Consumers Risk Losing Out On 5G With Canada’s High Spectrum Prices

Canadians often hear that their wireless prices are among the highest in the world. Now, however, a new study by the Global System for Mobile Communications Association (GSMA) sheds some light on the opposite side of the coin.

Canadian telecom companies pay among the highest prices in the world to access the spectrum needed to transmit voice and data signals. According to the study, which uses data across 64 countries and 229 operators, such high spectrum prices are increasing retail prices for consumers and businesses, reducing network speed and causing delays in the roll out of coverage for the suburban and rural population.

The report found that for developed countries like Canada, there is a significant link between spectrum pricing and slowing down the roll-out of 4G networks and a long-term reduction in 4G quality. The study estimates that an additional 7.5% of the population would be covered if government implemented lower spectrum prices.

Applied to Canada and by analogy, this could correspond to additional 5G coverage for about three million customers and businesses especially in suburban and rural areas as well as lower prices across the board few years from now. Moreover, it estimates that mobile download speeds could increase by 1 Mbps. Timing is also critical. Countries that have rolled out spectrum without delay experienced 11-16% higher coverage.

Frequency spectrum is a public resource, allocated and licensed by governments to telecommunications operators. Spectrum costs, which mobile operators need to pay in order to have the capacity to connect their customers, includes large upfront prices – often billions of dollars – in annual fees and other license obligations such as coverage and social obligations.

By way of example, the recent 600 MHz spectrum auction in Canada pulled in over $3.47 billion from Canadian telecommunications providers this year. The new GSMA study suggests pricing of public services that goes beyond the cost of provision could limit the ability of telecom companies to lower prices and invest in network quality expansion and upgrades, particularly in suburban and rural areas.

While academics and regulators acknowledge auctions and pricing mechanisms are required to allocate scarce spectrum efficiently, the purpose of this mechanism should not be to extract a maximum amount of financial resources from mobile operators and their private and business customers. In light of this study, regulators should explore ways to eliminate this tax from the mobile sector, while continuing to ensure efficient auction mechanisms.

This will be particularly important in view of 5G – and, in the future, 6G – which will constitute the building blocks of an upcoming new form of the digital economy, with industries such as manufacturing undergoing radical transformation (the so-called “fourth industrial revolution”). To strengthen national competitiveness in the future, the last thing a government or regulator should do is to tax and slow down new wireless-based business models with billions of dollars of artificially raised spectrum auction prices.

In detail, the GSMA report uses data from hundreds of operators across the world from 2010-2017 and assesses whether spectrum prices – adjusted for country market size, price levels and purchasing power and other aspects in spectrum management – can cause differences in service quality (such as coverage, up-and download speeds and latency) and retail prices.

The report is one of the first to use a model which considers the effect of spectrum cost on such a broad range of consumer outcomes. The analysis of the data suggests there is significant evidence of a causal link between high spectrum prices and negative consumer outcomes.

As an example, countries awarding only a small part of the available spectrum to mobile operators seem to fare poorly. When 20 MHz more spectrum is awarded, the average 4G download speeds increase by 1-2.5 Mbps while costs are simultaneously reduced. Assigning more spectrum also eases capacity constraints in urban areas, so operators can focus earlier on investing in suburban and rural areas. According to the study this measure could also increase overall population coverage by 2-4 percentage points.

The study also finds that “set-asides” of spectrum defined by the government for the benefit of selected small operators create an artificial additional scarcity of spectrum. These set-asides are meant to ensure that the selected players receive spectrum independently of their bids for spectrum. They seem, however, to also have the additional effect of further increasing spectrum prices.

The resulting lack of spectrum leads to a situation where the largest mobile operators need to densify their urban networks by constructing a large number of additional antennas in cities to compensate for the lack of spectrum. This increased investment requirement in urban areas puts investment and coverage in suburban and rural areas and their digitization progress even further at risk.

Finally, the study concludes that in order to improve consumer outcomes and spur digital innovation for the future, sufficient spectrum must be put on the market in a timely, fair and effective manner, and that auctions need to be well designed. Regulators should consider reviewing the objectives of auctions where the measure of success should no longer be to maximize revenues for the government or to use set-asides to benefit certain market participants where the mobile market is already competitive.

Spectrum policy continues to be a fundamental part of a competitive policy framework to ensure that consumers and businesses benefit rapidly from innovation in technology and services, falling costs and growth in general. An important amount of policy innovation will, however, be required by regulators as well in order to cope with the upcoming challenges.―CARTT