Paying for spectrum policy

In an article in the Financial Post this past Friday, an economist calculates that Canadians’ mobile bills include a hidden tax of 12-16% to cover the fees paid by carriers to the government for spectrum.

Robert Crandall calculates the spectrum fees paid by Canadian carriers to be 4 times what European carriers are paying, adding more than $4 billion per year to Canadians’ mobile services bills. According to Crandall, “If spectrum costs were as low as those paid by European wireless carriers, Canadian wireless rates could be as much as 12 percent lower.”

Crandall is a Senior Fellow at the Technology Policy Institute and he has authored or co-authored 8 books and more than 40 articles on communications policy. He is currently a consultant to TELUS and has served as a consultant to Canada’s Competition Bureau, the FCC, the FTC, and the Department of Justice in the US.

So, we have an interesting tension: We want carriers to invest in state-of-the-art networks and offer leading edge services to all Canadians throughout this country, which requires capital for hard assets and for acquisition of spectrum. The government is calling for more competition and lower prices, but has handed the Minister a mandate that could continue to inflate spectrum prices through scarcity caused by new-entrant set-asides.

Over the past few months, I have written a number of pieces looking at Canadian spectrum policy, including:

As I warned 2 weeks ago, “There is a cost associated with spectrum policy.” Crandall’s article shows how costly Canada’s spectrum policy has been for carriers and ultimately, for consumers.

Crandall measures some of the financial costs being paid by consumers for spectrum policies of the past, which have inflated our monthly bills by as much as 12% with what National Post columnist Terence Corcoran called “taxes that are paid by consumers.” Corcoran also published a commentary on Friday, “The biggest cellphone price gouger is Ottawa”.

There isn’t much we can do about spectrum policies of the past, but we need to acknowledge how Ottawa’s own spectrum policies continue to contribute so substantially to the prices Canadians are paying for mobile services. For example, the Canadian wireless industry pays nearly $200 million per year in annual spectrum licence fees – on top of the billions of dollars in fees paid to acquire spectrum rights at auction. Compare these annual fees to the US industry paying about half that amount (approximately US$80 million), despite 10 times the market size. As a result, on a per user basis, Canada’s service providers are paying spectrum fees that are 20 times the levels in the US.

After reading the Crandall and Corcoran articles, I couldn’t help thinking that the government could easily achieve the 25% mobile price reduction it wants by taking matters into its own hands, or rather, by taking its own hands out of mobile consumers’ pockets. Consumers are paying 13% in harmonized sales taxes (HST) on top of a hidden and embedded spectrum tax of 12%. That could produce the 25% reduction in consumer prices the government is seeking. Mission accomplished.

We need to get spectrum policy right going forward.

1 thought on “Paying for spectrum policy”

  1. There can be little doubt that the artificial scarcity of spectrum created by government drives up the cost of spectrum at auction as total supply is reduced. This is not a good thing. Having said that it does not necessarily follow that auction payments for spectrum in the absence of artificial spectrum scarcity drives up costs to consumers. Monies paid for resources that are in fixed supply are known as Ricardian rents (formulated by David Ricardo around 1809). Rather unintuitively Ricardian rents are said to NOT be a part of cost and price. This is all rather esoteric and can hardly be treated here but let’s think about another example.

    Most people would say that tickets to popular professional sporting events are expensive. People attending such events would no doubt say that they would rather pay less. A major expense for professional sports teams are players salaries. Does it follow then that if the government legislated players’ salaries downward that ticket prices would go down? NO it does not.

    The price of tickets is a function of supply and demand and the competition that exists between alternative entertainment choices available to consumers. Sports fans are willing to pay to see a sport played at an elite level. Sports teams need to hire players capable of playing at this elite level if they are to attract consumers.

    Players capable of playing at this elite level are in short supply (scarcity). Teams have to bid against each other to attract players capable of playing at this elite level. Thus elite players are able to command salaries far higher than what they would probably settle for in the absence of a scarcity at their skill level.

    So teams pay those high salaries (those Ricardian rents) to secure the player talent they need to sell tickets in a competitive market. Players’ salaries do not determine ticket prices but rather the converse – TICKET PRICES IN A COMPETITIVE MARKET DETERMINE PLAYER SALARIES!

    No one expects Sydney Crosby to take a pay cut so that hockey ticket prices will go down and if he did so ticket prices would not go down in any event. The profitability of his team would go up though.

    It comes down to how to split the Ricardian rents for spectrum. Leave them in the hands of the wireless service providers or share them between the public whose spectrum is being used and the service providers. Spectrum auctions determine how Ricardian rents are to be split. No service provider will pay more than their willingness to pay so the surplus between what they actually pay and what they were willing to pay is their fair share of the Ricardian rents generated by spectrum in fixed supply.

    My comments are entirely separate from the discussion of whether monopoly rents exist due to insufficient competition in the provision of wireless services and the consequential possibility of cooperative bidding behaviour in a spectrum auction obviating new competitive entry.

    Regulatory decisions are complex and best left in the hands of a competent expert independent regulator and populist political regulation should be avoided.

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