Ottawa opens up wireless industry to more competition

The Conservative government on Wednesday paved the way for new cellphone companies by announcing new rules designed to spur competition in the wireless industry.

The Conservative government on Wednesday paved the way for new cellphone companies by announcing new rules for an auction of radio airwaves designed to spur competition in the wireless industry.

About 40 per cent of the spectrum will be reserved for new entrants, with the remainder open to all bidders, including Canada's big three providers— Rogers, Bell and Telus.

The government will also mandate roaming agreements, which will force existing carriers to share their networks with newcomers for five years, plus another five if the new entrants can build up their own networks nationally. If a new carrier is unable to reach a "reasonable" roaming agreement with an existing provider, an outside arbitrator will be brought in, Industry Canada said.

The government is also forcing existing carriers to rent space ontheir cellphone towersto newcomers, againat "reasonable" rates, or risk having an arbitrator come in.

In handing down the rules, Industry Minister Jim Prentice gave potential newcomers, including Quebecor, MTS Allstream, Shaw and Eastlink, virtuallyeverything they asked for.

Key numbers
Bell, Rogers and Telus wireless revenue: $11.8 billion (2006 data)
Cellphone subscribers in Canada: 19.3 million (Sept. 2007)

Prentice told a news conference that he agreed with their assessment that pricesare too high and the wireless industry needs more competition."Our goal at the end of the day is lower prices, better services, and more choices," he said.

Those who had been arguing for more competition were delighted with the ruling. "This is a grand slam for consumers," telecom analyst Eamon Hoey told CBC News. "It really puts a heavy knife into the oligopolic style of structure we've had in the cellular business."

Chris Peirce, chief regulatory officer of MTS Allstream, was pleased as well.

"They have really gotten their policy right and it's good to see they were able to resist the arguments" of the incumbents, he said.

But Liberal industry critic Scott Brison was not pleased. "There's no proof it will lead to lower prices," he argued, saying regulation would have been better.Brisonsaid the auction decision will result in a $200-million windfall for the new entrants.

Lawson Hunter, executive vice-president and chief corporate officer of Bell, agreed with Brison and said the government was costing taxpayers money by subsidizing new entrants. The spectrum could go for up to 40 per cent less than what it would have if the auction were open to the highest bidder, he said.

"Basically you've sold an asset of Canada at well under market price."

He also said the auction rules were a direct reversal of the government's previous stance on the telecommunications market, which advocated deregulation and determination by market forces.

The other two major players were also disappointed by the announcement, with Telus saying that new companies are sufficiently large and have enough resources to bid in an auction without government aid.

Rogers head of regulatory affairs, Ken Engelhart, said the decision was about as bad as it could have been for the big three cellphone companies.

Newentrants could launch by late 2008

The auction process is to begin on May 27, 2008, and is expected to lastseveral weeks. Industry Canada expects new players will start up by the end of next year, at the earliest.

Attention will now turn to who the new bidders will be, with analysts expecting Quebecor, MTS, Shaw and Eastlink to enter the auction. Prentice said the amount of spectrum reserved for new entrants, or 40 megahertz, is enough to facilitate a new national carrier.

"It's reasonable to assume that will happen," he said.

Peirce said the MTS board will now have to decide on what portions of spectrum to bid on. Industry Canada stopped short of applying its set-aside rule on a national spectrum licence, which MTS had asked for, opting instead to apply the special condition only on regional licences.

Prentice said a number of regional players could, however, band together to form a new national cellphone provider.

Foreign companies, although faced with ownership restrictions, could also bid on the spectrum in partnership with a Canadian company.

The auction traces its roots to April 2005, when the Liberal government put together the Telecommunications Policy Review Panel to look at the state of the industry and the Telecommunications Act.

The panel submitted its report in March 2006 to the newly elected Conservative government and, among its broader telecommunications recommendations, suggested several changes to the wireless industry to make it more competitive.

Industry Canada, under then Industry Minister Maxime Bernier, launched a public consultation in February 2007 that incorporated some of the panel's suggestions.

The ministry asked whether special conditions should be imposed on the auction, including whether some spectrum should be set aside for potential new entrants and whether caps should be installed on how much any one company could own.

The framework also asked whether government intervention was needed in the commercial negotiation of roaming deals between cellphone carriers. Roaming agreements allow customers of one provider to connect to the network of a different provider, which allows subscribers to use their cellphones where their carrier doesn't have infrastructure.

About 90 submissions were made from various industry players, including incumbents Bell, Rogers and Telus, potential new entrants Quebecor, Shaw and MTS Allstream, the Competition Bureau and various consumer and business groups.

Dominant companieswanted free-market auction

The incumbents argued that no special rules should be imposed and that spectrum should go to the highest bidder.

The potential entrants argued that special rules were needed because the incumbents had every incentive to bid up the price of the spectrum to keep new competitors out of the market.

They also said mandated roaming deals were necessary because the incumbents had no incentive to sign reasonable agreements with newcomers. Without the ability to offer roaming onto other networks, the new entrants would have a difficult time attracting customers, they argued.

The potential new entrants cited high prices and the lack of competition between the incumbents as the reason for Canada's poor showing among developed nations in mobile phone adoption.

Canada's rank of 29th out of the 30-member Organization for Economic Co-operation and Development was justification for the government to get involved in the otherwise unregulated wireless industry, they said.

The United States held a similar advanced wireless spectrum auction in September 2006 that netted the government $13.9 billion US. The Federal Communications Commission is holding another auction in January of spectrum that will be vacated when analogue television broadcasting is shut down in 2009.

The U.S. wireless industry is moving toward a more competitive framework, with the FCC imposing a number of open-access rules on its upcoming auction. Winners in the auction will be forced to make all cellphones, including those from rivals, work on their networks.