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Money How the Canadian government's own policy inflates mobile wireless rates

16:53  17 january  2020
16:53  17 january  2020 Source:   financialpost.com

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Lost in the recent political debate over mobile wireless prices in Canada is the fact that the government’s spectrum auction policies account for as much as 16 per cent of the price of mobile services. Were spectrum costs as low as those paid by European carriers, Canadian mobile rates could be 12 per cent lower. 

The Canadian government’s spectrum policy, unlike the policies in most other developed countries, mandates “set-asides” of spectrum for smaller carriers in the periodic auctions that it conducts. Rather than making all spectrum available for open competitive bidding by the three national carriers— Bell, Rogers and Telus — and the smaller regional carriers such as Videotron or Shaw (Freedom) on equal terms, the government sets aside as much as 44 per cent of the spectrum in each auction for which only the smaller carriers may bid, purportedly to increase competition.

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These set-asides allow the smaller carriers to obtain spectrum rights at prices that are as much as 75 per cent lower than those paid by the national carriers, but these smaller carriers have not used this spectrum to provide service as widely as the national carriers have. The reduced amount of spectrum available to the three national carriers — and various other auction rules — result in spectrum prices that are much higher than auction prices in most of the rest of the developed world. The cost of raising the capital to invest in this extremely costly spectrum must be covered in the price of wireless services. In this regard, spectrum is no different from the physical assets employed in telecommunications, such as utility poles, fibre-optic cable, and cell sites.

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Through 2018, the three major Canadian wireless carriers spent $18.9 billion in spectrum acquisition costs. Three of the larger regional carriers, Shaw, SaskTel, and Videotron, reported a combined spectrum investment of another $2.8 billion, bringing the industry’s total investment in spectrum to $21.7 billion. (All data are in Canadian dollars.) On average, Canadian wireless carriers have spent about four times as much per subscriber for spectrum as their European counterparts.

Since 2008, Canadian mobile network operators have averaged $2.2 billion in annual capital expenditures on plant and equipment, according to CRTC data. Given the reported depreciation by the three national carriers, I calculate that Canadian wireless carriers have approximately $16.5 billion of this equipment on their books. Thus, in Canada, unlike most countries, mobile wireless operators have more invested in spectrum than in fixed plant and equipment.

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The contribution of any of these investments to the annual costs of delivering wireless services depends on the cost of capital, i.e., the return demanded by investors in the debt and equities of the carriers. I assume that the weighted average cost of capital before taxes to these national wireless carriers is 20 per cent of invested capital. Therefore, the required annual return on the $21.7 billion the wireless industry has invested in spectrum rights is $4.3 billion. The CRTC reports that total Canadian wireless service revenues were $27.1 billion in 2018. This means that the required return on investment in spectrum accounts for fully 16 per cent of wireless revenues.

These capital costs of investing in spectrum are the result of the very high prices that the national carriers must pay for spectrum through auctions that are designed to favour small carriers who do not use their spectrum to offer mobile services as widely as the three national carriers do. If the price of Canadian spectrum were, say, 50 per cent lower, the return to capital required by investments in spectrum would decline to just eight per cent of revenues. In other words, without taking into account the induced effects of lower prices on demand, a 50 per cent lower cost of spectrum could reduce wireless rates in Canada by about eight per cent. If spectrum costs were as low as those paid by European wireless carriers, Canadian wireless rates could be as much as 12 per cent lower.

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In short, the Canadian government’s policy of limiting the amount of spectrum available to its three national wireless carriers yields extremely high spectrum prices that have a substantial effect on Canadian consumers. The wireless carriers’ cost of investing in spectrum must be passed on to their subscribers — contributing as much as 16 per cent to the price of their wireless services. A much less restrictive spectrum policy would lower Canadian wireless rates and allow even more extensive network coverage, thereby providing greater benefits to consumers than the spectrum set-asides have provided.

Robert W. Crandall is a non-resident Senior Fellow at the Technology Policy Institute in Washington and is currently a consultant to TELUS

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