Canada stands out in several mobile broadband dimensions when compared to other countries in the Organisation for Economic Co-operation and Development—and not always for the better! While it scores at the top of network quality indexes, it has some of the highest network build costs and retail prices (though these are not so bad when accounting for quality). Broadband availability (or more precisely, lack of it) in rural areas is a particular problem. Canada has also been slower than most countries in making new 5G spectrum available, and the spectrum sold has been at comparatively high prices. The bundles available are also small and fragmented. For spectrum to be deployed in services that are technologically and economically efficient, operators need bundles covering sufficiently large bands of frequency.

Canada’s policy of “set-asides” (reserving spectrum for smaller regional and local operators at different terms and conditions than larger operators) is also unusual internationally. It certainly contributes to spectrum fragmentation and is likely responsible for the high prices paid by the nationwide operators as it creates an artificial scarcity. Combined with an array of other obligations, such as regulated roaming options, set-asides appear to have created several perverse incentives for smaller operators that likely contribute toward the country’s comparatively poor rural mobile broadband availability.

One of the most egregious incentives is for entities to acquire discounted set-aside spectrum—often with the assistance of government subsidies—and then “sit” on it, without deploying any infrastructure or services. Over time, the bundles’ value to spectrum-starved larger operators increases, and the original purchasers can sell the rights to them at a profit. Meanwhile, the consumers, who could have been served using that spectrum, go without broadband connection.

This situation has led opposition Sen. Dennis Patterson to propose Bill S-242, requiring spectrum rights holders to “use-it-or-lose-it.” This means that spectrum holders must deploy services to at least 50 percent of the population in the geographic region to which the rights pertain within three years or the minister will revoke their license granting them the rights to use it. The bill is currently before the Senate Committee on Transport and Communications. I was invited to testify to the committee on the bill on March 7.

I applaud Sen. Patterson for taking concrete action to address Canada’s internationally nonstandard spectrum arrangements. Getting allocated spectrum out of arbitrageurs’ hands and into use as soon as possible seems an obvious solution to Canada’s woeful rural broadband availability. However, caution is warranted, as use-it-or-lose-it obligations address only a symptom of the bigger problem in the country’s spectrum policy—the “set-asides” and other complex arrangements that surround them.

First, the bill’s spectrum rights relate to areas ranging in demographic and geographic characteristics, from predominantly urban to predominantly rural. Whereas it may be economically feasible for an urban operator to serve 50 percent of the addressable population with a comparatively small infrastructure investment, a rural operator may have to invest many times that amount to serve a much smaller percentage of the population. The costs of deploying equipment in rural areas are also much more uncertain. A perverse incentive of use-it-or-lose-it is that it places even more financial risk on rural-rights holders than they bear under the current arrangements. This may result in no one being prepared to take on the supply obligation in these areas—hardly desirable for ensuring broadband is made available more quickly in these areas.

Second, the 50-percent-over-three-years target may result in operators scaling back deployment once they reach the target, particularly if the 50 percent coverage is obtained in the area’s lower-cost, more densely populated parts. Surpluses that could have been used to subsidize the area’s more costly rural parts could potentially be extracted as profits rather than be invested in more infrastructure.

Third, a risk exists that customers of partly deployed networks reaching less than 50 percent of the population in three years will be left without the services they have already been using. The minister may rescind the first operator’s license, but it may not be possible to find another operator to take the operation on, given that due to fragmentation, the spectrum concerned is likely not adjacent to their current offerings and therefore is costly to integrate into their operations.

These problems are not necessarily insurmountable. A sliding scale of coverage and time can be used, depending on area characteristics, and a government-subsidized operator of last resort could be appointed. However, a longer-term and more sustainable solution would be to revisit Canada’s entire spectrum and broadband policies. Set-asides are not helpful for ensuring efficient spectrum allocation, and satellite technology now offers a real competitive option.

The post Spectrum Policy and Broadband Availability: A Peculiarly Canadian Challenge appeared first on American Enterprise Institute – AEI.