45 O'Connor Street, Suite 1800 Ottawa, Ontario K1P 1A4 (613)

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1 45 O'Connor Street, Suite 1800 Ottawa, Ontario K1P 1A4 (613) January 22, 1999 Mr. Michael Helm Director General Telecommunications Policy Branch Industry Canada 300 Slater Street Ottawa, Ontario K1A OC8 Dear Mr. Helm : RE : Review of the Spectrum Cap Applied to Providers of Personal Communications Services Canada Gazette Part I Notice No. DGTP Dated 24 October 1998 Introduction 1. Mobility Canada is filing the following comments on behalf of its member companies in response to DGTP Review of Spectrum Cap Applied to Providers of Personal Communications Services (PCS). Mobility Canada s comments are filed on behalf of BCE Mobile Communications Inc., BC TEL Mobility, The Corporation of the City of Thunder Bay Telephone, Island Telecom Inc., Manitoba Telecom Services Inc., MT&T Mobility Inc., NBTel Inc., NewTel Mobility Limited, Québectel Mobilité, SaskTel Mobility, TELUS Mobility Inc., Nortel Mobility Inc., Northwestel Mobility Inc., Prince Rupert City Telephones and Télébec Mobilité (collectively, the members ). 2. In its Notice, Industry Canada is seeking comments on the potential removal or modification of the application of a limit on the aggregate amount of spectrum

2 - 2 - that can be held by providers of PCS, commonly referred to as the Spectrum Cap. Mobility Canada submits that there is no requirement for the application of a Spectrum Cap because the intended aims of the policy are already evident in the wireless market. Mobility Canada submits that the concerns about market dominance that led to the imposition of these limits have not arisen and Industry Canada retains powers under the Radiocommunication Act and Competition Act to address concerns about market power without any need to impose artificial constraints on market forces, innovation and efficiency. 3. Mobility Canada notes that in its Notice the Department suggests that the application of the Spectrum Cap appears to have been successful, in that it has generated a more competitive market than had existed in the duopoly provision of cellular service. 4. Mobility Canada does not fully agree with that analysis. While the PCS policy decision made by the Minister to licence four blocks of spectrum has clearly contributed to increased competition, Mobility Canada submits that there is no evidence to suggest that competition would not have been as successful in the absence of a spectrum cap. Moreover while the spectrum cap may have had little impact on either new entrants or incumbents in the first three years, its continued application will almost certainly distort the economics of the wireless market and dampen investment in the development of more bandwidth intensive services. 5. In any event, the intended aims of the policy, i.e.: to foster increased consumer choice, stimulate jobs and investment and provide improved services at a reduced cost to the consumer have been achieved. 6. However, Mobility Canada submits that for the PCS market to reach its full potential, the following policy initiatives have to be implemented: (i) removal of the spectrum cap; (ii) the development of secondary markets for spectrum; and

3 - 3 - (iii) the release of additional spectrum to meet the requirements for growth and Third Generation Service (3G) requirements. (a) Has the original purpose of the Spectrum Cap been served, or is there a need for its retention, possibly with modification? What sort of modification would be appropriate? 7. As summarized in the Notice, the objective of the policy was to provide greater opportunity for competition in the provision of PCS than had existed in the duopoly provision of cellular service. The Department determined that increased competition would provide the most efficient means of achieving more aggressive deployment, lower prices, greater consumer choice and the accelerated introduction of innovative new services. There is absolutely no doubt that the PCS policy of licensing four new blocks of spectrum has contributed to increased competition and associated benefits. In this regard, even the new PCS entrants frequently characterize the wireless market as intensely competitive. 8. Carriers have invested over $2 billion already in the deployment of digital networks. Digital services are already available to a majority of Canadians and services continue to be extended. Canadian consumers now have lower prices than any of our major trading partners and the wireless carriers are launching a whole new range of voice and data services (voice dial, text messaging, access to the internet, global positioning services). Preliminary results announced to date suggest that the wireless industry may have added another 1,000,000 subscribers in 1998; a 25% growth rate. Moreover, Microcell and Clearnet each reported over 50% growth. Certainly the subscriber gains by the new entrants have exceeded most analysts expectations. 9. While Mobility Canada submits that the principal driver of increased competition was the government s licensing policy and not the spectrum cap, the fact remains that the wireless market is highly competitive and consumers are

4 - 4 - receiving the benefits of competition. The principal issue is not therefore whether competition has been achieved, it has, but rather whether the spectrum cap needs to be retained or modified. Another way of addressing the question is whether removal of the cap would lessen or diminish the benefits of competition. 10. Mobility Canada does not consider that removal of the spectrum cap would lessen competition or cause unwanted side effects such as warehousing for a number of reasons set out in (b) below. However, should it consider that safeguards are required, the Department retains, absent the cap, sufficient tools to address issues of market power should it perceive a need to do so. First, all licence approvals or transfers are controlled by the Minister under the Radiocommunication Act, so the Department can assess any requirements for spectrum on a case by case basis. Second, Industry Canada controls the supply of spectrum and can counter any concern about consolidation by issuing more spectrum. Third, the Director of Investigation and Research, under the Competition Act, would have to assess any significant spectrum transactions in any event using its market power tests. In the event the Director identifies any concerns, he can propose a variety of remedies or recommend the transaction be denied. 11. Given the existence of a dynamically competitive market and other tools to achieve policy goals, there is no requirement for arbitrary limits. Moreover such limits are inefficient and counter-productive since they limit a carrier s flexibility to service growth and develop and deploy more bandwidth intensive services. (b) Would the removal of the Spectrum Cap lessen or enhance competition? For example, would rescinding the Spectrum Cap remove a barrier to consolidation, which may reduce competition, or would it strengthen service providers and hence promote competition? Does the Competition Act provide sufficient safeguards against anti-competitive industry consolidation?

5 Mobility Canada submits that it would not be possible to lessen competition in the wireless market in the absence of a spectrum cap. First, the Department continues to control the regulatory process through its licensing powers. Second, no carrier has the ability to economically establish and then maintain a position of market dominance. In fact, what the spectrum cap is increasingly likely to do is constrain the ability of some carriers to fully serve all market segments due to a shortage of spectrum. 13. In order to exercise market power a carrier would have to be in a position to impose and sustain a price increase in the market. That is simply not possible in markets as intensely competitive as wireless since any unilateral price increase would only result in lost business and/or failure to recoup losses once competitors respond. Acquisition of one of the carriers in the market would not allow another carrier to increase prices since the remaining market participants would continue to offer competitive alternatives. Acquisition of two carriers by another would certainly increase concentration but that would require a multi-billion dollar investment, and result in excess capacity in many markets with no guarantee of any positive return since at least one alternative competitor remains. Moreover the Minister retains the authority, and has sufficient remaining spectrum, to be able to licence new entrants thus undermining such an acquisition strategy. The only way to control the price in the market would be to buy up all service providers and acquire all remaining spectrum. Not only does that defy economic logic but the authorities would never approve such transactions. 14. Could removal of the spectrum cap remove a barrier to consolidation? Absolutely, although consolidation is not the only way to grow. If it wanted to reduce incentives to consolidation, the Department could simply allocate more spectrum to incumbents to support growth. In any event, rational consolidation may be a positive step and is consistent with the broader telecommunications environment. To begin with the current industry structure is not sustainable. The industry as a whole will lose well over a billion dollars in 1998, despite continued

6 - 6 - record growth. Moreover the negative financials faced by the industry cannot merely be attributed to transitional capital investments. The existence of smaller companies in Canada with costs in $US, revenues in $CAN and prices well below larger US firms strongly suggests that Canadian carriers will need greater economies of scale and scope simply to survive. 15. Consolidation and competition are happening hand in hand throughout the telecom industry and consumers are obtaining tremendous price/service offers as a consequence. Mergers and takeovers are a fact of life in all markets, and wireless should be no exception, but even as consolidation occurs, competition continues unabated. 16. In the wireless business, consolidation does not necessarily mean less competition. First, bundling is becoming more prevalent and consumers can expect more alternative sources of supply even if consolidation were to reduce the number of underlying suppliers. The offering of SimplyOne service by Bell Canada through resale is such an example. The Roger Cable, AT&T and Cantel bundle is another. Second, the concept of territoriality is shifting. The Stentor Alliance is shifting from cooperation to competition to support national growth strategies. Bell Canada and BCT/TELUS will begin to compete in offering national services, some of which may contain underlying wireless components provided by their affiliates. The BCT/TELUS merger provides an excellent example of consolidation contributing to greater efficiency while at the same time resulting in increased competition in the industry overall. 17. However the main issue to address is the need for any artificial limit on spectrum acquisition, not whether any particular application to acquire spectrum is in the public interest. As noted above, the Department retains the power to issue new licences and approve any transfer of licence using public interest criteria. Moreover on any significant application to transfer a licence the Competition

7 - 7 - Bureau would be notified and would apply standard criteria to assess whether any acquisition or merger would substantially lessen competition. 18. In response to the Department s final question on whether the Competition Act provides sufficient safeguards against anti-competitive consolidation one need only ask the banking industry about the powers of the Director. Not only can the Director exercise its own authority on mergers and acquisitions but so can the Minister under the Radiocommunication Act. Given such oversight, the spectrum cap would seem to be redundant twice over. (c) What would be the effect of the continuation of the Spectrum Cap in the future on the availability of new PCS services and on the growth of these services? 19. Spectrum caps reduce a carrier s flexibility to develop and deploy innovative new services in areas such as wireless local loop, Internet access and 3G multimedia. That reduces the benefits of competition that can be delivered to consumers. The continued demand for analog service coupled with heavy demand for new CDMA services, has placed serious constraints on the ability of some Mobility Canada members in major urban centres to offer good quality voice service and, at the same time, free-up capacity for more bandwidth intensive services. This will become an increasingly serious problem as the market for basic service continues to grow and an increasing number of terminal products are made available to support higher data rates. Mobility Canada submits that current allotments to its member of spectrum for basic voice services will be barely sufficient to handle basic voice traffic, let alone exponential growth associated with data services. In fact, even before 3G services are deployed, increased demand for 2G+ services like Internet access at 64 or 128 Kps will be significant. Requirements of at least an additional 20 MHz for 3G services would suggest that absent the removal of the cap, some carriers could not even enter that market.

8 One of the principal policy goals of PCS was to offer more than voice functionality. New services such as high speed Internet access are bandwidth intensive. Services such as wireless local loop have to be volume intensive to support higher calling patterns as well as bandwidth intensive to support basic data requirements at speeds comparable to wireline. Mobility Canada submits that in core markets, many incumbent cellular carriers do not have the capacity to meet these demands, even though they may have both the human and financial resources necessary to implement such services as fast as the competition. On the other hand some carriers have more capacity available then expected demand. The absence of secondary markets for spectrum distorts the supply/demand equation at the expense of innovation and consumer demand. 21. Mobility Canada submits that the spectrum cap, not spectrum availability, will constrain the deployment of new services. There is still another 40 MHz available for PCS at 2 GHz. As well, further additional capacity should become available once UHF channel channel conversion is complete. Moreover there may be as much as 80 MHz in the 2100 range that could be allocated for future PCS, coincident with international/north American initiatives to free-up more spectrum for 3G and likely that even more spectrum will have to be allocated for 3G services. 22. In its Auction Framework, the Department supported the creation of secondary markets for new spectrum. The creation of secondary markets for already licensed spectrum, coupled with the removal of spectrum caps, makes similar policy sense. Not all carriers are capacity constrained and such carriers may want the flexibility to trade some spectrum to finance additional expansion. Creation of secondary markets that provided for licence transfer, including partitioning and disaggregation, could ensure that carriers seeking to invest in new high risk applications would have the opportunity to acquire spectrum from capital constrained carriers. That in turn would create incentives to ensure spectrum would be put to its most efficient use.

9 In dynamic markets, market forces not regulation are more likely to determine the most efficient use of spectrum. The essential elements for the continuation of a dynamic market for spectrum are: (i) the removal of spectrum caps; (ii) the development of secondary markets for spectrum; and (iii) the release of additional spectrum to handle growth and meet the requirements for 3G. 24. First, as discussed above the removal of spectrum caps does not eliminate any of the spectrum management or policy tools available to the Department to prevent or address abuses of market power. Therefore the maintenance of such redundant regulation only serves to reduce efficiency with no demonstrated benefit while at the same time reducing consumer access to innovative services. 25. Second, the removal of the cap and creation of secondary markets will ensure that spectrum is in the hands of those that value it most and are prepared to efficiently put it to its most productive use. In this regard, trading of spectrum is a pre-requisite for economic efficiency. (e) What other matters are relevant to this review of the Spectrum Cap? 26. Mobility Canada submits that its members have excellent track records when it comes to the efficient use of spectrum. They have invested hundreds of millions of dollars in cell-splitting and micro-cellular technology resulting in one of the most efficient AMPS systems in the world. Moreover member companies have begun to deploy digital overlays where AMPS capacity is available. However that is a slow process due to capacity constraints in some urban areas that prevent conversion and continued consumer demand for and satisfaction with analog based services. At the same time the rapid consumption of 10 MHz blocks in centres like Toronto and Montreal and growing use of data will create additional pressures for more spectrum.

10 Finally Mobility Canada would caution the Department not to put too much credence on arguments that removal of the spectrum cap could contribute to warehousing. Again that makes no sense in a dynamically competitive market. First, any spectrum acquired through a licence transfer or auction must be financed and financial covenants would require a return on that investment. Second, even where additional spectrum is allocated but not immediately utilized, a carrier would have to pay millions annually in licence fees. In an industry where profit is minimal when there is any profit at all, warehousing carries too high a cost. Further, warehousing does not work as a strategy if a market is already intensely competitive to begin with. (d) What would be the effect of the removal of the Spectrum Cap on the efficient use of frequency spectrum? Unnecessary Regulation 28. One of the goals of government policy is to remove unnecessary regulation. The Spectrum Cap is an example of unnecessary regulation. A fundamental premise of telecommunications policy as set out in the Telecommunications Act is to place greater reliance on market forces wherever possible. The Spectrum Cap conflicts with that objective without delivering, in the current environment, any perceivable benefits. As a regulation the cap is redundant because the Department has other policy tools available to it to achieve its ends. Moreover, the regulation is not benign since it reduces consumer choice and benefits by restricting supply. RABC Position 29. Mobility Canada notes and supports comments filed on behalf of the Radio Advisory Board of Canada (RABC) particularly as these comments pertain to 3G services. We agree that the continuation of the Spectrum Cap will deny the additional spectrum that will be required for evolving into third generation IMT-

11 wireless systems with capability to provide an array of high speed, high bandwidth products and services to customers. Mobility Canada also agrees with RABC that while many 3G services may be years out, we can expect to see substantial growth in data over the next few years. Regardless of the timing of 3G services, the demand for high-speed data services is already apparent and additional spectrum is required now if Canada is to be in the forefront of wireless data/multimedia development. 30. As noted by RABC new spectrum will be needed to ensure a smooth migration from existing 2G services to 3G services without service disruptions. Moreover as RABC suggests continuation of the Spectrum Cap would deny the additional spectrum for conducting 3G service trials 31. Mobility Canada notes that two wireless members of RABC expressed concern that the removal of the cap could remove one of the last safeguards preventing re-consolidation of the industry back to a duopoly or even a monopoly state. That is not the case. No one can seriously suggest that wireless is not a dynamically competitive business. Further, as set out above, (i) it would not make economic sense to pursue that strategy; (ii) the Minister and the Competition Bureau retain all necessary authority to safeguard competition; and (iii) no carrier would ever consider such an acquisition strategy given the government has sufficient authority to licence additional competitors whenever it chooses. Conclusion There is no evidence to suggest that the Spectrum Cap contributed in any meaningful sense to an increase in competition. The Spectrum Cap is a redundant regulation since other policy tools are available to promote the same goals.

12 Limitations on spectrum aggregation are inefficient and reduce the opportunity for any economically rational consolidation of the industry. The market is too dynamically competitive to be negatively impacted if limits on spectrum aggregation are removed. Maintenance of a Spectrum Cap will limit the development and supply of innovative new WLL, Internet and high-speed data. Spectrum Caps artificially constrain some carriers ability to serve all segments of the market and thus reduce the benefits of competition that could otherwise have been delivered to consumers. Spectrum Caps prevent to evolution towards and ultimate deployment of 3G services. Michael Hennessy Vice-President Government & Regulatory Affairs