3G, Competition at Stake in Canadian Auction

Will 3G be a revolution or an evolution? That's the underlying question in the debate over whether PCS auctions in Canada this fall should be opened to new players.

Industry Canada's options include limiting bids on the 40MHz to the four incumbents or setting aside spectrum for new entrants. Newcomers argue that they'll spur the market by increasing competition and forcing incumbents to offer 2.5G and 3G services more quickly.

"We will launch with an all-data network," said Mark Goldberg, a telecom consultant who represents newcomer 3664341 Canada. "It's not our intent to acquire spectrum and roll out voice services. You need new entrants to stimulate the development of new services."

Others counter that the market already is competitive. A 1999 Yankee Group study found that Canada has the world's most affordable wireless rates. The competition might not be cutthroat, but most providers are hemorrhaging red: In 1999, the industry had a negative cash flow of $1 billion on $4 billion in revenues.

The upside is that even as penetration approaches 25%, there's still significant room for growth, and like Internet start-ups, wireless providers are judged more by their potential for growth and revenues. But here's the scenario that could leave investors skittish: If more bidders means higher bids, then winners would have less capital to plow into their networks — just as increased competition threatens to drive down rates and average revenue per unit, shrink margins and leave less money for 3G.

"The investment community has said over time that this is a market that could handle three or four carriers," said Peter Barnes, Canadian Wireless Telecommunications Association president & CEO. "A splintering of the existing arrangement would undermine carriers' ability to get the capital they need to build out 2G and 3G. If the investment community doesn't like the new approach, then the cost of capital goes up, and that could work against low prices because you've got to recover those costs."

The debate isn't unique to Canada. In Sweden, one consultant says the market there can't support five UMTS licensees, and in the United Kingdom, regulators set aside a fifth UMTS license for new entrants, one of which charges that the pricing still favors incumbents.

"A set-aside for new entrants (helps) ensure that they aren't locked out by deep-pocketed incumbents that, in effect, have a business case dependent on keeping out competition and therefore can justify paying virtually any price to keep competition away," Goldberg said.

Newcomers also argue that increased competition will hasten 3G's arrival.

"We'll get the benefits of new, data-based services only if there's a new entrant," Goldberg said. "Our read of the other applications basically says they want the additional spectrum to roll out the same, old services."

Although the spectrum cap was raised to 55MHz late last year, regulators also must consider some incumbents' arguments that their capacity is growing scarce.

"Given the extreme competition, it doesn't make sense to reserve that spectrum for new players," said Brian O'Shaughnessy, Bell Mobility vice president, technology development. "Let's just get it on the market and let the players that have a need today get access to it as soon as possible."

If there's one point that both sides seem to agree on, it's that competition means constant one-upmanship, particularly in new services.

"If one company does it, it's going to be foolhardy for the others not to follow that innovation and do it as well," O'Shaughnessy said. "I think the market is going to take care of it on its own."