Competition and Canadian Wireless Telecommunications

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Graduate Studies Master of Public Policy Capstone Projects

2013-09 Competition and Canadian Wireless Telecommunications

Lo, Justin

Lo, Justin. (2013). Competition and Canadian Wireless Telecommunications ( Unpublished master's thesis). University of Calgary, Calgary, AB. http://hdl.handle.net/1880/51617 report

Downloaded from PRISM: https://prism.ucalgary.ca MASTER OF PUBLIC POLICY CAPSTONE PROJECT

Competition and Canadian Wireless Telecommunications:

Evaluating the Government of Canada’s Wireless Policies following the 2008 Wireless Spectrum Auction for Advanced Wireless Services

Submitted by: Justin Lo -

Approved by Supervisor: Dr. David Bercuson

Submitted in fulfillment of the requirements of PPOL 623 and completion of the requirements for the Master of Public Policy degree

September 9, 2013 ACKNOWLEDGEMENTS

I would like to thank my capstone supervisor, Dr. Bercuson for encouraging me to pursue my interest and providing me the ability to freely explore the topic to its fullest extent. I also thank family and friends who pushed me to pursue my ambitions with enthusiasm. Finally, this effort could not have been possible without the longstanding support and encouragement of my amazing fiancée, Jennifer.

EXECUTIVE SUMMARY

The following report looks at the Government of Canada’s policies regarding competition in the Canadian wireless telecommunications sector, and the transition of the

Government of Canada’s approach in telecommunications from regulation to increased competition. Specifically, this report looks at the impact of Wind Mobile and the other new wireless entrants on Canadian wireless telecommunications since their entry into the market following the 2008 wireless auction for advanced wireless services.

The report also looks at the historical approach to telecommunications regulation in

Canada, and finds that the development of Canada’s national telecommunications network was accomplished in a highly regulated environment that saw the emergence of a series of provincial monopolies and the dominance of a single national long distance exchange carrier.

This regime persisted until the Alberta Government Telephones v. Canadian Radio-Television and Telecommunications Commission and CNCP Telecommunications ruling by the Supreme

Court of Canada and the passing of the 1993 Telecommunications Act, which would become

Canada’s first amalgamated, national, legislation regulating the Canadian telecommunications industry. The Act established the Canadian Radio-television and Telecommunications

Commission as the primary regulator in Canadian telecoms, and also allowed for a greater degree of competition in the Canadian telecommunications market.

The rapid advance of wireless technology in Canada resulted in a review of telecommunications policy in Canada, and the 2006 panel review of the telecommunications policy in Canada noted that competition in the Canadian wireless industry has been dominated by three incumbent carriers who, at the time, possessed over 95% of the Canadian wireless market. As a response to the lack of competition in the Canadian wireless industry, the

Government of Canada adopted the panel review’s recommendation to increase wireless competition and would do so by setting aside a series of wireless spectrum licences for new entrants in their 2008 wireless spectrum auction. The auction resulted in the entry of three new wireless carriers to the Canadian wireless market: Mobilicity, Public Mobile, and Wind Mobile.

These three new carriers would compete with incumbent carriers Bell, Rogers, and Telus and hopefully increase competition in the Canadian wireless sector, while providing better prices for Canadian consumers.

The report measures changes in subscriber growth, subscriber market share, and average revenue per user from 2009 to 2012, capturing the period in which the new wireless entrants began operating to the last available annual report from Bell, Rogers, Telus, and Wind

Mobile. Due to the private nature of Mobilicity and Public mobile, neither is required to publicly report their earnings or growth and neither carrier is used in the comparison. The report finds that, while Wind Mobile has managed to grow its subscriber base at a comparable rate to the three wireless incumbents, its market share is still only 2% of the total wireless market.

However, the market share of the incumbent carriers has also steadily fallen since 2009.

Consequently, one can assume that the new wireless entrants have made some success in making the market competitive, though the results are still not large enough to definitely determine if this is a long term trend. When looking at average revenue per user, Wind Mobile fails to generate revenues comparable to the three wireless incumbents, and it is assumed that

Public Mobile and Mobilicity are experiencing similar difficulties. This suggests that the new wireless entrants are having difficulty maintaining financing competitiveness compared to the three incumbent carriers.

Recent news indicates that all three of new wireless entrants are experiencing some degree of financial difficulty. This is consistent with the average revenues per user found in the evaluation of Wind Mobile. The report concludes that the Government of Canada’s policies to generate increased competition in the Canadian wireless market have been met with mixed success, providing not guarantee of long term competitiveness. With the anticipation of another wireless spectrum auction in 2014 and a lack of data to evaluate long range outcomes, it is recommended that the Government of Canada:

 Continue to encourage increased competition in the Canadian wireless telecommunications market.  Proceed with the 700 Mhz wireless spectrum auction in January 2014 as planned, with spectrum specifically set aside for new bidders and entrants from the 2008 wireless auction.

 Continue to enforce the 5-year moratorium period on transfer of spectrum following the conclusion of the auction.

In addition, it is also recommended following the auction to:

 Modify future auction rules so that winning bidders only pay 5% of the winning bid within the first 10 days, and require the remainder be paid at the end of the five year period to reduce initial start-up costs.  Develop explicit rules regarding return of spectrum to the public ownership in the event of firm failure or failure to pay for spectrum at the conclusion of the five year transfer moratorium.  Allow for up to 49% foreign ownership of Canadian telecommunications providers.  Review and reconsider the CRTC’s role and mandate in the existing Canadian telecommunications industry, and define its role as a new wireless regime emerges.  Evaluate outcomes following the five year moratorium period of the 700 Mhz auction to assess capacity to accommodate additional competition in the Canadian wireless telecommunications industry long term (10 years and beyond).

TABLE OF CONTENTS

INTRODUCTION ...... 8

BACKGROUND ...... 11

Telecommunications Regulation History in Canada ...... 11

The 2006 Telecommunications Policy Review ...... 13

2008 Wireless Spectrum Auction and Wind Mobile ...... 16

LITERATURE REVIEW ...... 20

EVALUATION METHODOLOGY ...... 25

FINDINGS AND DISCUSSION ...... 27

Subscriber Growth ...... 29

Market Share ...... 30

Average Revenue per User ...... 32

POLICY IMPLICATIONS ...... 35

2008 AWS Auction Rules ...... 36

Telecommunications Act Restrictions on Ownership ...... 38

Recent Developments ...... 41

Long term Implications ...... 43

EXPECTED OUTCOMES AND RECOMMENDATIONS ...... 45

Licence Transfers and Foreign Ownership ...... 45

Regulatory Outcomes ...... 49

Long term Competition ...... 50

CONCLUSION ...... 52

APPENDIX ...... 55

REFERENCE LIST ...... 59

INTRODUCTION

The telecommunications industry has seen a rapid development and proliferation of wireless telecommunications globally, which has fundamentally changed the way citizens interact and utilized telecommunications on a daily basis. This rapid innovation has also resulted in the convergence of multiple forms of telecommunications such as voice, broadband internet, and short message services single a single, wireless package. The rapid pace at which telecommunications advances has resulted in a significant area of public policy that has been difficult for governments to keep pace with, resulting in a series of different regulatory and deregulatory approaches. These approaches can often take time to develop, becoming dated as soon as they are implemented. In Canada, the first legislation to directly address telecommunications did not occur until 1993 with the passing of the Telecommunications Act

(SC 1993) and was not amended significantly until 2012.

The telecommunications industry is also a capital-intensive industry. Consequently, significant finances are required in order to build adequate infrastructure and provide distribute telecommunications services across a large country such as Canada, especially with such a dispersed population. Consequently, Canada’s telecommunications industry has historically been dominated by large regional monopolies that have either been government owned utilities or have been supported by government legislation to maintain their position

within the Canadian telecommunications industry. However, with the convergence of telecommunication technologies and the move towards wireless communications, Canada’s telecom industry has evolved from a series of regional monopolies to an industry dominated by three, privately owned national players with limited competition. This has resulted in Canada having comparatively high wireless prices compared to other countries (Li & Ninan, 2010;

McGinley, 2011).

Modern telecommunications deregulation in Canada started with the passing of the

1993 Telecommunications Act as part of a larger global trend in the deregulation of wire line – also known as landline – services throughout the 1990s. Further advances in wireless technology and the convergence of voice and broadband data services resulted in the

Government of Canada undertaking a review of its telecommunications policy in 2006. As a result of this review, Canada has committed to increasing competition in the wireless telecommunications industry and to provide improved services and prices to Canadian consumers. The following report will look at Government of Canada’s new wireless policies and goals, and evaluate whether the steps taken by the Government since 2006 have resulted in more competitive pricing for Canadian wireless consumers. More specifically, this report will focus on the entry of three new wireless carriers to the Canadian landscape following the 2008 wireless spectrum auction and their effect on wireless services and prices in Canada. The report will provide additional focus to Wind Mobile as it has had the largest national penetration of

the three new wireless carriers. In addition, its ownership structure has resulted in changes to not only Canadian wireless telecommunication policies but has also resulted in modification to ownership requirements for new entrants under the Telecommunications Act.

In order to evaluate the effects of the Government of Canada’s new wireless policies on competition, this report will analyze changes in consumer prices and growth in wireless subscribers during the period of 2009 to present. Competition in Canada will be based on the growth wireless subscribers for new entrants in comparison to the incumbent carriers and the industry as a whole. The comparison will also look at average revenue per user, which is regularly used by the industry as a measure of revenue and competitiveness, to assess competitive viability of the new mobile entrants to the incumbent carriers. Due to the complex nature and scope of wireless services and market competition, this report focuses solely on the effects of new entrants from the 2008 wireless spectrum auction and the effectiveness of the

Government of Canada’s policies to increase competition during this period.

Prior to this report, the Government of Canada has announced an additional auction for licences in the 700Mhz wireless band for mobile services. The results of the new entrants following the 2008 wireless auction will be used to assess possible outcomes regarding the policy framework of the upcoming auction, and whether new policies will enhance wireless competition long term.

BACKGROUND

Telecommunications Regulation History in Canada

Canada’s modern regulatory regime regarding telecommunications began in 1993, following the passing of the Telecommunications Act and as part of a larger global trend to deregulate wire line telephone services to better serve consumers. Prior to the passing of the

Act, Canadian telephone services were regulated under the Railway Act of 1906 (Rideout,

2003). The development of the new global telecommunications regime during the 1990s was a response to the previous trend of government owned utilities and the prevalence of a natural monopoly that dominated telecommunications ecosystems globally. This was largely due to the large infrastructure costs associated with the development of a nationally connected landline telecommunications structure, as well as the historic treatment of long distance communication as a public utility similar to energy and hydro services, rather than a commodity good. This structure resulted in provincial monopolies run either by crown corporations such as

Alberta Government Telephones (AGT), Sasktel, and Manitoba Telephone System (MTS) or a single private corporation such as BCTel or Bell. These networks were interconnected through

Bell’s long distance network, affording considerable market power to Bell and limiting the possibility for new entrants in the Canada’s telecommunication landscape (Wilson, 2000).

Privatization and competition were viewed as a means increasing the capacity to serve consumers, as the single provider structure became strained and prices for consumers rose to meet demands (Wilson, 2000). However, this required all major telecommunications corporations to be subject to national jurisdiction and legislation, rather than being under provincial jurisdiction that existed for crown corporations and province-exclusive exchange carriers. This was remedied with the 1989 Supreme Court of Canada ruling in Alberta

Government Telephones v. Canadian Radio-Television and Telecommunications Commission and

CNCP Telecommunications. The ruling established national control for all telecommunications carriers regardless of status and jurisdiction. After this ruling, the Telecommunications Act was passed in 1993 and established the Canadian Radio-Television and Telecommunications

Commission (CRTC) as the primary regulatory body regarding telecommunications in Canada

(Telecommunications Act, 1993). The 1993 Act also consolidated all prior regulation of telecommunications under the Railway Act and the National Telecommunications Powers and

Procedures Act, while also establishing specific national policy objectives for telecommunications in Canada. These objectives were outlined in section 7 of the

Telecommunications Act, which stated:

7. It is hereby affirmed that telecommunications performs an essential role in the maintenance of Canada’s identity and sovereignty and that the Canadian telecommunications policy has as its objectives

(a) to facilitate the orderly development throughout Canada of a telecommunications system that serves to safeguard, enrich and strengthen the social and economic fabric of Canada and its regions; (b) to render reliable and affordable telecommunications services of high quality accessible to Canadians in both urban and rural areas in all regions of Canada; (c) to enhance the efficiency and competitiveness, at the national and international levels, of Canadian telecommunications; (d) to promote the ownership and control of Canadian carriers by Canadians; (e) to promote the use of Canadian transmission facilities for telecommunications within Canada and between Canada and points outside Canada; (f) to foster increased reliance on market forces for the provision of telecommunications services and to ensure that regulation, where required, is efficient and effective; (g) to stimulate research and development in Canada in the field of telecommunications and to encourage innovation in the provision of telecommunications services; (h) to respond to the economic and social requirements of users of telecommunications services; and (i) to contribute to the protection of the privacy of persons. (1993)

The above criteria would subsequently serve all future policy direction for telecommunications development in Canada, including the development and proliferation of wireless telecommunications in the country.

The 2006 Telecommunications Policy Review

In response to the rapidly changing global telecommunications environment and the introduction of a number of new telecommunications technologies, the Government of Canada

commissioned a panel review of telecommunications policy in Canada in April of 2005. The review was published in March 2006 and was a 300-plus page review of the telecommunications industry and telecommunications policy in Canada. The report found that, the Telecommunications Act led to deregulation and increased competition in Canadian telecommunication, the policy goals in the Act were now dated and did not accurately reflect the current state of Canada’s telecommunications industry.

The report noted the increased focus on wireless communications technologies and emphasized that Canada, at the time, had among the lowest wireless penetration and access for consumers among OECD countries. The review also noted that Canada had one of the lowest percentages of wireless subscribers in their population compared to other countries.

Consequently, the report proposed a number of recommendations to reform Canada’s telecommunications policy in order for it to more accurately respond to the emerging wireless telecommunications industry. The report also proposed that government’s position regarding telecommunications policy be clarified, finding that section 7 was both unclear and contradictory to itself (2006, p. 2.9-2.11). Of its recommendations, the two major proposals were put forward. The first proposed to replace section 7 of the Telecommunications Act with more specific policy goals to foster competition to develop Canada’s wireless network while limiting regulation so that it would only ensure that telecommunications providers worked in the public interest (p. 3.9). The second was to modify the government’s regulatory practices to

include the involvement of the competition bureau and move away from ex ante regulation to ex post regulation, acting on violations after they have occurred rather than trying to prevent actions entirely (p. 3.23).

While the policy review was underway, Stephen Harper and the Conservative Party of

Canada returned to power as the governing party for the first time since 1993 following the conclusion of the 2006 federal election. Following the release of the wireless policy review, the

Government of Canada under Prime Minister Harper adopted parts of the panel’s recommendations, most notably opting for a greater reliance on market forces to direct the telecommunications industry in Canada (Industry Canada, 2007). As a result of the policy review, the Spectrum Policy Framework was released in June 2007, in preparation of auctioning off portions of the wireless spectrum for public use to increase wireless penetration and accessibility for consumers. This was largely due to a sharp increase for wireless telecommunications due to the proliferation of smart phones and increased demand for wireless data by consumers (Industry Canada, 2007, p. 3). The policy framework followed the recommendations of the 2006 policy review, and its major policy objective was “to maximize the economic and social benefits that Canadians derive from the use of the radio frequency spectrum resource” (Industry Canada, 2007, p. 4). This included a reliance on market forces “to the maximum extent feasible” (Industry Canada, 2006, p. 2.12) and minimally intrusive regulation to ensure an efficient marketplace for telecommunications and wireless data

services. The 2007 policy framework would be used as the key document in drafting the framework for the subsequent 2008 wireless spectrum auction for the 2 Ghz advanced wireless services that would result in the entry of three new national wireless carriers into the Canadian mobile market.

2008 Wireless Spectrum Auction and Wind Mobile

The 2008 wireless spectrum for advanced wireless services (AWS) was held from May

27, 2008 to July 28, 2008. The auction was held in accordance with the 2007 spectrum policy framework’s policy goals of maximizing economic and social benefits from the licensing of wireless spectrum for public use. The framework for the AWS auction set out the terms of the auction as well as licensing blocks for eligible bidders, and mandated antenna and tower sharing by incumbent carriers Rogers, Bell, and Telus with new entrants to prevent the influx on redundant infrastructure that may be against the public interest (Industry Canada, 2007). In addition to auction rules outlined in the policy framework document and the licensing framework document (Industry Canada, 2007), all bidders would be required to adhere to

Canadian ownership requirements outlined in section 16 of the Telecommunications Act (1993).

The case of Wind Mobile and its status in the Canadian telecommunications industry is unique, as it was the largest of the three new entrants into the Canadian wireless market

following the 2008 wireless spectrum auction, securing 30 spectrum licenses, compared to the other two major new entrants – 10 for Mobilicity and 4 licenses for Public Mobile – giving it the biggest opportunity to emerge as a fourth national carrier. It has also had a significant impact on the Government of Canada’s existing wireless policy and also was an influencing factor in a recent legislative change to ownership requirements under the Telecommunications Act.

Consequently, the unique factors regarding Wind Mobile’s operating status and its larger network compared to the other new entrants is important for the evaluation of wireless competition policies in this report, as well as for future implications regarding wireless auction and wireless competition in Canada.

After being awarded 30 wireless licenses during the 2008 AWS auction, Wind Mobile launched their services on December 16, 2009, with initial coverage starting in the Greater

Toronto Area and Calgary (CBC News, 2009). This was not before a significant review of Wind

Mobile’s ownership by the CRTC, who voiced concern over Wind Mobile’s parent company,

Globalive Wireless Communications Corporation, and their ownership structure. Specifically,

Globalive was the only bidder in the 2008 AWS auction to have the backing of foreign investment through the Egyptian company Orascom Telecom Holdings (CRTC, 2009). The foreign backing of Globalive through Orascom prompted a review of Wind Mobile’s ownership by the CRTC in order to ensure that it met Canadian ownership requirements found in the

Telecommunications Act, which requires a corporation’s board of directors to be at least 80

percent Canadian and have at least 80 percent of the voting shares belong to Canadians (1993, s.16).

CRTC Decision 2009-678 regarding Wind Mobile’s ownership structure was published on

October 29th, 2009, and found that Globalive Wireless did not meet Canadian ownership requirements outlined in the Telecommunications Act. In particular, the CRTC found that

Globalive Wireless met the Canadian ownership requirements in fact, but was concerned that

Orascom’s investment in Globalive’s activities significantly affected the company’s ownership nature in practice. A key issue for the CRTC in reviewing Globalive’s ownership was that the majority of Globalive’s debt was held by Orascom and Orascom fronted a majority of the funding to establish Globalive’s wireless infrastructure. The CRTC felt that the amount of debt owed by Globalive to Orascom, as well as the number of directors that could be appointed to

Wind Mobile’s board of directors by Orascom would exhibit a significant amount of influence over Globalive and its operations, and could result in unfavourable outcomes for Canadians

(CRTC, 2009). As a result, the CRTC ruled that Wind Mobile did not meet Canadian ownership requirements and could not operate in the Canadian telecommunications industry.

Despite the CRTC’s decision regarding Wind Mobile, the Privy Council Office released an order in council regarding Wind Mobile on December 10, 2009. The decision of the Minister of

Industry, acting as Governor in Council, Globalive Wireless was sufficiently Canadian despite

Orascom’s significant interests and would be allowed to operate as a Canadian wireless carrier.

This was done through section 12.1 of the Telecommunications Act, which gives the Governor in

Council the ability to vary any decision reached by the CRTC under the Act (1993). Shortly after the Governor in Council’s decision, Wind Mobile launched its wireless service on December 16,

2009.

The decision from the Governor in Council was controversial and resulted in Telus and new wireless entrant Public Mobile challenging the Minster of Industry’s decision in the Federal

Court of Canada. The Governor in Council’s decision was initially overturned on February 4,

2011 by the Federal Court, who ruled that Orascom’s investments in Globalive and its ability to appoint members to Globalive’s board of directors was enough to consider it a non-Canadian company (Public Mobile v. Canada, 2011). The decision, however, was appealed by the government, and the Federal Court of Appeal found in favour of the Governor in Council on

June 8, 2011, allowing Wind Mobile to continue its business operations (Globalive Wireless

Management Corp. v. Public Mobile Inc., 2011). While Public Mobile attempted to appeal the issue to the Supreme Court of Canada, the Supreme Court elected not to hear the case, confirming Globalive Wireless’ status as a Canadian company and Wind Mobile’s eligibility to operate (Supreme Court of Canada, 2012). Following the Supreme Court’s decision not to hear the case, the Government of Canada passed Bill C-38, which came into force on June 29, 2012.

Bill C-38 included an amendment to the Canadian operational requirements found in the

Telecommunications Act, allowing companies to operate in Canada with significant foreign

investment as long as “it has annual revenues from the provision of telecommunications services in Canada that represent less than 10% of the total annual revenues, as determined by the Commission, from the provision of telecommunications services in Canada” (House of

Commons of Canada, 2012, s.595; Telecommunications Act, 2012).

The results of the 2008 wireless spectrum auction and the final ruling on Wind Mobile’s ownership status are significant to existing wireless policies regarding competition in Canada.

Wind Mobile’s status as a carrier enacted a change by the Government of Canada regarding ownership and operation rules for Canadian wireless companies, and will affect future competition in the Canadian wireless industry. While not directly affecting Canada’s policy regarding telecommunications competition, it will be a significant factor in the further deregulation of Canada’s wireless industry and the provision of wireless services to consumers.

LITERATURE REVIEW

Patricia Aufderheide’s Communications Policy and the Public Interest (1999) and Vanda

Rideout’s Continentalizing Canadian Telecommunications (2003) provide detailed insights into the history of telecommunications regulation and telecommunications policy in the United

States and Canada, respectively. Both look at the origins of telecommunications regulation and government perceptions regarding the telecommunications industry from its inception until the

major drafting of each country’s respective Telecommunications Act. The books also explain why these documents were necessary in creating the emerging regime in both countries. In particular, both talk about the initial view of wire line telecommunications as a public utility and the desire by both countries during the 1930s to 1950s to provide national telephone access to all citizens.

Kevin G. Wilson’s Deregulating Telecommunications (2000) also provides an in depth look at the history of telecommunications regulation in the United States in Canada in a comparative context, highlighting Canada and the United States’ approaches to regulation and how they compare to one another. In particular, Wilson notes that Canada’s approach to wire line telecommunications consisted of a number of provincial monopolies consisting of a mix of private corporations and government-backed telephone companies, with a single long distance carrier. He compares this to the United States, which allowed for AT&T to hold a monopoly over both local and long distance telecommunications until anti-trust lawsuits broke up the AT&T regime, and how American distrust of monopolies created more competition during the deregulation period compared to Canada. Wilson also notes that Canada’s regulatory approach was partly influenced by the previous Canadian policy of nation building, which started with the development of a national railroad and Canadian response to prevent American penetration into Canadian industries. Additionally, Arden’s “Competition versus Regulation” (2004) looks at the importance of the previous regulatory regime in the United States as a necessary step in the

deregulated, competitive environment that exists for wireless telecommunications in the

United States.

Gandal, Salant, and Waverman’s article “Standards in Wireless Telephone Networks”

(2003) looks at the impact of open competition and the development of wireless standards in

North America and Europe. They note that, while Europe collectively chose a single standard for wireless operation, North America allowed for a more competitive structure that enabled firms to choose their own standard and develop them as they saw fit, so long as interoperability existed between carriers for voice calls. However, Gandal et. al do not make any conclusions regarding which path was the more effective in creating long term competition in their respective wireless industries. However, they do state that the European approach allowed carriers to provide cheaper hardware for consumers due to economies of scale, while the

American model allowed for greater innovation by firms, faster access to better technologies and wireless services resulting in superior access to services for consumers. In this case, the larger comparative geographic nature of North America to Europe may have prompted each continent’s divergent approach to wireless regulation, which also plays a factor in how competition may evolve due to the capital intensive nature of wireless communications.

Mariscal’s article “Telecommunications Reform in Mexico from a Comparative

Perspective” (2004) compares the deregulatory approaches of Mexico, the United States, and

New Zealand during the 1990s, noting their similarities and different approaches to increasing

competition in their respective wireless industries. Specifically, each government’s attempt to deregulate a large, monopolistic telecommunications regime with mixed results. In particular, the Mexican approach to deregulation was rapid and resulted in significant development of the telecommunications industry in Mexico in a short amount of time. However, this approach has afforded Telmex significant monopoly power as a private corporation and resulted in above- average rates for consumers. Conversely, antitrust cases and lack of legislative consensus resulted in slower deregulation in the United States and New Zealand, but created more competitive landscapes for telecommunications. The United States’ and New Zeland’s approaches also emphasize the importance having at least marginal regulation to ensure that monopolistic practices do not prevent competition, as in the case of Mexico.

Bulow, Levin, and Milgrom’s “Winning Play in Spectrum Auctions” (2009), Cramton,

Kwerel, Rosston, and Skrzypacz’s “Using Spectrum Auctions to Enhance Competition in Wireless

Services” (2011), and Bajari and Yeo’s “Auction Design and Tacit Collusion in FCC Spectrum

Auctions” (2008) all look at the use of spectrum auctions in the United States as the main policy tool in increasing wireless competition, and all provide consensus that auctions are the best method in generating new competition in the development of the wireless industry.

Additionally, all three articles also emphasize the importance of auction structure and other tools such as set-asides, bidding credits, or bidding limitations to foster competitive entry into the wireless telecommunications industry to prevent overt exercise of market power and

collusion by incumbent wireless carriers. Most importantly, anonymous bidding is important to prevent collusive behaviour by incumbents, and block limitations and spectrums set-asides for new entrants are important measures for allowing new companies to enter the market

(Cramton et. al., 2011). However, none of these authors address the concerns of long term competition once new wireless entrants have entered the market, only noting that competition is increased through auction and license limitations such as set-aside blocks facilitate increased wireless competition.

The lack of material regarding Canada’s wireless industry and competition makes the evaluation of Canada’s wireless landscape since the 2008 wireless spectrum auction interesting, making it the first major change to Canada’s wireless telecommunications landscape.

Consequently, looking at long term competition viability and the effects on wireless prices for consumers can help determine whether Canada’s existing wireless strategy and policies are working. In particular, this study will try to address whether Canada’s policies for increasing wireless competition have generated sustained success or have only created short term solutions to competition. Additionally, Canada’s unique nature of having a large geographical mass, but low population gives rise to unique characteristics in the Canadian wireless market.

EVALUATION METHODOLOGY

The 2008 wireless spectrum auction for AWS services in Canada resulted in the entry of

Wind Mobile, Mobilicity, and Public Mobile into the Canadian wireless market. They entered with the intention of increasing competition in Canada’s wireless industry and consequently providing better services, access, and prices for Canadian wireless consumers. The purpose of this evaluation will be to determine whether the results of the AWS auction and current telecommunications policy in Canada has accomplished the goal of increasing services and lowering prices for Canadians, as well as whether an environment for long term competition in the Canadian wireless sector exists.

The CRTC releases their Communications Monitoring Report on an annual basis, and tracks wireless growth and development using a variety of factors, including percentage of market share by company, industry ARPU by province, subscriber and revenue growth rates, and wireless service rates by company. These numbers serve as a standard measure of the state of the Canadian wireless industry and how it is growing. However, the CRTC monitoring reports only look at the impact of new entrants based on their market share and rates compared to the incumbents. The reports make no conclusions regarding the effect of the new wireless carriers on competition, and only look at changes in their reported statistics from the previous year for some measures of wireless growth and competition in Canada.

The evaluation methodology used in this report uses time series data collected from

Wind Mobile, Telus Mobility, Bell Mobility, and Rogers Wireless regarding their mobile subscribers and revenue during the period of 2009 to 2012. Mobilicity and Public Mobile were excluded from the data series, as both companies are wholly privately held entities and neither releases their revenue or subscriber numbers to the public. Subscriber growth by Wind Mobile will be measured against the growth of the three wireless incumbents’ subscriber growth year- over-year during this period, and will look to see if Wind Mobile’s new subscriber rate has managed competitive increases during its operations in the Canadian wireless industry, as well as whether its subscriber growth has been larger than the three existing incumbent wireless carriers. Wind Mobile’s market share over this same period will also be looked at, to see if any significant changes to market share have occurred in the entry of the new wireless entrants.

In addition to measures of subscriber growth, Average Revenue per User will be taken from each company’s financial reports and compared over the same period. ARPU has been commonly used in Canada as a metric to measure profitability as well as competition in the wireless industry. The use of ARPU will be used to determine whether Wind Mobile’s revenues per user have increased during its time in operation, and consequently whether Wind has managed to increase their profitability versus the three incumbent carriers. In additional, ARPU for the three incumbents will be measured to see if ARPU has dropped, grown at a slower rate, or has held constant to see if new competition has reduced their profitability margins. This will

also be compared to the national ARPU average released by the CRTC in their annual monitoring report.

The goal of the evaluation is to determine whether the presence of the new wireless entrants has made an impact on ARPU across the industry and whether growth rates for new entrants such as Wind Mobile are positive enough to determine that their presence in the market is sustainable. The ability for the Canadian wireless market to ensure sustained competition will be used as the main fact in evaluating whether the Government of Canada’s policy decision to increase competition was a successful policy and has accomplished its goal.

Additionally, the sustainability of the new wireless entrants in the Canada market will also determine whether additional competition is possible, or whether the dominance of the three national incumbents is expected to continue long term. This evaluation does not, however, look at the effect of increase mobile competition on consumer prices themselves, due to the space and length limitations of this report.

FINDINGS AND DISCUSSION

The 2008 AWS spectrum auction concluded on May 27, 2008 and Bell, Rogers, and Telus were awarded 54, 59, and 59 licences respectively. Mobilicity, Public Mobile, and Wind Mobile managed to secure 10, 4, and 30 licences respectively, with Wind Mobile almost doubling the

bid total of the next largest new entrant, Mobilicity (See fig. 1, Appendix). The results of the auction show the large amount of capital required in order to enter the wireless market, and the significant market advantage available to the three wireless incumbents. More importantly however, the presence of Wind Mobile’s foreign backing allowed it bid significantly higher than the other two major new entrants during the auction in order to secure more licences and, subsequently, be in a position to provide more national coverage than Mobilicity and Public

Mobile following the conclusion of the AWS auction. The nature of the auction also shows the increasing costs required to secure spectrum licences for more of Canada’s population, as

Rogers paid an average of $33.30 per user, while Wind Mobile and Mobilicity paid an average of $19.00 and $15.08 per user. As a result, it is important to not only look at subscriber growth, but also at revenues attained by the new carriers versus the incumbent carriers to determine how competitive the new carriers are in comparison to the three incumbent carriers. While attracting more users is an important factor to assessing the amount of competition provided by new entrants, comparing their ability to generate revenue per user compared to the incumbents is also important. The analysis of subscriber share, market growth, and average revenue per user shows that, while Wind Mobile has been able to attract users at a competitive rate, its market share is still a small minority of the overall market. In addition, the effect of new competition has only had marginal effects on the revenues of the incumbent carriers, while the new entrants are not generating comparable per-user revenues to the incumbents.

Subscriber Growth

An overview of Canada’s telecommunications industry since the AWS spectrum auction in 2008 shows that growth in Canada’s wireless market has slowed since 2009, shrinking between 1 and 2 per cent each year (see Fig. 2, Appendix). This suggests that Canada’s wireless market has not yet reached capacity, but has reached a certain level in which growth is now occurring at a slower pace. This is consistent with the growth patterns experienced by the three incumbent carriers, all of whom experienced growth during the same period similar to the national growth rate, with rates shrinking from 2009 to 2012. The exception for the three incumbent carriers is Bell, who experienced an increase in growth from 2011 to 2012. However,

Bell’s growth was still smaller than the national rate, which is consistent with the incumbent carrier growth pattern over this period.

Wind Mobile experienced considerable growth since its entry into the wireless market.

Taking into consideration the limited coverage area that Wind Mobile has compared to the three incumbent carriers, it has managed to add 590,438 subscribers since their entry into the market. Looking at their year-to-year growth, they increased their subscriber base by 42% in

2011 and by 32% in 2012, showing significant growth over compared to the national rate. In addition their actual net additions, though smaller than the three incumbent carriers, is not noticeably worse than the incumbent carriers’ performance over this time. Wind Mobile actually managed to add 85,438 subscribers more than leading Canadian wireless provider

Rogers Wireless between 2011 and 2012. This suggests that take up by Canadian consumers to new wireless entrant service has been comparable the existing wireless incumbents. It also shows that the urban-focussed service strategies undertaken by each of the three new carriers was a strong move to enhance competition in Canada’s areas with the largest population density. It is expected that Wind Mobile, as well as Mobility and Public Mobile, have little to no growth in rural areas where they possess spectrum licences, which require more intensive capital investment with more limited revenue-generation potential.

While Wind Mobile has been able to add subscribers at a rate similar to the three wireless incumbents, sustained success in Canada’s market place requires Wind Mobile’s growth to exceed the national market and the growth of the wireless incumbents, in order to begin capturing more significant market share. However, similar to the national market, Wind’s growth numbers have shrunk annually since their entry to the market in 2010. However, for its initial three years of operation, it appears the Wind Mobile has been at least equivalently competitive with Bell, Rogers, and Telus at growing its subscriber base.

Market Share

While Wind Mobile has managed to attract a comparable amount of subscribers on an annual basis compared to the three incumbent carriers, the fact still remains that Bell, Rogers, and Telus collectively make up a powerful majority of the Canadian wireless market. As of 2012,

the three wireless incumbents still account for 93% of Canada’s wireless market (see Fig. 3,

Appendix) and exhibit a significant amount of market power as a result. Though Wind Mobile has managed to attract subscribers at a competitive rate, their market penetration has only reached 2 percent, though their share continues to increase and has doubled since their initial entry in 2010.

The significant market share that Bell, Rogers, and Telus posses, though still large, has also dropped with each successive year since the entry of the three new wireless entrants. In

2009, prior to the launch of Wind Mobile and the other new entrants, Bell, Rogers, and Telus collectively held 96% of the Canadian wireless market. In the three years since, their market share has shrunk 3%. In addition to Wind Mobile’s 2% share of the market, regional incumbents

Videotron, Sasktel, and MTS Allstream have increased their share 2% since 2009, capturing 6% of the Canadian market, up from 4% in 2009. This suggests the Wind Mobile has managed to increase their subscriber base and capture market share faster than existing incumbent carriers, but their small share means that they have not made a significant impact on the Canadian wireless landscape as of yet.

While Public Mobile and Mobilicity do not publicly report their subscriber numbers and growth, the Government of Canada’s 2012 CRTC Monitoring Report groups Mobilicity and

Public Mobile with Wind Mobile in their market share calculations, and shows that the three entrants collectively held 4% of the market in 2011, and claims that the three incumbent

carriers only held 91% of the market in the same year (CRTC, 2012). This suggests that the 2008

AWS spectrum has marginally increased competition, and time series trends suggest that over time that the incumbent carriers will continue to lose market share, suggesting a competitive environment. However, the trend suggests that growth for the new carriers is has not exceeded the market and dominance by the three incumbent carriers is expected to continue in the immediate future. This is also consistent with the CRTC’s data that states that despite new entrants now possess 4% of the wireless market they only capture 2% of existing wireless revenues. This suggests that while subscriber growth and market share have generated positive trends for competition, the new entrants may be experiencing troubles generating financial revenues.

Average Revenue per User

Revenues in the telecommunications industry are commonly compared through the use of average revenue per user (ARPU), which is measured on a dollars per month basis. Because the CRTC has not yet released its 2013 monitoring report, average national ARPU for 2012 is not available. However, when looking at ARPU changes between 2009 and 2011, the CRTC reports that ARPU in Canada has stayed near the 58 dollars per user mark, going slightly above in 2009 and dropping slightly below in 2010 with the arrival of the new wireless entrants. Since 2011,

ARPU has grown slightly and returned to 58 dollars per use exactly (See Fig. 4, Appendix).

Contrary to the competitive landscape suggested by the subscriber growth and subscriber market share analysis, an evaluation of ARPU trends from 2009 to 2012 does not suggest the level of competition that existed in the previous two models.

When looking at the ARPU of Bell, Rogers, and Telus, the results vary by carrier. Rogers,

Canada’s largest wireless service provider, had the highest ARPU from 2009 to 2011, but also is the only carrier that experienced a reduction in ARPU in each year, eventually giving up its status as the most profitable carrier on a per user basis to Telus in 2012. Conversely, Bell and

Telus both experienced growth in ARPU from 2009 to 2012, and both were either close to or exceeding the national ARPU growth in each year. In Bell’s case, their ARPU grew steadily during this period and ARPU growth increased year, though they continue to have the lowest

ARPU among the wireless incumbents. This could possibly be due to Bell’s services and network gradually improving to levels similar to Rogers and Telus, making them more profitable, or could be a factor of them becoming more competitive as a result of the 2008 AWS spectrum auction. Telus has managed higher a higher ARPU year-to-year compared to Bell, but also captures a higher market share of subscribers compared to Bell. In addition, Telus’s growth made it the most profitable wireless provider on a per user basis in 2012. Given the ARPU trends from 2009 to 2012, it is likely that all three wireless incumbents continue to experience a comfortable level of profitability despite the presence of new entrants into the wireless market.

Rogers, as the largest overall service provider, may be experiencing the effects of heightened competition from both the new wireless carriers and the other two incumbents the most, experiencing a 4.7% loss in ARPU from 2011 to 2012. However, the continued growth by Bell and the above average ARPUs for Rogers and Telus suggest that the three incumbents continue to control the market.

Wind Mobile’s ARPU suggests that, while it has been able to continue to grow its customer base, it is not currently competing on a profitable basis compared to the three wireless incumbents. For the most part, its ARPU has not changed significantly since its entry into the market in 2010, even experiencing a 9% loss in ARPU in 2011 before returning to levels similar to its entry in 2010. The lack of per user revenue for Wind Mobile may be largely due to its approach to using discount rate packages to attract subscribers, forcing them to forego some revenues early on in order to gain market share and reputation in the Canadian wireless market. However, with an ARPU close to $20 less per user than Bell, Wind Mobile’s financial situation does not appear to be favorable. This is similar to the case of Mobilicity, who reported an ARPU in 2011 of $30 (2012), and has recently announced that they are in the midst of restructuring their assets and looking for someone to purchase their operations (2013). The significant market power Bell, Telus, and Rogers possess has also allowed the incumbents to match any discount packages provided by new carriers in an effort to retain their customer base and attempt to attract users away from the new wireless carriers while simultaneously

providing larger network access as an added bonus. Consequently, in order to compete for customers the incumbent carriers must continue to provide discounts for their services, but are less competitive due to the lower average revenue per user.

POLICY IMPLICATIONS

The 2008 AWS spectrum auction was successful in bringing three new competitors into the Canadian wireless industry and, at least in the case of Wind Mobile, has been able to compete with the three incumbent carriers in terms of attracting customers to their network.

However, while Wind Mobile’s market share continues to increase steadily, it has only managed to capture 2% of the existing wireless market, while the three wireless incumbents still hold a strong majority with over 90% of the market. In addition, Wind Mobile has struggled to increase their average revenues per user since they began operations, and their ARPU is considerably less than any of the three incumbent carriers. Considering the analysis provided above, it appears that the Government of Canada’s policies towards increasing competition in the

Canadian wireless telecommunications industry have generated mixed results. The reason for these mixed results comes partially from the rules set out for the 2008 spectrum auction, and also partially due to limitations found in the Telecommunications Act itself.

2008 AWS Auction Rules

A significant factor in the ability to encourage competition from the results of the 2008

AWS spectrum auction comes from the policy framework that set out the auction rules and design (2007). The auction specifically set-aside portions of the spectrum available for auction and limited bidding on those blocks to new bidders only to ensure the entry of at least one new competitor to the Canadian wireless industry. This policy decision had the twofold effect of preventing the wireless incumbents from exercising their considerable market power to effectively overpay for spectrum to prevent new competition, and also helped prevent possible collusion by wireless incumbents to increase the costs for new bidders wanting to enter the market. While the set-asides did facilitate the entry of the three new wireless carriers, the spectrum set aside only represented a small minority of the available spectrum licences in the auction, and the wireless incumbents still captured a significantly higher number of licences than any of the new entrants. They did this by paying significantly more for their licences on a per-population basis (See Fig. 1, Appendix) compared to the new entrants.

The policy framework for the 2008 auction also mandated tower and site sharing by the incumbents with any new wireless entrants. This was done with the consideration that “new entrants contend that they cannot gain ready access to new antenna sites and that rates charged are artificially high so as to preclude new entrant access” (Industry Canada, 2007, p. 9).

The tower sharing agreements provide a benefit to the new entrants, as it reduced the need to

raise the capital required to build antenna towers in addition to building out their service network. Forcing the new entrants to build their own towers and acquire sites for their towers would have provided additional costs and time constraints that would likely have prevented the new competitors from effectively entering the market. However, the reliance on the incumbent carriers to provide services may also have some disadvantages for the new carriers, as this provides a strategic advantage for the incumbents in the discussion of tower sharing agreements. Even though arbitration provisions are in place if new carriers cannot agree to terms with incumbents on tower sharing, they may end up with a sub-optimal result in arbitration that could affect their service provision to their customers. Ultimately, long term success will require complete independence from incumbent carriers. However, this is a difficult proposition and may not serve the public interest, whose concerns factored into limiting new tower infrastructure and mandating antenna sharing prior to the AWS spectrum auction (Industry Canada, 2007).

The AWS spectrum auction and the rules applied to the auction were a reasonable policy approach that, in the short term, accomplished the Government of Canada’s policy goal

“to maximize the economic and social benefits that Canadians derive from the use of the radio frequency spectrum resource” (Industry Canada, 2007, p. 1). However, the policy framework and goal of the 2008 AWS auction only accomplished its goal by allowing for new competitors to enter the market, not ensuring increased competition. In particular, licensing requirements

do little to ensure further support in the critical first years of business and infrastructure development for new carriers. To claim to rely solely on market principles to determine the market and encourage competition is ignoring the fact that the market itself is regulated by the

CRTC under the Telecommunications Act and that high barriers to entry limit the ability to generate competition. While the initial barrier to competition in the form of spectrum licence acquisition was addressed in the AWS auction rules, it still afforded a significant amount of market power to be exercised by the incumbent carriers and provided no assurances to new bidders beyond licence acquisition.

Telecommunications Act Restrictions on Ownership

It is important to remember that the Policy Review Panel Final Report was released in

2006 following the election of a Conservative minority government. While the Government of

Canada elected to accept the recommendations of the report and adopt policies to encourage private competition in the wireless marketplace, it was unable to significantly amend any of the associated legislation due to the risk of doing so under a minority government. In turn, the

Telecommunications Act was not amended until 2012, after the Conservative party was able to secure a majority government. Consequently, the 2008 AWS spectrum auction limited new bidders looking to enter the Canadian wireless telecommunications industry through the Act’s ownership requirements, and in some ways limited the number of possible bidders during the

2008 AWS spectrum auction – some of whom may have had more resources to compete against the wireless incumbents.

A notable exception to this rule is Wind Mobile. As noted above, Wind Mobile’s parent company, Globalive Wireless, was subject to an ownership review by the CRTC. Globalive was initially deemed not Canadian due to the significant control that Egyptian telecommunications company Orascom Telecom Holding had over Globalive’s operations, as well as the amount of debt obligations that Globalive had to Orascom. As a result, the CRTC ruled that Globalive did not meet Canadian ownership requirements and would not be able to operate as a Canadian wireless carrier due to the Canadian ownership requirements outlined in the

Telecommunications Act. Though the ruling was varied by the Governor in Council to allow

Wind Mobile to operate, this was not without difficult or resistance, and resulted in other new entrant Public Mobile filing a suit with the Federal Court of Canada. Though Wind Mobile eventually was deemed Canadian and allowed to operate without restriction, this lengthy legal battle and Canadian ownership requirements pose a significant policy barrier when trying to encourage competition, especially when related back to the results of the 2008 auction.

The Canadian ownership rule was included in the 1993 Telecommunications Act as a response to the rapid technological growth of telecommunications in North America as well as the globalization of communications. This ensured that the Canadian telecommunications industry would be able to grow through Canadian investment with Canadian companies and

would allow the industry to grow as a national industry. However, because the Act was not amended until 2012, the legislative requirements for Canadian ownership found in the

Telecommunications Act also limited the amount of competition that could occur in the

Canadian wireless telecommunications market. This factor likely served to limit the number of new bidders during the 2008 auction, and it appears that Wind Mobile’s foreign backing helped the company bid higher than other new competitors, securing more licences at a higher cost per user than Mobilicity or Public Mobile (see Fig. 1, Appendix). As a result, the policy goal of increasing competition that was recommended in the 2006 panel review of telecommunications policy and the 2007 wireless policy framework were limited during the

2008 AWS auction by the Canadian ownership section of the Telecommunications Act. Though the entry of three new wireless providers did increase competition initially, it is likely that firms that firms with more resources were not inclined to the participate in the auction, for fear that they would face a lengthy legal battle after acquiring their spectrum licences. Industry Canada’s variance of the CRTC regarding Wind Mobile’s ownership was also ruled to be an exception to the ownership requirements of the Telecommunications Act (2009), initially only providing

Globalive with access to foreign capital that Mobilicity and Public Mobile were not afforded.

This was argued by Public Mobile in their court case, claiming that the Governor in Council’s ruling was unfair and prevented Public Mobile from being given the same opportunity to compete as Wind Mobile since their access to capital was limited (Public Mobile v. Canada,

2011). This appears to be a significant issue with the existing policies regarding wireless competition, as Public Mobile was recently purchase by an investment capital consortium

(2013), and Telus was recently prevented from initiating an acquisition arrangement of

Mobilicity’s assets (Evans, 2013).

Recent Developments

As noted above, Public Mobile has recently been purchased by a joint Canadian-

American private equity firm, which has subsequently announced that Public Mobile will be active in the upcoming 2014 wireless auction for the 700 Mhz spectrum (Evans, 2013). Similarly,

Mobilicity declared that it would be recapitalizing its operations in April of 2013, possibly in preparation of acquisition by another company (2013). Shortly after Mobilicity’s announcement, Telus emerged as a potential buyer for Mobilicity’s network and their spectrum licences, however this bid was blocked by Industry Canada, with the Governor in Council noting that such an arrangement would distort the market and make it less competitive, while also noting that the 2008 policy framework prevented licence holders from transferring their licences for a minimum of 5 years (2013). These recent developments suggest that, while the

Government of Canada is committed to ensuring competition in the wireless marketplace, the barriers to entry and market power exhibited by the three incumbent carriers is a significant hurdle for new entrants to overcome.

In the case of Wind Mobile, the Supreme Court of Canada’s decision not to hear Public

Mobile’s leave application against Globalive resulted in a significant policy change, as the

Government of Canada amended the Telecommunications Act to allow for foreign ownership for companies comprising less than 10% of Canadian telecommunications service revenues shortly afterwards (House of Commons of Canada, 2012). Following this decision, Wind Mobile

CEO Tony Lacavera intended to transfer his ownership shares of Wind Mobile to Orascom

Telecom Holding, who was now controlled by Dutch firm Vimpelcom Ltd. (2013). This was followed by news that Orascom has rescinded their takeover application (2013). As a result of this issue, Lacavera is now stating a desire to buy out the shares owned by Orascom and

Vimpelcom (2013). Additionally American wireless carrier Verizon has now stated an interest in potentially acquiring Wind Mobile’s assets (Chase, Erman, & Trichur, 2013). While no such deal has been finalized, the fact that sales and takeover rumors have affected each of the new wireless entrants shows a significant gap in policy that can be addressed.

Four years after the 2008 AWS spectrum auction, the Canadian wireless telecommunications market appears to be experiencing another major shift in the competitive landscape. Though financial concerns have affected each of the three new entrants following the 2008 AWS spectrum auction, Telus has since abandoned their takeover discussions with

Mobilicity (2013), and Wind Mobile CEO Anthony Lacavera has stated an interest in possibly acquiring Mobilicity’s assets (Hardy, 2013). This would bolster Wind Mobile’s existing network,

and add an estimated 250,000 additional subscribers to their user base (Evans, 2013). Should an agreement be put in place prior to the 700 Mhz wireless auction, the Canadian wireless market could see the emergence of a competitive fourth carrier if it is successful in the auction.

The outcome of the 2008 AWS spectrum auction also appears to have influenced the

Government of Canada, who has delayed the upcoming 700 Mhz wireless spectrum auction until January 2014 (Evans, 2013). In addition, rather than setting aside a portion of the spectrum for new entrants as in the 2008 AWS spectrum auction, the Policy and Technical

Framework for the upcoming 700 Mhz auction will instead employ spectrum caps to prevent oversaturation of bids in some licence blocks by the larger incumbent carriers, allowing for greater bidding activity over licences by regional carriers and the new entrants from the 2008

AWS spectrum auction. This presents an opportunity to allow for the new entrants to increase their market share at a faster rate than incumbent carriers, but still does not address concerns regarding long term competitiveness.

Long term Implications

In looking at wireless competition policy, the 2008 AWS spectrum auction successfully accomplished the Government of Canada’s policy goal of increasing wireless competition in the

Canadian telecommunications industry. However, the Government of Canada made no statements or commitments to long term competitiveness in the wireless industry until recently, stating that they would not approve any licence transfers they felt would decrease

competitiveness (Industry Canada, 2013). The issues faced by all three wireless incumbents were unlikely to be have been predicated by the Government of Canada when formulating its policy position, but the prevalence of these issues brings to question whether public policies to help support new wireless carriers should be taken to help them compete in the wireless industry after they have entered the market, in order to overcome the significant market power that the incumbent carriers possess.

At present, though each of the three new wireless carriers have faced financial issues, at minimum Wind Mobile and Public Mobile are expected to be active bidders in the 700 Mhz spectrum auction. Though it will have been 5 years since the completion of the 2008 spectrum auction should the 700 Mhz auction commence in January 2014 as intended, the new carriers have only offered services since 2010. While 4 years may be a lifetime from a technological standpoint, no strong conclusion can be made as to whether the Canadian wireless industry is capable of supporting a fourth or fifth national carrier yet, especially in light of the rapid growth the industry has experienced since the 2006 panel review report. As it stands, it is recommended that the Government of Canada proceed with the 700 Mhz auction as is and avoid providing any major support to smaller or new carriers to increase their competitive position. One major change however should be in regards to the final payment following the result of the auction for new wireless carriers, as well as rules regarding licences in the event of firm failure.

EXPECTED OUTCOMES AND RECOMMENDATIONS

As noted previously, this report looks solely at intra-industry competition and the potential viability of a new wireless carrier in the Canadian market. Though increased competition will likely result in better prices for consumers of wireless services, the scope of this report focuses primarily on the Government of Canada’s policy to introduce additional competition into the Canadian wireless industry and the consequent capacity to support new entrants in the market. As noted by Church and Wilkins, ARPU is a measure of revenues generated per user, not a measure of consumer pricing (2013). All developments and considerations contained within this report focus on the Government of Canada’s policies to increase wireless competition and the degree of success attained in this regard.

Licence Transfers and Foreign Ownership

The Government of Canada’s decision preventing Telus from acquiring Mobilicity, and their strict application of the minimum five year moratorium prior to transfer of any licences are no doubt moves by the government intended to limit the market power of incumbent carriers and maintain the presence of new entrants in the market. However, these policies do not necessarily create conditions for increased competition. Rather, the preventing of a wireless carrier in financial trouble from transferring their licences before the completion of the

mandatory five year holding period could result in bankruptcy and total loss of service for some consumers. Following the approach of the US Government following the failure of some telecommunications firms, what to do with licences of a failed or failing firm was debated

(Bajari & Yeo, 2008). The end result was that licences were returned to government control, and it makes sense that in the event of bankruptcy that the licences are returned to the

Government of Canada to be reposted for auction. This decision would interfere with the increased reliance on market forces supported by the Government of Canada and their 2006 panel review, but prevents incumbent carriers from poaching failing new entrants in an effort to expand their network through more cost-effective means than wireless spectrum auction. In this regard, it makes sense for the Government of Canada to implement provisions for return of spectrum licences to public ownership in the event of carrier failure in order to prevent incumbent carriers from potentially increasing their market presence. This also requires a review of wireless auction rules and how to best encourage competition in subsequent auctions. The success of the upcoming 700 Mhz auction and its use spectrum acquisition caps will be a major determinant in future spectrum auction design, though specific provisions for new entrant entry expansion is imperative to increasing potential competition in the Canadian wireless sector. Though this recommendation explicitly creates winners and losers, this step must be pursued if the Government of Canada is truly committed to increasing competition in the Canadian wireless sector.

The expansion of foreign ownership provisions in the Telecommunications Act is the first major change to the Act since 1993 and also breaks from the traditional Canadian approach of encouraging and protecting Canadian ownership in major industries. The amendment shows that the current government is deeply committed to increasing competition and will do so regardless of national sentiment and potential international security concerns. If the

Government of Canada continues to advocate for increased competition in the wireless sector, it should continue to encourage foreign competition to limit the market power of the incumbent carriers. This is consistent with the fact that, while all three new mobile entrants have experienced difficulty, Wind Mobile has been the most successful in its market entry, likely due to its access to foreign investment. Wind Mobile’s meagre success also provides evidence that the Government of Canada’s policies to increase competition have been partially successful, reducing the per user revenues of the three wireless incumbents as well as their significant market share. External reports also show that consumer prices for wireless have fallen since 2009, and that customer satisfaction with new entrants is consistent with other carriers (J.D. Power & Associates, 2013).

However, the existing ownership provision prevents large multinational wireless corporations like Vodaphone and AT&T from instantly disrupting the market or claiming a significant stake in the Canadian wireless industry. Instead, the 10% of industry revenues limit provided in the amended Telecommunications Act ensures that any firm looking to enter the

Canadian wireless market does so at a disadvantage to the large incumbent carriers. This policy is questionable since it prevents foreign investors looking to make an impact by rapidly increasing their stake in the industry, perpetuating the incumbent carrier advantage. A more significant policy that would drive the Government of Canada’s competition agenda forward would be to increase foreign ownership limits to 49%, as recommended by CRTC chairman

Konrad von Finckenstein (Marlow, 2010). The 49% ownership policy does increase international security risks and could potentially erode national presence in the industry, but will allow foreign interests to provide significant investment in new mobile entrants and facilitate sustained competition and access to capital for new mobile entrants, increasing their competitive viability in the near-term. Additionally the 49% ownership limits proposed will ensure that, as new entrants grow, they will remain Canadian owned firms at least in-fact.

While some may find issue with only having control in-fact, the variance made by Industry

Canada regarding Wind Mobile suggests that ownership in-fact is now the main indicator of whether a telecommunications carrier can operate in Canada, regardless of foreign influence on ownership. This is facilitated by the increasing globalization of wireless telecommunications, and the likely interest that foreign companies may have in a market as advanced as Canada’s.

Regulatory Outcomes

The new position by the Government of Canada significantly distorts the existing regulatory regime, as the government’s willingness to vary the decisions of the CRTC severely limits the regulatory legitimacy of the CRTC as a body. While the marginalization of the CRTC is potentially a politically sensitive issue, the fact remains that a move towards increased competition would result in shift in regulatory priority. Consequently, suggestions to more greatly include the Competition Bureau and a move to regulation only in cases of legislative violation – or after-the-fact regulation – makes sense for the Government of Canada. While the

CRTC is unlikely to be dismantled in the near future, the marginalization of the organization will result in the loss of credibility regarding their regulatory power and will need to search for a modified mandate. This is not necessarily a negative issue, however, as the CRTC’s role in broadcast regulation has also come under serious scrutiny with the proliferation of online streaming services originating from the United States and elsewhere abroad. In short, the changes the CRTC is experiencing both in telecommunications and broadcasting provides an ideal time to reconsider the CRTC’s role, and allow the Government of Canada to more efficiently allocate their regulatory resources in the shifting media regime. However, new this new approach must be thought through carefully, as the release of the CRTC’s wireless code includes provisions to limit contracts to two-year terms for Canadian consumers and may inadvertently cause price increases from the incumbent carriers (CRTC, 2013).

Long term Competition

Given the financial concerns surrounding the three new wireless entrants, it is highly unlikely that more than one of the carriers will exist in their current form in the next 10 years.

This does not, however, suggest that additional competition in Canada is unsustainable long term. Rather, it only suggests that existing policies adopted by the Government of Canada to increase competition in the Canadian wireless sector have only focussed on short term outcomes. With that said, government involvement to ensure long term success is potentially dangerous and any subsidies or tax exemptions for new entrants can create significant, unexpected market distortions leading to more serious issues. The decision to allow increased foreign investment in the Canadian wireless sector certainly contributes to increasing the potential of long term competition, but does not prevent foreign investment from withdrawing should they find expanding their market presence too costly for their operations. Referring again to the case of Wind Mobile, increasing new entrants ARPU to comparable levels of the three incumbent carriers while simultaneously reducing the ARPU of the incumbent carriers is imperative to creating a more competitive wireless landscape. This requires new entrants to be able to grow their consumer base without having to invest significantly more than the incumbent carriers in the process.

A large part of the start-up costs borne by new entrants is the payment for spectrum licences. As it stands, auction winners are required to pay 20% of their final payment within the

first 10 business days of auction close, and must pay the remaining 80% within 30 business days of close for the 700 Mhz auction (Industry Canada, 2013). This is a significant capital expenditure and can delay start-up and expansion for new carriers. It is recommended that rules for new entrant winners be changed so that only 5% of the final payment is due within the first 10 days, and that the remainder of the final payment be due at the end of the five-year holding period. While inflation technically means that the Government of Canada would lose revenue in the overall structure, this payment system allows new entrants to focus on developing their network with their available funds, rather than paying to operate to begin with. This also exposes the government to significant risk, as it may result in receiving no funds from carriers who fail before the five year period. However, the deferred payment on licences will provide new carriers with the opportunity to rapidly grow their network and attract consumers with a superior network, and should result in returns for the government if a firm is successful in remaining operational beyond the five year moratorium. Should a firm exit the market before the five year period, return of spectrum licences would allow the Government of

Canada to re-auction them to recoup revenues. This would require the Government of Canada to write in provisions in auction rules that stipulate that failed firms must return all of their licences to the Government of Canada for re-auction, but would allow new firms to avoid significant initial start up costs associated with launching their network.

CONCLUSION

The 2008 wireless spectrum auction for Advanced Wireless Services completed by the

Government of Canada resulted in the entry of three new wireless carriers to the Canadian wireless market. This was done as part of the Government of Canada’s move to increase competition in the Canadian wireless telecommunications industry and reduce costs for consumers. In looking at the Government of Canada’s efforts to increase competition in the wireless industry, the results have been mixed. Though the auction itself was successful in introducing new competitors to the wireless landscape, each has experienced financial troubles or possible takeover discussions since they began operating in 2010. The rapid pace of technological change, shifting consumer demands, regulated market factors, significant infrastructure costs, and the significant market power exercised by three incumbent carriers who make it difficult to accurately predict the best way to increase competition in the Canadian wireless industry. While each of the new carriers has experienced difficulties, they have also made inroads in the market at the expense of the incumbent carriers, and incumbent ARPU has fallen marginally during this period. In the short term however, some measures can be made to provide existing new carriers with more ability to compete notwithstanding Verizon’s possibly entry into the Canadian market. In light of the above analysis, it is recommended that the

Government of Canada:

In addition, it is also recommended following the auction to:

The above policy recommendations are expected to facilitate competition in the

Canadian wireless telecommunications industry, at least in the short-term. All

recommendations are consistent with the Government of Canada’s current wireless competition policy. While these recommendations do not guarantee long term competition in the industry, it is expected that these measures will facilitate the potential for additional competition in the industry. Should these measures fail, it should be concluded that Canada’s wireless telecommunications market still lacks the capacity for additional competition at this time.

APPENDIX

Fig. 1: 2008 Advanced Wireless Auction Results Summary Total Amount of Average Cost per Average Cost per Licence Winner Winning Bids Licences Awarded Population Covered Licence Licenced Population Rogers $999,367,000 59 30,007,094 $16,938,424 $33.30 Telus $879,889,000 59 30,007,094 $14,913,373 $29.32 Bell $740,928,000 54 27,245,106 $13,720,889 $27.19 Globalive Wireless (Wind) $442,099,000 30 23,265,134 $14,736,633 $19.00 Data & Audio-Visual (Mobilicity) $243,159,000 10 16,121,864 $24,315,900 $15.08 6934579 Canada Inc. (Public Mobile) $52,385,077 4 17,675,254 $13,096,269 $2.96 Source: Industry Canada, 2008

Fig. 2: Subscriber Growth by Wireless Carrier, 2009-2012 2009 2010 2011 2012 Net Net Net Total Total Additions % Growth Total Additions % Growth Total Additions % Growth Bell 6,954,000 7,242,048 288,048 3.98% 7,427,482 185,434 2.50% 7,681,032 253,550 3.30% Rogers 8,494,000 8,977,000 483,000 5.38% 9,335,000 358,000 3.84% 9,437,000 102,000 1.08% Telus 6,524,000 6,971,000 447,000 6.41% 7,340,000 369,000 5.03% 7,670,000 330,000 4.30% Wind 0 232,641 232,641 100.00% 403,000 170,359 42.27% 590,438 187,438 31.75% Canada National* 22,850,757 24,567,947 1,717,190 6.99% 25,883,819 1,315,872 5.08% 26,886,096 1,002,277 3.73% Source: Canadian Wireless Telecommuncations Association *Includes Sasktel, Videotron, and MTS Mobility in Calculation

Source: Canadian Wireless Telecommuncations Association

Fig. 4: Average Revenue per User by Carrier, 2009-2012 2009 2010 2011 2012 ARPU ($/month) ARPU ($/month) ARPU % Growth ARPU ($/month) ARPU % Growth ARPU ($/month) ARPU % Growth Bell 51.70 52.03 0.63% 53.55 2.84% 55.82 4.07% Rogers 63.59 63.03 -0.89% 60.20 -4.70% 59.79 -0.69% Telus 56.82 57.64 1.42% 59.10 2.47% 60.39 2.14% Wind 0.00 29.00 100.00% 26.40 -9.85% 28.10 6.05% Canada National* 58.80 57.90 -1.55% 58.00 0.17% Source: Bell Mobility, CRTC, Orascom Telecom Holding, Rogers Wireless & Telus Mobility *Includes Sasktel, Videotron, and MTS Mobility in Calculation

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