can require anywhere between 30 to 300 times the amount of bandwidth (and thereby spectrum) of voice calling.”

20 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

However, nowhere does Rogers mention the impact of the relatively low penetration of these services on their bandwidth needs or the accelerating improvements in spectral efficiency of new mobile technologies that enable all carriers to pack more bandwidth into a single hertz, thereby minimizing the needs of incumbent carriers for additional spectrum.

To further explain the implications of the existing significant spectrum holdings of Canadian incumbent mobile carriers, we highlight the following example.

To serve the Ottawa market – population 1.1 million – Rogers, Bell and Telus currently split 180 megahertz of spectrum between themselves, again before the upcoming auction of 105 MHz of new spectrum in Canada. This corresponds to an average of 60 MHz of spectrum per mobile carrier, pre AWS auction. In the US, in New York City with 19 million potential customers, post the 2006 AWS auction, six carriers split 270 MHz of mobile spectrum between themselves, which translates as an average of 45 MHz each.

Rogers already holds 85 MHz of spectrum in Ottawa-Gatineau, even before the upcoming auction! As a matter of fact, each of the three national players already enjoys as much as or more than 45 MHz of spectrum in Ottawa-Gatineau, prior to the upcoming auction in Canada. How can they justify the need for more spectrum?

The overriding conclusion is that the Canadian mobile telecommunications market is not a competitive market but a well coordinated oligopoly. The incumbent mobile carriers have the motivation for and are clearly intent on spectrum hoarding to prevent entry.

In other words, Canadian incumbent mobile carriers have:

1) the motive (blocking new entrants) 2) the means (well demonstrated in the 2001 auction), and 3) the (upcoming) opportunity to hoard spectrum.

21 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

Canada’s government must take action to prevent this squandering of such as precious public resource and ensure its most efficient use by enabling entry by new facilities based carriers.

A spectrum set aside is a must if Canada is to hope attracting any serious bidder in the upcoming auctions other than the incumbents.

2.3 The future of Canada’s competitiveness in mobile is at stake, not the past!

We highlight the fact that the majority of analyses quoted by the incumbent mobile carriers to prove that the Canadian mobile market is competitive and would thus not benefit from special measures to stimulate entry were published before or in 2004, i.e. when Canada, as a matter of fact, did have 4 national mobile carriers and the level of competition was indeed much higher than it is now and prices were lower10.

However, it is now clearer than ever that since 2004, Canada’s mobile market has been operating as a cozy oligopoly. This is why price increases are accelerating and why Canadian mobile carriers post operating profit margins so much better than those achieved by their US counterparts, as highlighted in QMI’s May 25th Submission.

It is the future of mobile communications that is of concern to Canadian mobile consumers, not the past!

10 As examples, some of the documents quoted are : • Competition Bureau, Acquisition of Microcell Telecommunications Inc, by Rogers Wireless, Backgrounder, Completed in 2004, Publicly released in April 2005 • CRTC Order from 1997, notably in the case of request for mandated and resale in the 1990s which was declined , notably in Telecom Order CRTC 97-1797 , when the telecom mobile market did not consist of 3 major incumbents, but actually had two emerging new entrants, Clearnet and Microcell. • Telecom decision CRTC 98-4, Joint Marketing and Bundling, March 24, 1998, again when the Canadian market was being developed by 2 new entrants in addition to incumbent carriers. • Telecom Decision CRTC 2003-26 on an Application by Microcell regarding alleged contraventions of Section 27(2) of the Telecom Act by Rogers Wireless and Bell Mobility

22 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

We also note with interest the use of the rule of three facilities-based players that is used to trigger a forbearance application in the wireline telecommunications segment to justify the fact that the Canadian mobile market, with its 3 national players, is fully competitive and therefore that no special measures are necessary to stimulate entry.

The objective of the rule of 3 facilities-based players is to deregulate prices, not to prevent or stimulate entry by new carriers. It also does not imply that 3 carriers is enough, only that retail pricing can be disciplined by the presence of 3 independent facilities-based carriers.

Prices for mobile services in Canada have been deregulated for many years. The rule of three facilities-based players simply does not apply to the question “Is there a need for special measures to stimulate entry in the Canadian mobile market?”

Unlike wireline telecommunications, mobile requires spectrum, a public resource to which access is government controlled.

2.4 The presence of MVNOs and resellers does not make the Canadian market competitive; the actual level of success (or lack thereof) achieved does matter

Mobile Virtual Network Operators and mobile resellers cannot be considered real and sustainable competition under the present conditions in Canada.

This is evidenced by the recent failure of Amp’d Mobile, one of the best financed MVNOs to be launched, crumbling under a mountain of debt.

Rogers claims it supports 24 data resellers11. At p. 57 of its submission, Rogers states “The MVNO market has taken off in the last few years with Rogers alone having five

11 Rogers May 25th submission, p. 6. 23 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

direct arrangements with resellers and supporting many other indirect relationships with resellers for voice services, and 24 arrangements for data services”. It should be noted that Canadian mobile carriers do not report their wholesale subscribers any more. In the very recent past, the total number of wholesale subscribers was negligible and growing at a snail’s pace; a clear evidence of the difficulty experienced by resellers.

To demonstrate this, Figure 1 highlights the total number of Rogers Wireless reported wholesale subscribers after the acquisition of Microcell until the third quarter of 2006, when Rogers stopped reporting this information. As of the end of IIIQ 2006, the total number of Rogers wholesale subscribers stood at 132,000 (notably including subscribers from Videotron Ltd, as well as of the numerous other resellers claimed by Rogers). It also includes subscribers from Primus. In all, it represents approximately 2% of the entire customer base of Rogers and can barely be considered material in the overall Canadian market. Rogers adds of the order of 8,000 wholesale subscribers on average per quarter.

24 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

Figure 1 - Recent evolution of wholesale subscribers for Rogers Wireless

Rogers Wholesale Subcribers

140,000

120,000

100,000

80,000

60,000

40,000

20,000

- 2004 Q4 2005 Q1 2005 Q2 2005 Q3 2005 Q4 2006 Q1 2006 Q2 2006 Q3

The most successful MVNO in Canada is Virgin Mobile Canada in which Bell has 50% equity participation. Virgin Mobile Canada has reportedly captured of the order of 400,000 mobile subscribers. If we add the Rogers wholesale customer base to Virgin Canada, we get less than 550,000 mobile subscribers served via these numerous competitors.

We can make a reasonable assumption that the entire MVNO and reseller market in Canada likely does not exceed 700,000 subscribers out of a total of 18.6 million, or less than 4% market share for all these resellers and MVNOs.

Not a huge success to speak of.

25 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

As a matter of fact, after more than 10 years of “encouraging resale and MVNOs on a voluntary basis (i.e. without mandated obligations to incumbents)”, it amounts to a dismal performance.

We are baffled by the Rogers comment in its submission that the MVNO market has “taken off in the last few years”. The actual results clearly indicate otherwise.

The actual results of mobile resale and of the MVNO market in Canada should undoubtedly be viewed as a call to action for the Canadian government.

Videotron fully echoes these conclusions from its own experience. A MVNO cannot provide the latest technology, handsets or services to its customers. A MVNO cannot be differentiated by coverage. A MVNO cannot innovate. A MVNO does not have any leeway. In a reseller model, the mobile carrier control what it will allow.

While the MVNO model may be suitable for small niche applications, it is completely inapplicable to bring widespread competition in mobile in Canada and to entrepreneurial companies looking to bring their customers the latest innovation at the best possible prices. To even pretend that it is, is simply a convenient argument to support the complacent view that the Canadian mobile market is doing just fine, thank you very much!

2.5 The last chance for facilities based entry but not for incumbent mobile carriers

QMI reaffirms its strong opinion that the upcoming auctions for AWS spectrum are the last chance to increase the level of competition in the Canadian mobile market, for the benefit of all Canadian consumers. It is important that the Government not let this opportunity slip away by yielding to the well coordinated public outcry from the three major incumbents, Bell, Telus and Rogers.

26 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

The incumbent mobile carriers will have many opportunities to supplement their spectrum holdings in future spectrum award processes, including the 700 MHz spectrum. However, such is not the case for potential new entrants to the upcoming auction. Owing to the level of maturity of the Canadian mobile market, the time for new entry is now or never.

Respectfully submitted, now is the last call!

It should therefore be expected that incumbent mobile carriers speak in unison against any measure that would bring more competitors into their protected gardens.

Other Governments have faced similar onslaught from incumbent mobile carriers but have fortunately persevered. Mandated roaming was also a significant issue in the UK when it was imposed. This is highlighted by LYA in their discussion of the 3G auction and its rules in the UK in 2000 and submitted by QMI as an Appendix on May 25th12.

Of note, it was also a material factor in the decision of the winning new entrant in this auction, namely Hutchison, to participate at all. “The UK put in place a suite of strong criteria and policies to stimulate entry • Mandated roaming on the incumbents’ 2G networks on reasonable commercial terms, a condition put in place for until 2009. In a case of dispute, the regulator could set a rate at “retail minus”.13 This was initially met with a legal challenge from two of the incumbents (One2One and Orange), although the initial ruling in their favour was subsequently overturned on appeal. With four incumbents, the issue was eventually resolved when two of them (BT and Vodafone) agreed to voluntarily providing roaming.14 The respective licenses of BT and Vodafone were subsequently modified to require them to negotiate a roaming agreement on

12 A Discussion of Spectrum Licence Conditions and the Impact on New Entrants, October 2006 (May 2007 update), p., 27.

13 Information Memorandum, op. cit., page 43 14 Klemperer, op. cit., page 15 27 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

request by a new entrant.15 National roaming was indeed a determining factor in the decision of Hutchison of Hong Kong (that backed TIW and eventually became 3 UK) to participate in the auction…“The statements in the information memoranda regarding national roaming were a material factor in Hutchison 3G’s decision to participate in the auction process and in its valuation of the license.”16 .

As a point of interest, Hutchison was much rumored to be considering a participation in the Canadian PCS auctions in 2001. In the end, they did not. Of course, Canada has yet to set in place adequate mandatory rules for roaming.

Mandated access to digital seamless roaming applied across voice, data and video services and negotiated pricing with adequate dispute resolution mechanisms are the key elements of QMI’s recommendations to the Government to provide a reasonable chance of success to new entrants.

15 Information Memorandum, op. cit., page 1 16 Response by Hutchison 3G UK Ltd to the OFTEL Consultation on its Proposals to set a national roaming condition after 25 July 2003, 24 July 2003, paragraph 1.3 28 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

2.6 The critical requirements for the spectrum auctions to be a success for all Canadians

Our overwhelming conclusion remains that the only explanation for the differences in penetration, pricing, capital investment levels and technology deployment in Canada versus the US is that the level of competition in Canada is much lower, indeed that the market is a well coordinated oligopoly and that only new entrants can bring the full benefits of competition in wireless that Canadians so much deserve.

There is close coordination between the top three mobile carriers as evidenced by their responses to the consultation, even though their spectrum holdings vary significantly between carrier and between regions across the country.

If only to highlight this point, the CWTA has even recommended that the spectrum band 1670-1675 MHz be awarded to a consortium formed undoubtedly of the major mobile carriers, a suggestion that should be strongly opposed by anyone really in favor of competition!

The Canadian government needs to heed this call for action now….before it is too late!

A spectrum set aside is required, not only because the Canadian market is not sufficiently competitive and because incumbents have a well documented prior behavior of preventing entry (absent set aside), but also because new entrants are significantly disadvantaged by the foreign investment restrictions currently in effect in Canada.

No serious potential contender can consider the possibility of real and sustainable entry in this market, if spectrum cannot be awarded on reasonable terms and conditions to new carriers.

29 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

QMI, via Videotron Ltd., will commit in excess of $500 Million in capital investment to build its state of the art 3G network in Quebec alone, an investment which will not take place if a spectrum set aside is not put in place as well as mandated seamless digital roaming.

Only Canada’s government can resolve this issue and can prevent the hoarding of spectrum that is about to take place, if sufficient spectrum set aside is not implemented as part of auction rules and adequate license conditions not imposed on mobile carriers in Canada.

30 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

3. Lies, damned lies and statistics: The Myth promoted by the Big 3 Canadian incumbents that there are only 4 mobile players in the US

In its submission of May 25th, in its discussion of the adequate number of mobile carriers in any given country, on p. 7, Rogers states the following: “Another eleven have just four operators, including the United States, a country with about ten times the population of Canada.

We are often beguiled by the data being heavily promoted by each of the big three national mobile carriers in Canada.

The following Figure, from CTIA, and Tables highlight that, to the contrary, the average US city is served by 5 or more mobile carriers and that this number increases to 7 or 8 mobile carriers on average, after the new licensees post AWS auction are taken into account.

The Tables represent the number of mobile carriers in a total of 22 US cities similar in size to Montréal and Quebec City, all across the US.

Definitely, there are much more than 4 mobile carriers per city in the US. Often there are 8. This is twice as much as the maximum number of 3 mobile carriers currently operating with mobile spectrum of its own in any given Canadian city.

The new carriers in US cities were often regional mobile carriers expanding their reach and thus increasing the overall competitive rivalry in new markets.

Again, figures often beguile us…

31 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

Figure 2 – Mobile Telephone Operator Coverage Estimated per County

(Source CTIA May 2007)

32 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

Table 2 – Average number of mobile carrier per city in the US-pre and post AWS auction

Average number of network-based mobile providers Average Average Number of US Existing PCS Potential new Total census Mobile cities analyzed and cellular operators from Existing + new population penetration * operators AWS auction (2) with AWS Cities similar to Montreal 10 3,378,615 78% 5 2 7 Cities similar to Quebec City 12 653,670 70% 5 3 8 * Penetration based on FCC data for Economic Area licenses © Lemay-Yates Associates Inc., 2007

Table 3 – Details on the number of mobile carrier per city in the US; pre and post AWS auction

Network-based mobile providers Census Mobile Existing PCS Potential new Total Market area population penetration (1) and cellular operators from Existing + new operators AWS auction (2) with AWS Dallas 5,819,475 78% 5 2 7 Atlanta 4,917,717 92% 6 1 7 Detroit 4,488,335 85% 5 2 7 Seattle 3,203,314 79% 4 3 7 Comparable to Montreal Minneapolis 3,142,779 71% 5 2 7 (3.6M pops) St. Louis 2,778,518 70% 5 2 7 Tampa 2,647,658 85% 6 1 7 Pittsburgh 2,386,074 64% 5 3 8 Denver 2,359,994 80% 5 2 7 Sacramento 2,042,283 79% 6 2 8 Albany NY 848,879 65% 4 4 8 Albuquerque 797,940 71% 6 2 8 El Paso 721,598 60% 6 2 8 Akron 702,235 64% 5 3 8 Columbia, SC 689,878 73% 4 4 8 Comparable to Quebec City Toledo 656,696 62% 5 3 8 (700k pops) Knoxville 655,400 72% 6 3 9 Little Rock 643,272 68% 6 3 9 Charleston 594,899 80% 4 4 8 Wichita 587,055 68% 6 1 7 Fort Myers 544,758 95% 6 2 8 Mobile 401,427 67% 7 3 10 (1) Penetration per FCC Economic Area penetration (11th CMRS report) (2) Including Comcast's SpectrumCo which includes Sprint Nextel as minority owner (5%) © Lemay-Yates Associates Inc., 2007

33 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

The myth being promoted by the three biggest mobile carriers in Canada is only meant to dull our senses into false complacency that if 4 carriers is OK in the US, then three carriers in Canada must be more than sufficient.

Again, the widespread use of this myth by the Big 3 Mobile carriers in Canada is a call for action by the Canadian government and obviously, as demonstrated by this information, there is substantial urgency.

34 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

4. Prices in Canada are much higher than in the US: A situation that should not be tolerated

In its May 25th Submission, Bell Canada concedes that mobile prices in Canada are higher than in the US by stating the following, on p. 24:

“The subscriber base of the smallest U.S. carrier is still bigger than the whole Canadian industry. Just by virtue of economies of scale, U.S. rates should be lower than rates in Canada and most other countries.”

First of all, we would correct Bell Canada and note that there are many US wireless carriers with a subscriber base much lower than Bell Canada, Telus or Rogers.

More specifically, we highlight that as per the list of US carriers compiled by the FCC and reproduced in the following Table, there are at least 25 carriers active in the US. Out of these 25, 21 have a subscriber base smaller than the entire Canadian industry and 20 have a subscriber base lower than the smallest carrier out of the Big Canadian 3. So much for the Bell affirmation that “The subscriber base of the smallest U.S. carrier is still bigger than the whole Canadian industry.”

35 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

Table 4 - Top 25 Mobile Telephone Operators by Subscribers (in thousands)

Source: FCC, Eleventh Annual Report to Congress on the State of Competition in the Commercial Mobile Radio Services (CMRS) Industry, FCC 06-142, p.102.

Second, we would bring forth the fact that Canada boasts much lower prices than the US in wireline telecommunications services, as Videotron is well aware, be it for telephone service or for High-Speed Internet service, notwithstanding our supposedly lower economies of scale.

It is the fact that Canada only has a maximum of 3 mobile carriers in Canada per market that is the main reason why prices in Canada are so much higher than in the US.

36 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

The following Tables highlight the significant price differences between US and Canadian mobile prices (as assessed by LYA in IV Q/2006 and IQ/2007).

In addition to the evident conclusions of consumer gouging by Canadian incumbents, we would also like to highlight the material additional differences:

• System access fees: ranging from $0.45 US in the US to a maximum of $2 versus $7 to $9 in Canada • Long distance charges: virtually obliterated by US carriers versus $0.2 to $0.3 Can per minute in Canada.

Table 5 – Overview comparison of US/Canada pricing for basic and big bucket packages

Basic package Big bucket package Long Package (per Long distance Package Minutes Minutes distance (per month) (per minute) (per month) minute) Average Canada plan ($ Cdn)$ 34 188 $ 0.30 $ 196 1,367 $ 0.20 Average US plan ($ US)$ 36 400 $ - $ 173 5,250 $ - © Lemay-Yates Associates Inc., 2007

37 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

Table 6 - Detailed comparisons of US/Canada pricing for basic and big bucket mobile packages

Basic package Big bucket package System Long Package (per Long distance Package access Minutes Minutes distance (per month) (per minute) (per month) fee minute) CANADA ($ Cdn) Bell Canada$ 25 50 $ 0.30 $ 105 1,000 $ 0.30 $ 8.95 Rogers Wireless$ 25 200 $ 0.30 $ 155 1,500 $ 0.30 $ 6.95 Rogers - Urban FIDO$ 30 400 $ 0.30 n/a n/a n/a$ 6.95 Telus Mobility$ 25 100 $ 0.30 $ 305 1,600 $ - $ 6.95 US ($ US) Two-year contract rates Cingular$ 39.99 450 $ - $ 199.99 6,000 $ - $ 1.99 Verizon$ 39.99 450 $ - $ 199.99 6,000 $ - $ 0.45 Sprint Nextel$ 29.99 200 $ - $ 149.99 3,000 $ - $ 1.50 T Mobile$ 29.99 300 $ - $ 129.99 5,000 $ - $ 0.86 Alltel$ 39.99 700 $ - $ 199.99 6,500 $ - $ 1.00 US Cellular$ 29.99 300 $ - $ 149.99 5,000 $ - $ 0.55 Noncontract rates MetroPCS$ 43.00 unlimited$ - n/a n/a n/a$ 0.55 Cricket$ 30.00 unlimited$ 0.08 n/a n/a n/a$ 0.55 US Prices are for two-year contract "individual plans" except for MetroPCS and Cricket which do not require contract US plan prices exclude regulatory pass-through fees such as USF and gross receipts tax Telus "big bucket" package is 3-year contract only; other Canadian packages are 1, 2 or 3 year contract rates Prices exclued 911 access All packages include voice mail and other features, system access or regulatory recovery charges (estimated for some US carriers) © Lemay-Yates Associates Inc., 2007

If Canadians use less minutes on their mobile phones than US consumers, it is simply because it is too expensive.

One cannot use US minutes of use averages and apply them to the Canadian market to twist the above price comparisons. As every business person well knows, it is price which will impact the demand for these services and not the reverse. Corporations will not decrease prices if the usage of their products or services keeps on increasing.

If higher prices for voice services were not enough, Canadians also pay substantially more for mobile data services, a key contributor to economic productivity. This is demonstrated in the following figure which highlights that in Canada, the cost to transmit

38 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

500 Mb of data on any of our three national carriers is four, five or even more than 6 times than what it costs in other countries.

No wonder that this is then reflected in the lower percentage of revenues generated by mobile data services by Canadian mobile carriers, as was demonstrated in QMI’s May 25th submission.

Figure 3 – Cost to transmit 500 Mbytes on selected worldwide carriers Source: Kazam (carriers’ websites as of June 15, 2007)

Cost to transfer 500MB

$1,800.00

$1,600.00

$1,400.00

$1,200.00

$1,000.00

$800.00

$600.00

$400.00

$200.00

$0.00 Telstra 3 O2 Orange O2 T-Mobile Vodafone Cingular Sprint Bell Rogers TELUS Australia UK Germany USA Canada

39 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

5. Level of innovation and new technology deployment in Canada vs. the US: we have fallen behind and fast action is required to catch up

5.1 3G network technology deployment

As part of the submission of Bell Canada, in Appendix 4 entitled “The State of Wireless Technologies in Canada17”, QSI states “The Canadian mobile wireless industry is keeping pace with the United States … in terms of deployment of next generation mobile wireless technology and services, and leads the US in certain respects”.

Unfortunately, it just isn’t so!

An announcement of the availability of a new technology is far from meaning that all Canadians have access to it. As a matter of fact, the information placed on the public record on May 25th fails to mention the reach of new technologies in Canada versus the US, a very peculiar omission.

As an example, HSDPA has been available since April 2007 in Toronto. Rogers offers the service to this limited area with 2 HSDPA handsets, PDA and 1 consumer phone.

Based on our primary research in Rogers’ store, Montreal consumers will have to wait until October to be able to benefit from HSDPA technology.

In contrast, AT&T now offers 7 handsets with HSDPA including 2 PDAs and 5 consumer HSDPA phones. AT&T launched HSDPA in the US in 200518. It now covers 165 cities and 73 of the top 100 cities in the US with its HSDPA network.

17 18 GSM Association, Case Study Series, “Raising the bar for mobile broadband today.” 40 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

In its May 25th Submission, Telus states the following: regarding its current footprint for EVDO technology19.

“In Alberta, the TELUS footprint now extends to virtually 100% of its coverage area and the EVDO footprint nationally now reaches 67% of the population…. TELUS has already begun to upgrade its EVDO service to EVDO Rev A commencing in 2007.”. TELUS offers no indication as to when mobile telephone service using EVDO Rev A will be available.

TELUS promoted the fact that it now offers EVDO to two thirds of Canadian consumers while at the same time US carriers boast that they provide EVDO Rev A , i.e. the next generation of EVDO technology, to two thirds of the US population.

TELUS is thus fully one technology generation behind US carriers. This is not what we would refer to as being in the same timeframe or even a fast follower!

Videotron is well known for offering the latest technology and fastest network access to its entire subscriber base, and not only to cherry-picked customers in major urban centers.

Videotron would leverage the same know-how and operational expertise in mobile services, with substantial benefits to consumers and business productivity in Canada.

We also highlight the factual error made by QSI on p. 7 “Rogers substantially completed the integration of Microcell (which changed its name to FIDO) networks in 2005 …” (BOLD added for emphasis).

The fact that FIDO was the commercial brand used by Microcell since its inception should have been relatively easy to verify and this does cast doubt on the accuracy of information in the QSI report.

19 Telus submission, p. 36 41 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

5.2 The penetration of Blackberrys® in Canada vs the US

Arguments were put forward that the penetration of Blackberry® terminals was twice as high in Canada as in the US as proof of the level of technology deployment in Canada20. QSI states, on. p.28 of their Report, “In terms of Blackberry® penetration per mobile wireless subscriber, Canada (with 2.5%) currently exceeds the US (with 1.5%) by one percentage point.”

The methodological problems with the analysis developed by QSI are numerous.

Firstly, we note with interest that the comparison was not made on overall sales of mobile PDAs but on one particular brand, the Blackberry, which is Canadian based.

Blackberrys®, while wildly successful, do not represent the entire market for business PDAs in Canada nor in the US.

As a matter of fact, it seemed very likely that US carriers might offer a broader variety of PDAs for business and consumer applications than what Canadian carriers do, and verification of this fact was easily completed.

As shown in the following Table, based on the PDAs offered by Cingular and Verizon, Blackberrys® represent of the order of 35% of the market wide offer21. In Canada, this proportion is over 40% as highlighted by the analysis of the market offer of Bell, Rogers and Telus.

20 QSI report, submitted by Bell Canada, etc.. 21 Market research conducted in June 2007 42 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

Table 7 – A Canada/US comparison of PDAs offered by Selected Mobile Carriers22

US Carriers Canadian Carriers Cingular / AT&T Verizon Bell Rogers Telus BlackBerry 41% 30% 36% 58% 38% Cingular / AT&T 27% 0% 0% 0% 0% HP 0% 0% 0% 8% 0% HTC 0% 0% 0% 17% 0% Motorola 0% 20% 27% 0% 13% Nokia 9%0%0%8%0% Palm 18% 30% 27% 8% 25% Pantech 0% 0% 0% 0% 13% Samsung 5% 0% 0% 0% 0% UTStarcom 0% 0% 9% 0% 13% Verizon 0% 20% 0% 0% 0% Total PDAs Offered 22 10 11 12 8 © Lemay-Yates Associates Inc., 2007

In addition, the QSI analysis does not take into the fact the “somewhat significant” differences in penetration between Canada and the US, where the US enjoys a much higher penetration than Canada.

If the same QSI analysis is recalculated only including the impact of wireless penetration, thus Blackberry® penetration being estimated on a per population basis, the differences between Canada and US vanishes, in spite of the fact that the market offer for wireless PDAs in the US is broader than what is found in Canada ! This is highlighted in Table 7.

We would further note that this does not take into account the slowdown in Blackberry® sales in the US in recent years caused by its patent litigation difficulties.

22 US carriers offer their own branded PDAs. 43 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

Table 8 - Blackberry® Penetration as a percentage of the population (Without taking into account all other mobile PDAs offered)

2007 2006 2005 US 1.53% 1.058% 0.594% Canada 1.78% 1.298% 0.738% Difference 0.248% 0.240% 0.145% © Lemay-Yates Associates Inc., 2007

If we would then adjust for the fact that there are many more choices of PDAs offered by mobile carriers in the US than in Canada, then we would conclude that the overall penetration of PDAs in service in the US is higher than what is found in Canada, even considering that this wonderful technology was invested in Canada and that Research In Motion is the worldwide recognized leader in this field.

Finally, the QSI analysis is based on reporting by RIM which highlights revenues from Blackberry® services per country but not the average monthly price achieved per region. This therefore assumes that US prices are similar to Canadian prices. While RIM does not report its ARPU per country, based on the lower prices offered in the US and on the higher volumes achieved, one can assume that monthly revenue to RIM for US units are lower than those in Canada. This would also increase the QSI estimate of the number of Blackberry® units in service in the US.

The conclusions reached by QSI that Blackberry® penetration in Canada is twice as high as that achieved in the US have been disproved and should be discarded.

Blackberry® penetration alone cannot be used as a proxy to assess the level of technology deployment in Canada vs the US based on the facts provided by Bell and on the critique provided above.

44 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

5.3 Concluding remarks on the question of new wireless technology development in Canada

In the course of the May 25Th submissions to the Department, none of the incumbents felt the need to comment on their own performance nor to justify their demand to participate in the auction, and indeed to dominate it (if recent examples are a predictor of the next round), other than by stating that they all really need spectrum without any justification or quantification.

They provided, at best, a sketchy outline of how they would introduce more advanced technologies, and at what speed. The goal described by Industry Canada in the consultation document – of delivering advanced wireless services to enhance Canadian competitiveness – seems hardly to have distracted them at all.

Rather, each spent most of their submission attacking the concept of new competition with an indignation which signaled very clearly their view that the Canadian market exists to serve their corporate interests. We have a display of smugness; what’s good for Bell, Telus and Rogers is good for Canada.

This attitude, silhouetted against a dismal record of price and innovation, is deeply offensive.

The slow development of advanced wireless applications, of course, speaks for itself; as owners of highly lucrative wireline telephone networks, the incumbents are scarcely motivated to invest in cannibalizing new technologies.

But it is still striking that in their documentation the incumbents fail to acknowledge any shortcomings at all. Instead they smugly insist that prices are low, service is high, innovation is rampant, etc. despite ample evidence to the contrary.

45 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

Far from promising to do better for Canada, they signal clearly that, if allowed to sweep the table clean in the upcoming auction as they have done in the past, they will carry on as before. And this is a prospect that Canada cannot countenance.

6. Mandated Seamless Digital Roaming

To date, not one of the incumbents has acknowledged the position of QMI regarding roaming. QMI’s recommendation to the Department is:

• Mandated access, • Negotiated pricing, and • Adequate arbitration measures via the Competition Bureau to ensure quick resolution of any disagreement.

Mandated roaming is a must with regional carriers. One cannot imagine the public outcry if mobile customers to regional mobile carriers in Canada were not able to roam outside of their home coverage areas because of the roaming conditions put forward by the mobile incumbents, which would constitute an effective denial of service. As already explained by QMI, this situation is exacerbated in Canada since we have a GSM monopoly.

Telus, Bell Canada and Rogers articulated their opposition to mandated roaming by focusing on their strong opposition to prices fixed by a regulatory intervention and on the fact that mandated roaming would provide a disincentive to investment in networks by new entrants.

At p. 65 of its May 25th submission, Telus states “ Mandated roaming has the potential of discouraging the build out of competing networks- a new entrant can acquire one or two key cities and rely on mandated roaming at another party’s expense to provide high cost coverage “.

46 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

QMI would like to highlight that roaming services will be offered against adequate compensation, and therefore not at the expense of another party. .

Mandated roaming certainly does not reduce the incentive for new entrants to build out networks. As per QMI’s recommendations, new entrants would have the obligation to serve 50% of the population of their Tier 2 license areas within 3 years, a quite aggressive network build-out requirement which even surpasses the suggestion put forward by Rogers.

All new entrants would have substantial motivation to further lower their cost structure by continuing the build out of their license areas. But there is no doubt that they will require roaming in areas where they do not own spectrum. This will not reduce competition in Canada; it will provide a major boost to services provided in all regions and to competitive rivalry.

It will enable the same level of competition in mobile services as what is found now in wireline services across the country.

Mandated digital seamless roaming is required because 1) it is a necessity for regional mobile carriers. 2) Canada is an oligopoly when it comes to mobile and 3) because Canada has a GSM monopoly.

Mandated roaming across all services i.e. including voice, data and video, is a must because this is where the future of mobile communications and of the mobile web resides and new entrants cannot build a credible business case based on yesterday’s services.

Further comments discussing the status of roaming in the US illustrate the point that the number of incumbent carriers as well as the number of carriers using a specific technology (GSM or CDMA) has a direct impact on the need for intervention in the case of roaming.

47 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

In its review of the merger of Cingular and AT&T Wireless in 2004, the FCC determined that the continued presence of two nationwide and numerous regional GSM-based carriers would be sufficient to ensure ongoing availability of roaming services at competitive rates.23

In the Alltel-Western Wireless and Sprint Nextel mergers, the FCC chose to continue to only require manual roaming since this ensures that customers are provided with service and if rates are unreasonable there is an avenue to complain.24

However, the FCC initiated a further review of roaming, the record of which is not yet complete, specifically seeking input such as:25

Are there instances in which providers refused to enter into automatic roaming agreements with other providers with compatible systems, or where they have discriminated with respect to the prices or other terms on which they make roaming agreements available to different carriers? We also seek comment on whether CMRS industry mergers could increase the incentive for large, nationwide carriers to deny automatic roaming agreements to their local or regional competitors.

It should be kept in mind that in most US markets there are 5 to 7 carriers, and in some cases this will increase to up to 10 carriers after the 2006 AWS auction.

This is in stark contrast to the Canadian market, pre-AWS, where there is a maximum of three carriers per market. The two CDMA carriers (Bell and Telus) already have an enhanced roaming and resale agreement between themselves and Rogers is the only GSM carrier.

Without mandated roaming in Canada, any reasonable agreement is unlikely to be attainable.

23 FCC 05-160, paragraph 13 24 FCC 05-160, paragraph 16 25 FCC 05-160, paragraph 27 48 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

If Rogers refuses to enter into a roaming arrangement with a GSM-based entrant, then there is no other potential roaming partner to turn to. Bell-Telus, via their own “enhanced” arrangement no doubt would see this as an incentive to deny a similar level of capability to smaller competitors.

If the FCC in the US feels that these are issues worthy of consideration with up to 10 providers per market, it should be considered not only worthy, but urgent and critical to review the situation in Canada.

Smaller and regional carriers in the US believe that “competitive market forces alone are no longer sufficient to ensure that they will be able to provide their customers with reasonable affordable access to automatic roaming services.”26

This was reiterated more recently by MetroPCS, citing the time lag in the consideration of automatic roaming and the increased consolidation of the industry as disadvantaging it and other smaller carriers in terms of negotiating automatic roaming arrangements at reasonable rates.27

A grouping of 25 regional carriers in the US has proposed “roaming principles” to address these issues, as shown below.

26 Letter from SouthernLINC Wireless, Leap Wireless, MetroPCS, Bluegrass Wireless and 21 other carriers, addressed to Kevin J. Martin, Chairman FCC, September 20, 2006 27 Letter from MetroPCS to Marlene H. Dortch, Secretary FCC, Notice of Ex Parte Communication, March 2, 2007 in WT Docket No. 05-265 49 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

Table 9 – Roaming principles proposed in the US

The above proposed principles for roaming would provide a good template for Canada as the underlying technologies and networks are the same, and in particular given the greater patchwork in licensing that will likely result from the upcoming AWS license auction.

50 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

Given that Canada has two regulators with oversight responsibility for mobile – Industry Canada under provisions of the Radiocommunications Act and the CRTC under the Telecommunications Act – certain aspects of the proposed principles would fall under the jurisdiction of one or the other.

7. AWS Band plan

The incumbent mobile carriers in unison have recommended that Canada adopt exactly the same band plan as the US, instead of the Department’s proposal, based on various arguments including spectrum efficiency and the cost of handsets and base stations.

The Incumbents’ proposal would have the very detrimental impact of removing the 30 MHz license currently part of the AWS band plan proposed by the Department.

This recommendation by the incumbents should be seen for what it is, namely another attempt to ensure there is no license for a new entrant, anywhere in the country. This eventuality was also recognized by the Commissioner of Competition in her May 25th submission at par. 56.

“ For example, adapting the band plan to the needs of incumbents can discourage entry, especially when the needs of incumbents differ from those of new entrants.”

Any cross border frequency sharing issues can be easily managed compared to the overriding need for a well spectrum-endowed new entrant to increase public welfare Canadians deserve from mobile communications.

QMI strongly recommends that the Department retain the AWS band plan with the 30 MHz E licence as proposed in DGTP-002-07.

51 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

8. AWS Service Areas

All incumbents, also in unison, have indicated their preference for either a national or only Tier 2 license areas.

For example, “Telus recommends that the department utilize Tier 2 licence exclusively.28”.

QMI strongly opposes these proposals.

QMI believes that it has demonstrated the substantial beneficial impact of regional licenses in the US. The recent AWS auction saw a large number of licenses awarded to small players, which then results in providing better service to more rural areas.

QMI also highlights again the comments from the Commissioner of Competition, which has noted in her May 25th submission at par. 56.

“The band plan and the service areas can also play an important role in promoting competition”

Furthermore, as is demonstrated earlier in this document, it is a complete myth to promote the concept that the US market is only served by 4 players. Regional carriers are alive and well in the US and are a key element of the higher competitive rivalry seen in this market compared to Canada.

QMI strongly reiterates its proposal that AWS licenses be awarded on service areas as per the Department’s original AWS service areas as described in DGTP-002-07.

28 Submission by Telus Communications Company, in response to Gazette Notice No. DGTP-002-07, 25 May 2007, p. 74. 52 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

In addition, we include with our reply comments two letters indicating that mobile access in various regions of Quebec is a real problem for economic developments (See Appendix C) and that more competition and new mobile carriers in all regions of Canada are needed to rectify this problem and support Canadian businesses and consumers outside of the larger cities.

While it is a fact that a national alternative carrier may eventually emerge from a multitude of smaller regional carriers, it is also clear from the experience to date that national carriers do not have the incentive to bring new technologies and services to the less densely populated areas of the country.

In retrospect, prior decisions not to ensure that mobile spectrum be awarded to regional mobile carriers appear to have contributed significantly to the oligopolistic nature of the Canadian mobile industry and to the lack of adequate services in more rural areas of the country.

It is not too late to change this and to ensure that Canadians everywhere in the country have access to the latest technologies and services available from mobile telecommunications.

These services are a necessity, not a luxury. A recent promotional letter from Mr. Wade Oosterman, President of Bell Mobility, claims that a Blackberry service provides its users with one additional hour per day of productive time “Saviez-vous que les utilisateurs d’un appareil Blackberry gagnent 60 minutes supplémentaires de temps productif chaque jour 29?”

These types of benefits are required for all businesses and consumers in Canada, not just those in urban areas. It is critical to ensure that mobile telecommunications can fully contribute to increasing Canada’s productivity and the growth of the Canadian and Quebec economy everywhere.

29 See the Bell letter in Appendix D to these comments. 53 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

Awarding mobile spectrum to new entrant regional carriers in all areas of Canada is the key to make this happen.

9. Licence terms and conditions

QMI reiterates its agreement with AWS licence terms longer than 10 years. QMI has proposed 20 years in its May 25th submission.

QMI believes that the interim network deployment requirements it has proposed consisting of 50% of the AWS licence area population to be served within 3 years is an adequate measure to ensure proper utilization of the spectrum by new entrants and that no other measures are required.

Bell Canada has submitted that the Department should consider the use of indefinite licence terms as indicated below.

“Bell Canada submits, for the reasons discussed below, that it is now timely for the Department to seriously consider, assuming ongoing compliance by licensees with conditions of licence, the use of indefinite licence terms for wireless service providers operating as radiocommunication carriers who acquire spectrum through an open market auction (i.e. without the assistance of regulatory intervention such as set- asides).”30

QMI strongly disagrees with the Bell Canada proposal for indefinite license terms, even in light of the sizable investments already made and to be incurred in the future by all licensees.

Spectrum is a scarce public resource and Canada’s government needs the ability to ensure that it is always used in the best interest of the Canadian public.

30 Bell Canada's Response to Specific Questions Raised in the Department's Consultation Paper 54 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

It is most definitely against public interest that any entity could hold on to any mobile spectrum for any definite period of time considering the often volatile evolution of telecommunications markets, the evolution of the competitive landscape in telecommunications in Canada as well as the issues related to foreign investment in Canada.

55 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

10. Appendix A – Leveling the Playing Field: Efficiency and Revenue Arguments for License Set Asides

Daniel R. Vincent Professor of Economics, University of Maryland, College Park, MD 20742 [email protected] June 20, 2007

1. Introduction

Competitive auctions are often touted as effective mechanisms for efficiently allocating scarce resources such as spectrum licenses. In many environments, a well-designed auction is transparent, is simple and places scarce resources in the hands of the economic agents who can use them best.

In contexts where potential bidders are ex ante symmetric (that is, they may have different privately known valuations for the resources but there exist no objective criterion by which to differentiate them), a symmetric auction is often desirable. However, in other contexts, where some bidders enjoy incumbency or other advantages, it has long been recognized that modifying the auction so as to counterbalance some of these advantages can be socially beneficial (see [2] or [5]). Some methods for achieving this goal include setting aside some resources for which only members of the disadvantaged group may bid (“set asides”) or offering bidding credits which require the advantaged bidders to outbid their weaker rivals by some pre-specified amount. These modifications can “level the playing field” and enable the auction outcomes to more closely approximate the social optimum.

This appendix describes the rationale underlying the arguments for these policies with an emphasis primarily on set asides and demonstrates why they may be helpful in achieving desirable social outcomes.

2. Incumbency Advantages in Spectrum Auctions

Suppose a single license is being sold at auction to one of n potential bidders. The “valuation” a bidder has for a license, π, reflects what the license is worth to the bidder gross of infrastructure costs, c, and the price of the license itself. For example, π would often be the operating profits generated by the license. In a “regular” auction, the bidder who typically acquires the license will be the bidder whose net value, π-c, is the highest. This property is usually a desirable one since it often implies that the firm that can generate the highest social value obtains the license – more efficient firms will be able to generate higher operating profits, π, and/or build out the network at a lower cost, c. 56 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

However, as first noted by Gilbert and Newbery [4] (see also [7]) in a related context, the valuation π is best thought of as the opportunity cost of failing to acquire the license. If all bidders are new entrants, then this opportunity cost is the foregone operating profit minus the build-out cost and the standard conclusions follow. If, instead, some of the bidders are incumbent firms in a wireless industry, then the opportunity cost of failing to prevent an entrant from acquiring a new license must be more carefully assessed.

Classical industrial organization theory informs us that per firm profits in imperfectly competitive industries decline with the number of independent firms (see for example [9]). Intuitively, as more firms enter the industry, we move along a spectrum from monopoly to perfect competition. For an incumbent firm, the opportunity cost of failing to acquire a license and enabling new entry in its market includes, in addition to the operating profits, the lost incremental profits that it had enjoyed from competing in an oligopoly with a smaller number of firms.

This extra effect generates an incumbent “preemptive incentive” that can enable incumbent wireless bidders to outbid entrant bidders even when operating profits minus build-out costs of the entrants exceeds that of the incumbents.

Furthermore, entrant bidders in the wireless industry are likely to experience significantly higher build-out costs than incumbent bidders. Jehiel and Moldovanu (2001) list a variety of reasons for this: the cost of base stations has already been sunk for much of the incumbent’s network (cEntrant>cIncumbent); and many of the network effect benefits has already been captured (πIncumbent> πEntrant).

Both the network advantage and the need to build out infrastructure suggests that even without the preemptive incentive, an entrant may face significant hurdles in acquiring spectrum in a symmetric auction. From a total surplus standpoint, this feature may argue in favor of allowing the incumbents to exploit their competitive advantage in the auction (since it reduces the need to expend social resources). However, as discussed later, this argument should be weighed against the benefits of increased competition in wireless for a complete evaluation.

Observe that financial constraints are not at the heart of these insights. Economic theory tells us that rational agents make their decisions by considering incentives at the margin. Thus, even potential entrants with sufficient financing would be subject to these effects – if the marginal profitability of acquiring a license is lower for entrants than for incumbents, then we should expect incumbents to outbid even deep-pocketed entrants unless the entrants are significantly more efficient than the incumbents.

These arguments lead Jehiel and Moldovanu [5] to argue, in assessing the European UMTS auctions, that “...[e]ntering the market by directly overbidding GSM incumbents seems quite difficult unless new entrants are much more efficient and therefore expect higher profits, or incumbents have tighter budget constraints etc.”. (p. 4). Without

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measures to level the playing field at an auction, entrants are likely to find it extremely difficult to outbid incumbents for spectrum.

3. Policy Instruments In Question

In both theory and practice, there exist a variety of ways an auction may be designed to counterbalance incumbency advantages. Set-asides refers to the practice of restricting bidding for a subset of licenses only to bidders who can plausibly be argued to suffer a disadvantage because of the incumbency effect. In the U.S. PCS auctions, the C and F Blocks were restricted to so-called “designated entities” – at various times this denoted minority or female owned businesses or small or very small businesses. In the UK UMTS auctions, bids for the A license was limited to new entrants. Set asides force incumbent bidders to bid on a more limited amount of spectrum and generally allow favored bidders, for example new entrants, to bid for all licenses in the auction.

Alternatively (and sometimes equivalently) spectrum caps could be imposed that would limit the ability of incumbent bidders to acquire all the spectrum available at auction. Initially, in the U.S., companies were limited in terms of how much bandwidth they could own; however, it abandoned spectrum caps in January, 2003.31

Another method for reducing incumbency advantage (or other exogenous advantages) is to offer bidding credits. Bidding credits operate by requiring the advantaged bidders to outbid other bidders by a specified amount (often a percentage) before they are deemed winners of the license. The FCC used bidding credits for very small businesses in the C and F Block PCS auctions. They were also employed to a lesser extent in the AWS auctions. Bidding credits have the advantage of allowing the auctioneer to calibrate the mechanism to account for a perceived disadvantage, however, in practice, it is unlikely that such detailed knowledge would be available. Bidding credits, unless they are very high, do not ensure new entry in a market.

Other tools that may be used to encourage auction participation and license acquisition by non-incumbents include selling more disaggregated licenses – entrants tend to be smaller in geographic scope and smaller licenses might be more likely to match their desired footprint – and favorable payment terms – to the extent that entrants are more likely to be financially constrained, these terms serve to fill a missing market.

Beyond auction-specific tools, policies such as mandatory roaming and co-location terms can serve to reduce some of the inherent disadvantages faced by entrants. Mandatory roaming reduces the network advantage of incumbents (πIncumbent> πEntrant ) and co- location agreements reduce some of the base station costs (cEntrant> cIncumbent) and may be socially desirable for other reasons.

31 Spectrum caps could be applied to the total amount of spectrum any firm can control, as was the case originally in the U.S. or to the total amount a firm can acquire in a particular auction, as was done for example in the UK 3G auctions. 58 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

4. Set-Asides and Efficient License Allocations

Generally, when firms with higher valuations acquire scarce resources, the outcome is socially desirable. However, this conclusion is reversed if the source of these higher valuations is the higher profits derived from preempting competitive entry to a market. In imperfectly competitive industries, the fewer the firms, the more likely that incumbent firms have the ability and incentive to raise prices and reduce output (in the wireless industry, this could mean either fewer minutes per subscriber or lower penetration or both). If the preemptive effect is present, it almost inevitably comes at a cost of foregone consumer surplus that exceeds the gain in private profits of the incumbents. As a consequence, standard social surplus measures would not tend to include this source of valuation as a desirable criterion to use to allocate scarce resources. Indeed, the presence of this type of valuation advantage would generally be an argument to limit such a bias. Set asides serve as a way to limit the distortionary incentives that incumbent license holders have for preempting entry.

5. Competition Arguments

Over and above efficiency arguments, competition policy also suggests reasons to encourage entry by implementing set asides. Suppose the preemptive effects were relatively minor but that the build out costs for entrants were higher than for incumbents as seems plausible (cEntrant> cIncumbent). On the one hand, fewer social resources are expended if the license were to go to an incumbent since it has already sunk many of the infrastructure costs. On the other hand, additional entry increases competition in the downstream market (the wireless market). The resulting lower prices and increased output may more than compensate for the need to pay the higher build out costs. This is a familiar argument of the second-best where society may be willing to incur some inefficiencies in terms of duplicating costs in return for the benefits of competition.32 The argument may be yet further reinforced if, as is sometimes asserted, consumer surplus is weighted more than firm profits in the social welfare function.

6. Revenue Implications of Set-Asides

While maximizing revenues from spectrum auctions is not a primary policy goal for governments, it is also not a given that license set asides result in a reduction of total revenues in an auction. Indeed, in some circumstances, license set asides can result in higher revenues.

Auction theory suggests that when bidders at an auction are heterogeneous, it is often revenue enhancing to bias the auction to favor the ex ante weaker bidders (see, for example, [8]). Intuitively, this policy is effective because it encourages effective price

32 Peter Cramton [2] reflects this logic in his assessment of set asides in the UK UMTS auctions: “On balance, setting aside the largest license for a new entrant probably was a desirable tradeoff between competition and efficiency.” (p. 53). 59 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

competition in the auction when otherwise the stronger bidder(s) would not face strong rivals. One way to achieve this goal is through bid credits for weaker bidders.

Set asides can also raise revenues relative to a symmetric auction by channeling the competition among the incumbents into one locus and the competition among entrants into another. It is known that auctions with reserve prices typically raise more revenues. Set asides can work in much the same way as a reserve price auction in that it reduces the expected number of licenses incumbents can win. They have an advantage over true reserve price auctions though in that, while (credible) reserve price auctions require that some valuable licenses not be sold with positive probability, here, the licenses that are not sold to incumbents are still put to productive (and revenue increasing) use by selling them to the entrants.

There is some reason to believe that this effect raised revenues in the UK UMTS spectrum auction. In that auction, there were four incumbent bidders and five licenses, the largest and most valuable of which (License A) was restricted to new entrants. Among the four remaining licenses, License B was the most valuable and two incumbents, Vodafone and British Telecom engaged in a vigorous bidding campaign to acquire it. In the end, Vodafone outbid BT, paying almost £6B for the license. The other three licenses were only 1/6 smaller and sold for about £4B. Peter Cramton, in a report commissioned by the National Audit Office of the United Kingdom argues that “...revenues would probably be slightly lower without the set asides.”([2] p.52).

A separate positive effect that set asides can have on revenues is by encouraging higher auction participation. Many auction theorists ([2] and [5] for example) believe that unless some actions are taken to level the playing field, incumbents are highly likely to obtain all licenses on offer. The anticipation of this result at the outset may discourage potential participants from even bothering to develop a business plan for spectrum licenses. A consequence is that the pool of prospective spectrum users (and therefore bidders) is diminished. Bulow and Klemperer [1] argue that the introduction of an additional bidder can be expected to have a stronger positive impact on revenues than most other auction modifications. In his assessment of why UK revenues reached such historically high levels, Cramton states

A critical choice impacting revenues was the decision to auction five licenses. Five licenses guaranteed that a new entrant would win a license. This certainty that an entrant would win created a strong incentive for potential entrants especially strong potential entrants to enter the bidding. Setting aside the largest license for a new entrant further intensified the incentive to enter ([2], p. 51).

Limiting who can bid for the restricted licenses typically lowers the price paid for those licenses (if they did not, then it is unlikely that entrants actually would acquire the licenses.) However, this does not necessarily imply reduced revenues overall. By

60 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

encouraging entry and promoting more competitive bidding, license set asides can lead to increased total revenues in a spectrum auction.33

7. Conclusion

In auctions, such as spectrum auctions, where incumbent wireless firms compete with entrants to acquire new spectrum, a variety of reasons suggest that incumbents have a bidding advantage over entrants. An incumbent may have a higher use value for the spectrum because of the positive network effects from its installed subscriber base and its build out costs are likely to be lower because many of the base station costs have already been sunk. Over and above this natural advantage, though, incumbents in imperfectly competitive markets have a preemption incentive that reinforces their willingness to pay for additional spectrum.

The higher willingness to pay due to the preemption incentive should be a source of concern rather than comfort for a government. This willingness to pay does not represent a cognizable benefit in a typical social welfare calculation since it usually is accompanied with larger losses in consumer surplus.

Governments may also wish to override the natural advantage incumbents enjoy if when this advantage results in too little entry and, therefore, too little competition in the downstream market. Set aside licenses are a way to counterbalance the incumbency advantage.

Furthermore, the use of this tool does not obviously come at the cost of lower auction revenues since set asides can promote greater price competition among incumbents for the licenses they are eligible to acquire.

8. References

[1] Bulow, J. and P. Klemperer. “Auctions versus Negotiations”, American Economic Review 86(1). Pp. 180-194. 1996.

[2] Cramton, P. “Lessons Learned from the UK 3G Spectrum Auctions.” The Auction of Radio Spectrum for the Third Generation of Mobile Telephones. Pp. 47-55.

[3] Crandall, R. and A. Ingraham. “The Adverse Economic Effects of Spectrum Set Asides”. May 24, 2007.

[4] Gilbert, R. and D. Newbery. “Preemptive Patenting and the Persistence of Monopoly”, American Economic Review 72, 1982. Pp. 514-526.

33 Note that Crandall and Ingraham [3] illustrate, correctly, the first part of this argument – a set aside, if effective, should reduce the cost of a license for entrants compared to no set aside. However, it does not follow from that observation, that overall revenues will decline for reasons discussed here. 61 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

[5] Jehiel, P. and B. Moldovanu. “The European UMTS/IMT-2000 License Auctions”. SonderForschungsBereich 504, D.P. No. 01-20. April 2001.

[6] Klemperer, P. “ Using and Abusing Economic Theory”. 2002 Marshall Lecture to European Economic Association. Reprinted in Journal of the European Economic Association, 2003.

[7] Krishna, K. “ Auctions with Endogenous Valuations. The Persistence of Monopoly Revisited”. American Economic Review 83. 1993. Pp. 147-160.

[8] Manelli, A. and Daniel R. Vincent. “Optimal Procurement Mechanisms”. Econometrica, 63. 1995. Pp. 591-620.

[9] Tirole, J. The Theory of Industrial Organization. MIT Press. 1988.

62 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

Curriculum Vitae of Mr. Dan Vincent

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11. Appendix B - DGTP-002-07 AWS – QMI Reply Comments June 27, 2007 – Licence Conditions in Other Countries

As part of its May 25 comments QMI submitted a report by Lemay-Yates Associates Inc. entitled “A Discussion of Spectrum License Conditions and the Impact on New Entrants” (LYA Report). As part of its May 25 comments Bell Canada submitted a report by Gilbert+Tobin as Appendix 3 entitled “Spectrum Allocations Processes – A review of global experience” (G+T Report).

The G+T Report provides no valid input to the discussion in Canada.

As can be seen in Table 1 at page 6 of the LYA Report:

• G+T is incorrect concerning mandated roaming in the US – in the US there is a basic common carrier rule for manual roaming and the FCC is currently reviewing roaming amid many complaints from smaller carriers,

• G+T oversimplifies the US tower sharing environment where there are many third party providers; in Canada, recommendations on tower sharing have been languishing since 2004,

• G+T mistakenly affirms that the entrant set-aside in the UK 3G auction did not result in entry, even though entrant 3 UK that won the set aside license now has 77% market share for 3G services.

• G+T misidentifies incumbent BT as having been the entrant bidder in the UK 3G auction, but correctly blaming BT for driving up the prices to irrational levels. Irrational bidding by incumbents was also a characteristic of the 2001 auction of Additional PCS spectrum in Canada.

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• The German auction experience proves the contrary to G+T’s findings – intervention was required to ensure entry; the German process attracted entry, but the lack of specific measures to support entry was absent and entrants failed, and,

• G+T states that license processes in Ireland did not attract entry and roaming was not mandated – neither is true; entrant Hutchison 3G is ahead of its network rollout obligations and roaming was mandated once an entrant had deployed network covering 20% of population.

In addition, one of G+T’s main points is that “market forces will encourage roaming agreements among market participants” (page 4). G+T sites a number of countries where roaming was not mandated.

These include Malaysia which has five national licensees, Australia which has four34, Finland which has 4, Hong Kong which has six, etc.

G+T’s affirmation that roaming agreements are normal commercial practice in many countries should not be too surprising.35 Not only are there usually more market participants in those countries than there are in Canada, but also all of the market participants in many cases operate on a common technology platform – GSM.

In Canada there is only one national carrier using GSM (Rogers). Rogers being the only GSM carrier clearly has no need for domestic roaming agreements.

New Zealand is the only other country identified by G+T where there is only one GSM carrier – and in this case the would-be entrant TelstraClear recently ceased its efforts to enter apparently due to a “last-minute change to a roaming agreement with Vodafone”.36

34 In Australia, Telstra was originally a CDMA carrier but began transitioning to GSM in 2005. 35 G+T also appears to be confused as to what the actual regimes are. For Malaysia G+T states roaming was not “mandated”, but on the other hand was “required” as part of the licensing process (page 7). 36 “Vodafone set to take TelstraClear’s mobile clients”, New Zealand Herald, June 14, 2007 71 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

The other two carriers in Canada – Bell and Telus – use CDMA technology. Bell and Telus already have an enhanced roaming and resale agreement between themselves.

If a new entrant chose to deploy CDMA-based technology it would be up against a “cozy” Bell-Telus arrangement. And if it chose GSM-based technology, its only potential roaming arrangement would be with Rogers, which is the only GSM-based carrier at present.

Without mandated roaming in Canada, any reasonable agreement is unlikely to be attainable.

72 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

12. Appendix C – Position Papers

INTRODUCTORY NOTE: The following three analysis show that in the case of the Canadian wireless market, we can’t talk about free market. "In the context of the Canadian wireless market the government, which is in favor of more competition, has no other choice but to intervene in order to avoid barriers to entry of new competitors."

Three important observers in the Academic and private fields has been retained by Quebecor Media to comment on the competition in the Canadian wireless market.

Mr Abraham Hollander PhD, Professor of Economics (Université de Montréal);

Mr Yves Rabeau PhD, Professor of Business strategy (Université du Québec à Montréal-UQAM)

Mr Réal Gauthier, Consultant for various government in CIT, Concept & Forme (Montréal)

These three well Known observers in three different ways try also to demonstrate the extent that the market power exercise in the wireless market in Canada and what the impact of allocating spectrum to create new competitors would have on the competitiveness of the wireless market in Canada.

73 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

12.1 Analysis of the status of competition in wireless by Professor Abraham Hollander, Université de Montréal

Assisting facilities-based entry in wireless telephony

A comment by: Abraham Hollander Professor of Economics Université de Montréal

June 27, 2007

1) I have been retained by Quebecor Media to write a short note commenting on the arguments put forth in support of, and in opposition to the adoption of special measures calculated to facilitate the acquisition of spectrum by suppliers of wireless telephony who do not at present holds licenses to spectrum. 2) The justification for such measures rests on four principal claims: 1) That a wireless operator who does not hold such license cannot provide effective competition; 2) that the relative underperformance of Canada in terms of pricing, market penetration and the adoption of the newest technologies is due, in part at least, to less effective competition by incumbent suppliers; 3) that new facilities- based entry would intensify competition in wireless services; 4) that unless Industry Canada sets up a mechanism that supports such entry, incumbent operators will likely engage in strategic bidding and succeed in excluding competition that would erode their margins and market shares. 3) The report addresses the arguments that bear on the appropriateness of entry- assisting mechanisms under the following headings; a) the strength of the evidence relating to the effectiveness of competition among incumbent national operators; b) incumbents’ incentives to exclude competition by acquiring spectrum offered at auction; c) the effects that adoption of entry-facilitating measures would have on the efficiency of spectrum allocation, and the need for regulatory oversight.

Competition in wireless telephony

4) A number of studies have pointed out that market penetration is significantly lower in Canada than in many industrialized economies. European countries that used to lag Canada with respect to wireless services currently enjoy substantially larger penetration rates. Also, Canada runs behind other advanced economies in regard to the deployment of 3G technology. Furthermore, the average price Canadians pay for wireless service does not compare well to the prices charged to subscribers in the US and in several European countries. 74 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

5) Average revenue per minute of communication has declined and market penetration has increased in Canada. This, however, cannot be portrayed as evidence of competitive rivalry. Indeed, the market for wireless telephony is hardly mature, and for that reason alone, one would anticipate falling prices even if it were supplied by a monopoly. A monopolistic supplier may well start off with high prices- in particular when capacity is still small- in order to extract high margins from consumer segments that have the highest willingness to pay. It would progressively lower prices as its product gains acceptance and capacity expands, in order to allow the capture of customers with lower reservation prices and more elastic demand. 6) Economic theory puts forth that price under competition tends to be lower than in the absence thereof. It does not state that prices do not fall over time when competition is absent or weak. Therefore, a mere showing of falling prices hardly provides evidence of rivalry in the marketplace. 7) The relevant baseline to which current Canadian prices ought to be compared is not past prices but prices under an alternative state of competition. Because no such prices are available for Canada, the fitting alternative is to look at measures of performance in other countries. And as already indicated, Canada does not rank well in this regard. 8) When making cross-country comparisons one must have regard for the fact that differences in performance may result from factors other than differences in the intensity of competition. Geography may matter; the date of introduction of wireless service could also be relevant. Another factor is the cost of wire-based service. 9) One may presume that for many consumers the number of wireless calls is influenced by its cost relative to the cost of wire-based communications. If so, one would expect that for a given number of wireless competitors, the price per minute will be higher in those countries were wired-based communications are metered and paid by the subscriber. And, if the opposite appears to be true, there is more reason to suspect that the reason is a lack of intense competition among wireless providers. 10) Fluctuating market shares sometimes serve as indicators of competition. The reason is that oligopolists who collude or settle for the quiet life will not actively pursue the clientele of other firms. As a result market shares will be stable. Lack of stability of market shares can therefore serve as an indicator of rivalry. 11) While there is no set measure of instability which constitutes an infallible indicator of competition, one does not consider that small variations in market shares are indicative of intense rivalry. The Sanderson and Tepperman study notes that the shares of total subscribers of the three national operators have been quite stable, but that the shares of their new subscribers have been volatile on a quarterly basis.37 As it turns out, this volatility was insufficient to affect to the stability of the shares of all subscribers. More importantly, there is no reason to expect that quarter after quarter new subscribers should allocate themselves

37 M. Sanderson and A. Tepperman, An assessment of market power in the provision of wireless telecommunications Services in Canada. May 25, 2007 at http://www.strategis.ic.gc.ca/epic/site/smt- gst.nsf/vwapj/dgtp-002-07-bell-Appendix-1.pdf/$FILE/dgtp-002-07-bell-Appendix-1.pdf 75 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

among incumbents in proportion to their historical market shares even when incumbents do not compete. Also, the volatility as is appears in a graphical representation is influenced by the length of the period for which data are supplied. On may guess that if the fluctuations of shares of subscriber additions had been displayed on a monthly rather than on quarterly basis, volatility would have appeared larger yet. The upshot is that the observed fluctuations in quarterly shares of subscriber additions do not support a claim of competition.

Bidding to exclude competitors

12) The efficiency-based argument in support of assisting facilities-based entry rests on the claim that incumbents will outbid a potential purchaser, not because they provide a better or less costly product, but because the profits they stand to lose from facilities-based entry, exceed the profits an equally efficient entrant - and even a somewhat more efficient one – can expect to earn by entering. The reason is that entry intensifies competition and lowers the margins incumbents earn from their customer base. The base is also eroded by entry. 13) The maximum amount an incumbent firm would willing to bid to prevent the acquisition of spectrum by competitors equals the difference between the profit it earns when outsiders hold licenses to spectrum and the profits it earns when they do not. The outsider’s maximum bid is equal to the gap between its profits with and without ownership of spectrum.38 Because the gap is larger for the incumbent firm than for the entrant, one expects that the incumbent’s will successfully bid to exclude facilities-based new entry. 14) Incentives to act in such exclusionary manner are weaker when the market is shared by several incumbents.39 However, weaker does not means absent. As demonstrated by Wilkie, firms that hold about 1/3 of the market will, under reasonable assumptions about demand elasticity and profit margin, find that they benefit by excluding competition through the acquisition of spectrum.40 The incentive to act in such way becomes greater when rivalry among incumbents is less intense, and when the potential entrant is expected to adopt an aggressive stance. Lastly, one must consider the possibility that the regional share of an incumbent could be larger than its national share in the very region where the entrant is strong, or is likely to be aggressive. 15) The threat to incumbents from facilities-based entry seems particularly great in innovative dynamic industries like telephony where new products, new ways of combining existing products and novel ways of offering products to consumers are constantly being tried out. In such industries the successful firm is more likely

38 The latter may be zero if no entry without spectrum is contemplated. 39 This has been pointed out by Guofu Tan and David Krause, Economic issues relating to the framework to auction spectrum in the 2GHz range ( May 25 , 2007) at http://www.strategis.ic.gc.ca/epic/site/smt- gst.nsf/vwapj/dgtp-002-07-bell-Appendix-2.pdf/$FILE/dgtp-002-07-bell-Appendix-2.pdf 40 S. Wilkie, Spectrum auctions are not a panacea: Theory and evidence of anti-competitive and rent- seeking behaviour in FFC rule making and auction design, March 26, 2007, http://www.m2znetworks.com/xres/uploads/documents/Wilkie%202%20Auctions%20No%20Panacea%20 Wilkie.pdf 76 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

to grab market share quickly than in humdrum sectors where shifts in share are more liable come about nibble by nibble. 16) It has also been argued that incumbents will not bid strategically to exclude potential rivals because it makes no sense to pay for spectrum that will lie fallow.41 This calls for two observations. If it is true that the incumbent national providers can meet their current and expected future needs for spectrum from their current holdings, it becomes harder indeed to understand their opposition being driven by reasons other than the exclusion of effective competition. And, if they do not hold a surplus of spectrum, one should not expect that all of the frequencies they acquire at the upcoming auction will lie fallow. Incumbents may use some frequencies themselves, or make some of it available against payment to operators who do not provide a real competitive challenge, do not threaten the status quo and make a suboptimal use of the spectrum. Still, the latter uses reduce the effective cost of exclusionary bidding. 17) It has also been claimed that because there are scale economies in wireless telephony, measures designed to facilitate the acquisition of spectrum may well elicit small inefficient entry. It has been remarked as well that the number of firms which can be expected to operate at an efficient scale would be smaller in Canada than in the US.42 18) In this regard, it is important to stress several points. First, a claim that wireless telephony is characterized by scale economies does not amount to a claim that efficient scales cannot be attained in Canada with a larger number of facilities- based firms than are currently active. Second, the presence of scale economies does not imply that the resource cost of operating at a scale somewhat below minimum efficient scale, outweighs the benefits of intensified competition ensuing from a larger number of effective competitors. Third, one must take into account that stronger competition would likely produce an increase in market penetration. If so, the effect of entry on the average cost of incumbents would not be affected as much when they lose share, than if penetration had remained constant. Fourth, in an industry like telephony, the increased pressure from extra competition to innovate and adopt new technologies at a faster pace likely outweighs the adverse effects from a possible increase in average cost. Fifth, and perhaps most importantly, small scale entry is not a necessary bad even if one accepts the premise that Canada has room for no more than three national facilities-based operators. Entry in an industry often takes place at a small inefficient scale, but when the entering firm succeeds in making a better mousetrap or produces it at a lower cost than an incumbent (at equal scale) it may end up replacing that incumbent. In the end, the market may still be served by the same number of firms as before entry, but consumers and total welfare are higher. Entry may have been inefficient from a short terms perspective, but in the long term it would be beneficial from a welfare perspective. If entry had been prevented because it could only have occurred at an efficient scale, consumers may not have had the opportunity to enjoy the benefits of a better mousetrap.

41 Guofu Tan and David Krause (2007) 42 Ibid. 77 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

19) Economic theory shows that additional entry will sometimes lower welfare. This is more likely when fixed costs are high and entry does not lead to an expansion of the market. The entrant merely captures share from incumbents, a process referred to a business stealing.43 Welfare declines as extra fixed cost is incurred while the same amount of output is produced.44 However, economic theory also shows that even when entry is not conditional on the acquisition of spectrum, the number of active firms may be lower that the number of firms at which welfare is highest. This is more likely when product offerings are differentiated, as is the case in wireless telephony.45

Overbidding and regulatory oversight

20) It has been argued that setting aside a frequency block on which current owners of spectrum may not bid carries the risk of putting spectrum in the hands of parties that overpay, go bankrupt, and leave spectrum unused until it is transferred to another operator. The transfer itself consumes resources 46 21) It is perhaps useful to stress that overpayment followed by bankruptcy is not limited to instances where a public authority allocates a limited resource that is essential to compete.47 One would expect the failure rate of recent entrants to be higher, whether or not they benefited from a special mechanism at auction. 22) The relevant issues are: a) Whether the contemplated entry-facilitating measures increase the likelihood of such of overbidding significantly; b) whether there exist ways and means, short of abandoning the measures, to mitigate the likelihood of overbidding; c) whether the remaining additional risk, if there is any, is sufficient to outweigh the benefit from extra competition expected to result from adoption of the measure. 23) Overpayment has been presented as a more likely outcome when incumbents are precluded from bidding.48 The reason given is that their exclusion curtails the amount of information revealed during the bidding process. And, less informed bidders are more likely to make unreasonably high bids. 24) It is true that with all else is equal, less information entails a higher probability of overbidding. However, all else is not equal under as set-aside scheme because the parties with the greatest incentive to raise bids do not participate. For that reason one cannot really assert that a set-aside increases the probability of excessive bidding, even if those who participate are less experienced and a smaller amount information transpires during the bidding process. 25) Furthermore, there is no basis for claiming that all participants in a restricted auction will be ill-informed; some may in fact have accumulated considerable

43 Ibid. 44 However welfare may increase even when the market does not expand if the entrant has lower variable cost than the incumbents at whose expense he gains. 45 The reason for suboptimal entry is that sellers cannot fully capture the benefits that consumers get from greater variety. 46 Ibid 56-57. 47 And, spectrum acquired at an auction that did not exclude certain classes of bidders may also be left unused, because of miscalculation of by design when it serves to exclude competitors. 48 Ibid, 78 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

experience in wireless telephony. The likelihood of overbidding is presumably higher when the set-aside is used as an affirmative action program designed to favour small operators. It is less likely when bidding is open to all who do not hold a license to spectrum. 26) Also, when the entry-assisting measure involves the grant of bidding credits rather than set-asides, the argument that efficiency is impaired because less information is transmitted, is clearly inapplicable.49 27) Wilkie (2007) presents the results of a study which illustrates that the FCC auction of PCS blocks A and B, which included spectrum caps, did in fact meet efficiency criteria. He also suggests that the ancillary measure of instalment payments may have contributed to the bankruptcies that plagued the acquirers of that block C. 28) Furthermore, the risk of overbidding can probably be mitigated by adopting measures that reduce the proceeds a successful bidder can expect from reselling the spectrum within a short time after acquisition. 29) For these reasons one must conclude that the arguments cited in support of the claim that measures designed to assist facilities-based entry increase the risk of overbidding are not well grounded. And, the expected incremental welfare losses from overbidding, if they exist at all, appear too small to counterbalance expected welfare gains from additional competition.

Final remarks

30) Auctions are said to be an efficient allocation mechanism because they put assets in the hands of the parties that value them most. However, such outcome need not maximize value from a social or economy-wide perspective. It is true that an incumbent who outbids and entrant for an exclusionary purpose – even an equally, or somewhat more efficient entrant- values that asset most. In that instance, however, the asset does not yield the highest return from a social perspective.50 31) Some have raised the spectre that inefficient entry elicited by an entry-facilitating mechanism may lead to further intervention designed to lend a hand to a weak entrant. In this regard one should point out that the mechanisms contemplated by Industry Canada are once-and- for-all measures, that they are limited to the auction, and that they do not target a particular firm. There is no apparent reason to suppose that the regulator would feel duty-bound to support a horse it did not bet on. 32) Also, because the measure in question is a one-time measure, the claim that it is akin to re-regulation of wireless telephony is mistaken.51 Entry facilitating mechanisms such as set-asides and bidding credits obviously affect the conditions

50 Wilkie (2007) summarizes a body on research which shows that auctions which differ from the simple model in ways that are typical in the case of spectrum auctions often lack the virtues of efficiency and maximization of sellers’ revenue attributed to simple auction. 51 And for that matter the sector remains subject to some regulatory supervision. The CRTC has not give up jurisdiction in the all areas of wireless telephony. It still supervises the conditions at which access to spectrum is given to operators who do not hold licenses. 79 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

of entry but, Industry Canada already influences these conditions through its choices in regard to the amount of spectrum made available, and through the way it slices that amount in bands to be auctioned. 33) Also, one can hardly claim that the adoption of entry-assisting measures such as set-asides, bidding credits or spectrum caps fails the test of transparency or simplicity. 34) Finally, one must also consider the argument that the Competition Act provides an effective means to counter anticompetitive conduct by incumbents and thereby removes the need to encourage new facilities-based entry. Competition law declares that certain forms of conduct which threaten competition are illegal. It allows the Competition Tribunal to order private parties to desist from anticompetitive acts, or to take action to preserve a state of competition that existed, or would have prevailed in the absence of an anticompetitive act. The focus of competition law is the restoration or preservation of a state of competition which prevailed or would exist in the absence of the proscribed or reviewable conduct. When firms do not engage in anticompetitive conduct as defined under the law, competition authorities do not intervene even when the state of competition is unsatisfactory compared to a feasible alternative. 35) That approach is certainly rational from the point of view of competition policy. This, however, does not entail that an identical approach is best on the part of a public body that engineers the transfer of a public asset to the private sector, when the ways and means by which the transfer takes place affect competition, and, more generally, the public interest.

Conclusion

36) This report has reviewed a number of arguments that have been put forward against the implementation by Industry Canada of a mechanism to assist facilities- based entry by one or more operators who do not at present hold licenses. It has explained why these arguments do not in fact support the claim that a straight auction without any entry assisting measure is best from a welfare perspective. Because the author’s mandate did not include the draft of a recommendation in regard to the particular form in which assistance should be provided, the report does not elaborate on that issue.

About Mr Abraham Hollander

Ph.D. Economics University of Minnesota. Abraham Hollander is Professor of Economics at the University of Montreal. His main fields are industrial economics, the economics of copyrights and international trade policy. He has published in these areas and is a co-author of a graduate textbook in international trade. He has consulted in these areas for governments, international organizations and business. He has also held a position at the World Bank and was T.D. Mac Donald Chair at the Bureau of Competition Policy in 1994-1995.

80 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

Selective biography

• « First-Degree Discrimination in a Competitive Setting : Pricing and Quality Choice », Cahier de recherche #2005-01, Département de sciences économiques, Université de Montréal, 2005, 24 pages (avec D. Encaoua). • « Product Specification, Multiproduct Screening and Bundling : The Case of Pay-TV », Information Economics and Policy 17, 2005, 35-59 (avec C. Crampes). • « Competition Policy and Innovation », Oxford Review of Economic Policy 18(1), 2002, 63-79 (avec D. Encaoua). • « Pleasures of Cockaigne: Quality Gaps, Market Structure and the Amount of Grading», American Journal of Agricultural Economics, août 1999 (avec S. Monier et H. Ossard). • « Applied International Trade Analysis », Michigan University Press and McMillan Press, 1998, 650 pages (avec J.M. Viaene et H. Bowen).

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12.2 Analysis of the status of competition in wireless by Professor Yves Rabeau, Université du Québec à Montréal

Yves Rabeau PhD (MIT) Professor , Department of business strategy School of management Université du Québec à Montréal

I. What is the situation regarding competition in Canada’s wireless market?

1. The wireless market in Canada is an oligopoly dominated by three main players, the incumbents, which hold a surplus of spectrum that could, in fact, serve many more customers than the current number of subscribers. There are a few resellers, including Vidéotron, which lease capacity from the licensees, but they have no significant effect on the nature of market competition. This overall situation also hides available spectrum on a regional basis, where the effects of domination by some players are significant. Bell and Rogers dominate in Ontario and Quebec; in Manitoba and westward, Telus provides the main competition for Rogers.

2. The incumbent battle for market share to lower their average cost per subscriber. But competition for a share of this lucrative market has more benefits for shareholders than for customers. The prices paid by Canadian subscribers are about twice as high as those in the United States, and licensees are slow to innovate and offer value-added services to their customers. The Telecommunications Policy Review Panel52 drew attention to the fact that Canada trails in the wireless sector compared to other industrialized countries: with its penetration rate of 58%, Canada ranks 29th among OECD countries. Our main trading partner’s penetration rate is 76% and rising. As a result, the United States enjoys a strong competitive

52 Telecommunications Policy Review Panel, Government of Canada, 2006. See in particular Chapter 1, page 14. 82 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

advantage, and mobile telephony is increasingly important in corporate business models. Mobile telephony is used for text, data and video transmission in the business and consumer sectors. If value-added services had been offered sooner as a result of greater competition and if the licensees had been more innovative, they could have lowered their subscriber fees to counter the effects of the small size of the Canadian economy and increased the wireless penetration rate in this country. Nothing should prevent Canada from doing as well as the Scandinavian countries53, whose markets are smaller than Canada’s.

II. Domination effect

3. In the recent past, new arrivals attempted to carve out a place for themselves in the wireless market. Microcell and Clearnet acquired capacity in the 1995 spectrum auction. Until 2000, Canada had five wireless providers. But the two small players competing with the three dominant companies were unable to stay in the game.

4. In the 2001 auction, the incumbent acquired almost all the available spectrum to consolidate their dominant market position. This resulted in a situation where licensees hold capacity that far exceeds the number of subscribers they serve. In so doing, they have wrapped up the market and operate in an oligopoly, which favors control over the rate at which innovative new products are launched on the market, in order to recover investment costs for the benefit of shareholders.

5. This oligopoly in the wireless market can be partly explained by Canada’s regulations regarding foreign investments, which stipulate that a company wanting to obtain a wireless license in this country must be at least 80% Canadian owned and operated. Because of this provision, Canadian licensees are shielded from competition from foreign wireless companies and therefore able to operate in an

53 The penetration rate for cellular telephony is 103% in Norway, 108% in Sweden and 95% in Finland. Source: The Economist, “The World in Figures,” 2007 edition. 83 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

oligopoly in which the players have no interest in sparking a price war54 nor in speeding up depreciation on past investments in order to maintain higher profitability—as is in fact the case. It is surprising that public authorities, aware that there is no competition from outside the country, agree to allow such a large concentration of spectrum ownership when it is a strategic element in our economy’s competitive capacity.

III. Will we be able to catch up with our global competitors in the area of third- generation wireless services?

6. Canada suffers from a widespread lack of innovation: our country ranks 14th among industrialized countries in this area55. With the low rate of wireless penetration in Canada, this sector’s case illustrates the lack of vitality with respect to innovation. Advanced wireless telephone services play an increasingly strategic role in industrialized economies. Companies, public services, and health care in particular, as well as consumers, rely more and more on mobile services to receive, exchange and use information. The wireless telephone is becoming one of the most frequently used means of accessing the Internet and thereby all the services IP technology offers to society56.

7. Industry Canada is considering available avenues to auction a new volume of spectrum for advanced mobile services so that the Canadian economy can derive the greatest benefit from this new generation of wireless services. To this end, it has asked existing and potential players in the wireless sector to submit position papers

54 See Peter Nowak, “Canadian cell phone bills double U.S. counterparts. Higher costs blamed on lack of competition,” Financial Post, January 30, 2007. In this article, the author cites a study by Darren Kirk of Moody’s on the oligopoly in Canada’s wireless telephony sector. 55 Conference Board of Canada, “Les performances du Canada : bilan comparatif,” June 2007. 56 See Yves Rabeau, “Broadcasting in a sea of change: Technology, consumers, and corporate strategies.” Centre d’étude sur les médias, Laval University, and the Canadian Media Research Consortium, international symposium, Sheraton Centre, Montreal, November 24, 2006.

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so that it can define the rules for the next auction. The results of this pre- consultation show that, to date, wireless licensees, which have used considerable means to defend their position, are determined to have rules—or an absence of rules—that will allow them to maintain their existing oligopoly. A key argument in their presentations is allowing market forces to express themselves freely when auctions are held. According to the licensees, this would correspond to the new trend in the telecommunications regulation and to the Department’s political will. It is an erroneous reading of a market protected from foreign competition and the means needed to make it more competitive so that Canada can catch up with its competitors. In effect, in the absence of foreign competitors already specializing in wireless that could have participated in the auctions had Canadian regulations allowed it, the claim that new Canadian players are free to enter the market by participating in spectrum auctions for advanced wireless services with no other constraints amounts to an idyllic view of how markets operate. It in no way corresponds to the underlying reality in an industry where oligopoly prevails.

8. In addition, the licensees’ vision of the market is also a mistaken interpretation of a policy aimed at making the market more competitive. A department that seeks to increase competition in the wireless market to make it more innovative will not implement a policy that definitively consolidates the licensees’ oligopoly. Such consolidation would mean a loss for the Canadian economy.

IV. Implementing the means to increase competition in the wireless market

9. To succeed in stimulating competition in the wireless market, conditions must be created to so that new players can access the spectrum and deploy networks to offer new services to their customers. One way of doing this is to reserve a certain amount of spectrum for new players that want to take part in the auctions. The licensees claim this would be a form of disguised subsidy for the new players57.

57 It should be borne in mind that a licensee like Rogers (Cantel at the time) obtained reserved spectrum in 1984, as well as a period of protection during which Cantel was able to develop its network in a given 85 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

They assume that prices for the reserved spectrum would be lower for new players than in a free-market situation, and therefore without any rules, and that the price difference would be tantamount to a subsidy for new players. But not doing so would also be a way for the government to help the licensees maintain their advantageous oligopoly and thereby reduce potential competition in the wireless sector58. As was the case with landline telephony, where competition helped bring down prices and expand services, it would be preferable to introduce temporary rules that would encourage new players to enter the wireless market. Then, after a certain amount of time, the principle of state or market regulator withdrawal59 could be applied, once competitive forces are sufficiently well established to ensure competitive pricing and a there is a flow of innovation comparable to that among our trading partners such as the United States. It is this argument of sufficient competition that licensees in the wireless market used to eliminate the CRTC’s most recent rules for IP telephony.

10. The licensees also maintain that if the Department reserves a portion of the spectrum for new entrants, the government will be deprived of revenues as a result of not having allowed the market to function freely. The response to this objection is twofold. First, the Department’s goal at the time of the auction should not be to maximize its revenues but, rather, to obtain the greatest benefit for the Canadian economy. Then, if the objective were to maximize state revenues, the Canadian government should lift constraints on foreign ownership and invite large foreign wireless companies to participate in the advanced services spectrum auction. It is not certain that under these conditions, the licensees would promote a spectrum auction with no rules whatsoever.

11. In addition to reserving a certain amount of spectrum for new players, it is also essential to set a ceiling on the spectrum that can be purchased by a licensee in order to prevent the hoarding that reduces market competition. Some licensees have

region before facing any competition. See Michael Geist, “Federal spectrum auction put wireless competition on the line.” Ottawa Citizen, June 19, 2007. 58 Michael Geist, op.cit, clearly asserts the debate centres on intensifying competition by reserving spectrum for new entrants or maintaining the status quo with no reserved spectrum.

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considerable financial resources at their disposal to attempt to limit the development of their competitors’ markets. The cost of hoarding is thus compensated by better control over the market by the licensee in an oligopoly situation. This ceiling could be lifted once competitive conditions allow, after consultation with the main industry players.

V. Deployment of new networks: an approach consistent with the economics of telecommunications

12. The experience of opening the long-distance market to competition shows that it is better to encourage new players to deploy their own networks instead of leasing capacity at wholesale rates for resale to customers. The resale approach may bring down prices but it does not foster innovation and the marketing of new products. Currently, Vidéotron and Virgin Mobile lease capacity from the licensees and are therefore dependent on them when it comes to the services they can offer their customers. This is one of the factors prompting Vidéotron to take part in the upcoming auctions for advanced mobile services. But in any industry where infrastructures are large and costly and their deployment time is lengthy, competitors often share the costs, according to terms and conditions defined by the various parties. This is also the approach regulators have taken when they have allowed competition in the local market. The CRTC has required licensees to open their local facilities to allow competitors to install their equipment in order to share the local customer network while paying the licensee a reasonable usage fee.

13. The same logic governs the sharing of cell towers in the licensees’ existing networks with new players. The licensees oppose this type of measure, arguing that it would not encourage the new entrants to invest in their own networks. In terms of public efficiency, one wonders what benefit customers would derive if the new players had to build their towers next to the licensees’ existing towers. The new entrants are prepared to apply this principle of sharing infrastructures to their own

59 The CRTC frequently uses the “forbearance principle.” 87 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

investments by agreeing, for example, to share a tower that they would erect in an area where the licensees have no equipment. Competition will indicate to the newcomers what investments need to be made in the network to benefit their customers. Access to existing towers should therefore be obligatory in general, and new entrants should pay the licensee-owners of the towers a usage fee that corresponds to the costs they have incurred, plus market yield.

VI. An additional obstacle to competition: roaming

14. Interconnection agreements among carriers are an often-disputed question, even though they are essential for ensuring competition in the telecommunications market. In Canada, with the opening of competition in long distance calling, newcomers had to reach agreements with the licensees. There were several legal disputes concerning these interconnection fees60. As well, Internet service providers had to negotiate access fees for the local loop. With the increased number of available services and the use of wireless as a means for employees to stay in contact with their company’s data network, there will be a growing number of interconnections among the various telecommunications service providers. This is already the case for Internet access providers. For instance, a Bell employee working from home can access the Bell network via a cable company’s high-speed Internet connection if the cable company is only one providing service in the region. The greater the interconnection among networks, the more new services providers can offer and the more the market will become competitive and innovative.

15. Roaming is based on analogous logic: it is essential to a competitive wireless market for various providers to have agreements that allow their customers to use their wireless telephones anywhere in Canada. This condition is especially important since our country is so huge. Once again, the Americans are ahead of us

60 See Yves Rabeau, “Vague Schumpétérienne et politiques économiques : les telecommunications.” Choix, vol. 10, no. 6, June 2004, Institut de recherche en politiques publiques. 88 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

because the wireless carriers’ customers do not pay long-distance charges anywhere in the United States61. Realizing the strategic importance of roaming in the development of wireless networks, the European Union has just taken fairly drastic measures to reduce interconnection costs among the networks of European wireless carriers. As a result, roaming charges will be cut by 70% during the summer of 200762.

16. It is clear that Canada’s wireless licensees have powerful means to suppress competition by new players. High roaming charges would significantly curtail the scope of the new entrants’ subscriptions. That is why they are requesting a mandatory procedure that would give seamless access to the digital wireless networks of the various licensees in Canada. Reciprocally, the licensees would have access to this procedure if they want to allow their customers to make calls using the new entrants’ networks. The new players are proposing a negotiation period with the licensees so that they can reach an agreement. But to avoid long, drawn-out negotiations or the possibility of disagreement between the parties, they would have access to an arbitration process under the auspices of the Competition Bureau.

17. It is therefore clear that the Department responsible will have to demonstrate strong leadership to ensure that there is a mandatory negotiation system for roaming. This is a vital condition for expanding competition in the wireless market and stimulating innovation in this industry. It will benefit all users and the Canadian economy as a whole.

VII. Do we really have a choice?

1.The Telecommunications Policy Review Panel has, in a sense, sounded the alarm regarding Canada’s trailing position in the wireless sector. While Industry Canada must be consulted to develop the rules for the auction of new spectrum for

61See Catherine McLean, “EU slashes cellphone roaming charges.” The Globe and Mail, June 20, 2007. 62 See Catherine McLean, op. cit. 89 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

advanced wireless services, it seems clear that there is a need to open the wireless market to greater competition if we are to catch up, at least partially, with our competitors. The conditions discussed in this paper will have to be implemented to change the competitive structure of Canada’s wireless market.

2.The oligopoly of three wireless giants shielded from competition by foreign companies has clearly not delivered results in terms of price and innovative offerings that would place Canada at the cutting edge of wireless telecommunications. Competition—as the Conference Board has just pointed out—remains the most effective tool in making companies more competitive and innovative. In conclusion, we maintain that the solution for revitalizing this industry is that Industry Canada, in the upcoming spectrum auction for advanced wireless services, must implement the necessary conditions presented in this paper to intensify competition in the wireless market. Greater competition will force all players to be more efficient and, above all, more innovative.

About Mr Yves Rabeau

Yves Rabeau completed a master’s in commerce and a graduate diploma in applied economics at the University of Montreal’s École des Hautes Études Commerciales (HEC), as well as a doctorate in economics at the Massachusetts Institute of Technology (MIT).

Professor Rabeau has taught management and economics at the HEC and economics in the University of Montreal’s economics department. He is currently professor of management and economics in the department of business strategy of the school of management science at the University of Quebec in Montreal.

His teaching and research focus on the economics and management of telecommunications and the media, and on innovation and the emergence of new business models. He also works on cost-benefit analyses for private and public investment projects, the economics and regulation of the energy sector, the economics of foreign investments and on questions regarding salary and remuneration. He has also been a visiting professor in France, Poland and Romania.

Professor Rabeau has written numerous books, research documents, technical studies and articles that have appeared in scientific and business journals. He has given many lectures 90 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

at scientific conferences, business symposiums and other events. His two most recent books explore the development of Canada’s telecommunications industry.

He has worked as a consultant to the federal and Quebec governments, the Caisse de dépôt et placement du Québec, and other Canadian and foreign organizations. He worked at the Bank of Canada and was consultant to the federal government’s Kent and McDonald royal commissions. He has also served as expert witness in many regulatory cases involving telecommunications and energy, as well as cases dealing with salary settlements. In addition, he presented white papers at various forums organized by the federal and Quebec governments, and by the European Economic Union. Since 1989, he has served as a consultant on various projects of the Fédération des Chambres de Commerce du Québec.

Professor Rabeau has worked as a consultant for many Canadian corporations, including Gaz Métropolitain, Hydro-Québec, Molson and Labatt, Quebecor, Transcontinental, Stelco, Bombardier, Bell Canada, Bell Actimédia, Bell Mobility, France Télécom, Jean Coutu Group, Télébec, Teleglobe, Telus, Vidéotron, Telesystem International Wireless, Cisco Systems, Royal Bank and Standard Life as well as other Canadian, French and US companies. During a sabbatical in 1996-1997, he served as guest consultant to the senior management of Teleglobe Inc. In 2004-05, he headed a team that researched the Quebec government’s telecommunications management policy. In 2006, he took part in a research project on IP telephony funded by France Télécom.

He serves on the boards of directors of the Canadian Life and Health Insurance OmbudService and the Montreal Economic Institute.

1) Publications on telecommunications:

Les télécommunications: problématique d'une industrie en évolution rapide. Institut de recherche en politiques publiques, ISBN 0-88645-170-1, October 1995, 123 pages.

“Enjeux dans le secteur canadien des télécommunications,” in Perspective on the New Economics and Regulation of Telecommunication, edited by W.T. Stenbury. Institute for Research on Public Policy (IRPP), 1996, pages 49-60.

“L’économie de l’information à l’heure des grands réseaux de communication,” in Le Progrès technologique : évolution ou révolution?, edited by Daniel Racette. Association des économistes québécois, ISBN2-9802225-8-5, 1997.

“L’origine du mirage et les voies de l’avenir,” in La convergence des promesses folles aux espoirs déçus. Centre d’études sur les médias, symposium proceedings, Laval University, July 2003.

“La vague schumpétérienne dans les télécommunications : implications pour les politiques publiques,” in the collection Choix 10, no. 7. Institut de recherche en politiques publiques, Montreal, August 2004. 91 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

“The Schumpeterian Wave in Telecommunications: Public Policy Implications,” in Choices 10, no. 7. Institute for Research on Public Policy, Montreal, August 2004.

“Les services de communications vocales sur protocole Internet :une occasion unique d’ouvrir la téléphonie locale à une véritable concurrence : une étude sur les conditions de succès de l’introduction de cette technologie sur le marché des télécommunications au Canada.” White paper published by Quebecor Media Inc., May 2005.

“La radio-diffusion en pleine transformation : la technologie, les consommateurs et les stratégies des enterprises.” Centre d’étude sur les médias, Laval University, forthcoming, 2007.

In collaboration with R. Miller and L. Molinié, “VoIP : stratégies d’un titulaire face à l’innovation : le cas de la téléphonie IP.” Report presented to France Télécom, February and June 2006.

In collaboration avec Jean-Guy Rens, “Les télécommunications dans le secteur public du Québec.” Report on strategic management of telecommunications submitted to the minister responsible for the Quebec government’s shared services centre.

2) Lectures

“Mobility and e-commerce.” Special guest at the 2003 Bell Mobility Conference, Blue Mountain Inn, Collingwood, Ontario, January 22, 2003.

“Convergence, or the Art of Destroying Shareholders’ Value,” opening lecture, national symposium on “Who Controls Canada’s Media?” McGill Institute for the Study of Canada, Omni Mont-Royal Hotel, Montreal, February 14, 2003.

“Schumpeterian Innovative Waves and Hayek’s Disequilibrium: the Case of Telecommunications.” Bombardier Chair lectures, ESG-UQAM, Montreal, March 20, 2003.

“Current Trends in the North American Telecom Industry.” Worldwide seminar, Ericsson, Montreal, July 3, 2003.

“La convergence contenu/transport dans l’industrie des telecommunications.” Symposium organized by the Caisse de dépôt et placement du Québec, Montreal, March 11, 2004.

“IP Telephony: Another Disruptive Innovation in the Telecommunications Industry.” Lecture presented to the Association des Compagnies de téléphone du Québec, Mont- Orford, October 5, 2004.

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IP Telephony: Another Disruptive Wave of Innovation.” Lecture presented at the Bell University Laboratories as part of the Bell Canada innovation series, Montreal, November 12, 2004.

“Voix sur IP : une dernière rupture schumpétérienne vers un marché concurrentiel de la téléphonie.” Bombardier Chair lectures, ESG-UQAM, April 2006.In collaboration with S. Ben Letaifa, “L’Approche ‘Pull’ en terme d’innovation : le cas des fournisseurs de VoIP.” ASAC, 2006.

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12.3 Analysis of the status of competition in wireless by Mr. Réal Gauthier, Consultant

Toward genuine competition in the Canadian telecommunications industry

A comment by: Réal Gauthier Consultant Concept et Forme

June 27, 2007

Strong leadership to support rapid changes under way

1. There is no arguing that change in the telecommunications industry is accelerating. A look at countries comparable to Canada shows that most of those currently positioning themselves at the cutting edge of advanced telecom services are acting within a framework of enlightened leadership, with respect to both policy and innovation. While strengthening the industries that are directly affected, each country, in its own way and at its own pace, is modernizing the regulations that govern their telecom industry and, in particular, wireless services. 2. Swift action is being taken to take optimal advantage of the boom in state-of-the art technologies and services and to gain the competitive edge. Competition among service providers and operators is intensifying. Monopolistic and oligopolistic ways of operating are being called into question in order to diversify the offering and provide customers with better rates. Clearly, in all those countries, the referring rule is free market. 3. Over the past 15 years, Canada undertook many thoughts and actions to regulatory reform. In March 2006, this process culminated in the final report by the Telecommunications Policy Review Panel. The report concluded that “… Canada's laws, regulations, policies and institutions governing telecommunications need to be fundamentally reformed.”63 4. With regard to the advanced services, the report strongly worries about the weak performance of the current Canadian telecom system. Moreover, parallel to the context of the report, several experts point out disconcerting figures showing show that Canada’s historical position as a leading innovator is eroding.

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5. Many technical, geographic and even circumstantial explanations were publicly given by analysts and the licensees. One of the formal findings making consensus is that an oligopoly prevails in Canada’s wireless industry. 6. We will not address the causes here, but rather, the impacts of this situation and the avenues available to us. 7. The first is the expression of a strong government desire to put an end to this situation of convenience, which puts limits on consumers and the entire Canadian economy.

Beyond the figures and detailed technological reports

8. 3G, as seen through the experiences of countries similar to Canada, must figure in the vast landscape of Canada’s telecommunications future. 9. Its issues are to be understood on a scale that goes beyond mobility alone. A scale of effectiveness, efficacy and above all, support for the economic growth and competitiveness of a country as a whole. In this respect, 3G will open the door to 4G, which will make it possible to cross thresholds that Canada is far from attaining for the moment. 10. While Canada’s critical situation with regard to its 3G positioning is now better documented, there is less data on ultra high-speed landlines, where Canada is also increasingly falling behind. According to OECD statistics64 of the 30 countries leading the way in broadband landline networks, Canada ranked second from 2001 to 2003. It slipped to fifth place in 2004, seventh in 2005 and ninth in 2006. From a global figurehead in telecommunications, Canada has been reduced to an “average” country. 11. Numerous stakeholders in the current Industry Canada consultation process have demonstrated that Canadians are paying too much for mobile services. While the regulatory action under way to ensure greater competition is necessary, it alone cannot resolve everything. According to the Kazam report65, the government’s efforts should focus on the entire telecom ecosystem. In the short term, the example of the Ubiquitous Japan strategy (u-Japan in 2004), a country in which 3G services were introduced in 2001, should be considered, especially its regulatory component.

In future, greater convergence of services

12. The experience of countries that have begun the deploying 3G shows that such advanced services have a place in the daily lives of consumers and the operations of entire companies. This experience reveals the ever-stronger presence of

64 According to OECD data: OECD Broadband Statistics to December 2006, http://www.oecd.org/document/7/0,3343,fr_2649_37441_38446855_1_1_1_37441,00.html. 65 Industry Canada (Kazam Technologies), Le secteur canadien du sans-fil, Analyse, positionnement et capacités : 2006-09, May 2007. 95 Canada Gazette Notice DGTP 002-07 Quebecor Media Inc. - Reply Comments - June 27, 2007

convergence and ubiquity, two essential concepts in the telecommunications sector as it is shaping up before our eyes. 13. When the rules for attributing frequencies for 3G services are being established, enlightened government leadership must be demonstrated, and the value of the spectrum to be allocated must be established. 14. It is more than just a euphemism to assert that the performance of Canadian operators has been very lacklustre when it comes to introducing new communications services. The fact that the wireless operators in the oligopoly are treading water no longer needs to be proven. 15. If nothing is done to stimulate its own wireless industry, Canada is at great risk of being unable to take full advantage of the potential offered by advanced services. Our country therefore has a very urgent need for the competitive input of companies that have already mastered convergence and innovation in multimedia. In this specific case, a statement of specific rules is essential to ensure that this will happen.

Adaptation needed in regulatory framework

16. Wireless services in Canada are at a crossroads—for consumers, companies and the economy as a whole. Canada’s desire to regulate these new advanced wireless services can be qualified as a “survival” situation. Already trailing, it will take a few years of sizeable efforts and investments before third-generation Canadian cellphone services catch up with those in other OECD main countries. 17. The challenge must be met: these services must be rapidly deployed and under optimal conditions so that Canadian consumers can obtain quality services. It is a question of public interest, and this last point means that new players must be allowed to enter this industry. 18. A number of analyses in the past several years have shown that Canada’s productivity rate is not up to the expected level. From a leadership position in technology, the country has dropped to that of an ordinary player in cutting-edge sectors. Since 1990, the contribution of the information technologies and communications (ITC).as a leading factor in productivity has become inescapably obvious. This contribution should be estimated at about 50% to 60% of the growth rate in the country’s productivity. The introduction of 3G advanced services will thus contribute to improve the rate of productivity of the country. 19. The ultimate aim of the process under way is improved telecom services for the public and for businesses, an increased level of competitiveness and innovation in the country and expansion of Canadian cultural content.

Acting now to limit the impact of Canada’s trailing position

20. Free up an industry that is too highly concentrated in the hands of few licensees by allowing for the arrival of new players. It has been established that Canada is lagging behind in the penetration rate for cellphone services.

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21. It has also been established that charges are higher in Canada. It has been proven that this significantly hampers any competition and innovation in the industry. We are not talking here of a competitive market in the economic sense of the term. 22. The performance of current Canadian licensees must prompt the government to allow new players into the wireless industry. This means lowering the numerous barriers that keep them out. The current situation calls for firm government resolve. 23. There is an urgent need to act. The spectrum auction for advanced wireless services offers a major opportunity to improve the situation in Canada, 24. The current context in Canada’s telecommunications market calls for an adapted solution. This means that specific rules must define to open the door to new players that are more flexible, more enthusiastic and that have demonstrated their ingenuity.

About Mr Réal Gauthier

Réal GAUTHIER has developed highly diversified expertise in information technologies and communications (ITC). He has mastered business applications (content/infrastructures) and industrial strategies.

Mr. Gauthier’s experience includes work for the Cité de l’optique and Dévéloppement économique Québec, , a comparison of ITC in Ottawa/Montreal/Quebec City, the R&D centre for optic telecom, the IT-health study, an action plan for the Metropolitan Montreal ITC cluster (MI) and design of a proposed R&D centre (CIMIM, Centre International des Médias Interactifs de Montréal), etc. From 1975 to 1984, he worked in the cable television industry and in strategic planning at the NFB. From 1966 to 1969, he served as a commissioner on the Rioux Royal Commission (teaching of arts and design) in Quebec. Since 1984, he has focused his activities on the consulting firm Concept et Forme: he has carried out many projects in Canada and Europe, including Hydro-Québec (intelligent electrical network), and has worked on the new services of Geneva MAN (world’s first metropolitan area network) of the ITU in Geneva, Switzerland.

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13. Appendix D - Letters of support for new mobile carriers in Canada

The two letters enclosed both support the need for new facilities-based carriers in mobile telecommunications.

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D. 1 Letter from the « Chambre de Commerce du Haut-Richelieu », dated June 14 2007

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D.2 Letter to The Honourable Minister of Industry from the Fédération des chambres du Commerce du Québec, dated January 15, 2007

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14. Appendix E - Letter from Bell Mobility highlighting the productivity gains with Blackberry® service

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15. Appendix F - Speech from Robert Dépatie, President and CEO of Vidéotron Ltd, Telecom Summit, Toronto, June 13, 2007

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16. Appendix G - Speech of Pierre Karl Péladeau, President and CEO of Quebecor Inc., April 17 2007, Canadian Club of Ottawa

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17. Appendix H - Selected diaporamas from Third generation mobile telecommunications services- A need for Vidéotron- An opportunity for Canada, a presentation by Pierre Karl Péladeau, President and CEO of Quebecor Inc.

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18. Appendix I - Selected diaporamas from Reflections : A presentation by Robert Dépatie, President and CEO of Videotron Ltd, Telecom Summit, Toronto, June 13, 2007

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19. Appendix J - The admissions: Selected abstracts in recent articles

On set aside

1. Abstract of Carrie Tait’s article | No deal without all wireless, says Telus chief COVETED ASSETS | Tuesday, June 26, 2007 | Financial Post,

…..To satisfy Canada's competition watchdog, Telus has said it would support setting aside new wireless spectrum to allow newcomers easier access to the market. ….

2 Abstract of Peter Nowak’s article, Hasten bid review: Telus | Play for Bell could lose to private equity firms | Tuesday, June 26, 2007 | National Post.

…Mr. Entwistle also refuted charges that he had flip-flopped on whether Canada needs new wireless providers. Earlier this month, Telus said in a submission to the government that it opposed new entrants getting any sort of government assistance in an auction of wireless airwaves to be held next year…

On penetration Rate and Canadian wireless industry performance

3. Abstract of Francis Vailles article | Une fusion qui annonce des bouleversements : Le PDG de Telus croit que le pays a besoin d’un ‘’champion’’ des télécoms. | LaPresse Affaires, 22 juin 2007

….Selon le gestionnaire_(Darren Entwistle), le Canada a encore de six à huit ans de croissance dans le sans fil, puisque le pays a un retard de quatre points de pourcentage sur les autres pays en terme de pénération.

On competition

4. Abstract of CanWest new services | Telus confirms talks with BCE | Canwest News service | Thursday, June 21, 2007

…"Telus believes the combination of the two businesses would represent a compelling strategic and financial opportunity for all BCE and Telus stakeholders. It would be an all-Canadian solution for both immediate and long-term value creation, whilst ensuring a vibrant player continues in this increasingly competitive industry," said Darren Entwistle, president and CEO of Telus….

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5. Abstract of Peter Nowak’s article, Hasten bid review: Telus | Play for Bell could lose to private equity firms | Tuesday, June 26, 2007 | National Post.

…Mr. Entwistle said he did not want a repeat of Telus's thwarted purchase of Microcell Telecommunications, which ended up being bought by Rogers Communications Inc. in 2004. Telus had a deal set and was waiting on approval from the Competition Bureau, but lost out when Rogers swooped in to acquire the struggling wireless provider because it had fewer regulatory hurdles to clear….

6. Abstract of Carrie Tait’s article Telus won’t sell wireless assets if told to by Regulators June 26 | The Gazette

…Right now, as an industry buyer, I’m at an inherent disadvantage to a financial buyer…said Telus CEO said…I’m not asking for any protection. All I’d like to see is the gouvernement support an expeditious timeline for our review’…

*** END OF DOCUMENT ***

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