Friday, March 4, 2011

Achieving the best outcome for Rural Canadians in the next spectrum auction

The Government of Canada, through Industry Canada, is currently engaged in a consultation process to determine how to release spectrum licences for up to 84 MHz of wireless spectrum in the 700 MHz frequency band. The spectrum has been made available by the decommissioning of analog UHF TV with the move across North America to digital TV.

The federal government has already decided that this spectrum should be made available for various mobile broadband applications. What it wants now is input on how the spectrum should be auctioned and regulated for such services.

Spectrum is limited and lucrative in High Density Markets

Anyone involved in the mobile broadband space will know that spectrum is a very limited commodity and in recent years has become extremely expensive to obtain.  The last major auction of spectrum in Canada was the 105 MHz of Advanced Wireless Services (AWS) band in 2008, which netted the federal coffers $4.3 billion.  The value is driven by its ability to create profits in metropolitan and high density markets.

The 700 MHz spectrum has unique characteristics that make it extremely desirable in rural broadband applications.  Its comparatively low frequency allows for a longer range and is better than higher frequency spectrum at penetrating buildings, which gives end users a more reliable signal when they move indoors.

The trade-off is that these lower frequencies require larger antennas, which are harder to fit into handheld devices. All things being equal, a 700 MHz antenna needs to be about twice the size of a comparable AWS antenna. That means you either add a 700 MHz antenna which makes the handheld devices larger and less convenient, or you use their existing antennas which do not handle 700 MHz well, the end user loses calls, and you have almost entirely cancelled out 700 MHz’s benefits of increased range and penetration.

In rural low density markets the cost of the wireless tower and backhaul infrastructure makes any end user broadband service relatively expensive even if no purchase price is attributed to the 700 MHz spectrum.

Luckily it is feasible to split the licences into those that apply to high density markets and separate licences that target solely the rural low density markets.

Choosing the best answer

The Government of Canada has two choices here:
1)    Throw the new 700 MHz spectrum into the pool of existing cellular mobile frequencies, adding slightly to the overall capacity while foregoing the unique range and penetration benefits of this spectrum; or
2)    Split the 700 MHz spectrum into rural and urban licenses so that rural Canada is not lost yet again in the lucrative urban wireless pool.

The AWS auction held in 2008 took the first approach, setting aside 40% of the spectrum for acquisition by new entrants to the wireless space. The net effect of this approach in rural Canada has been insignificant.  The new entrants have focused on cherry picking the metropolitan areas and have not had any material impact on rural broadband.

Auctioning off the 700 MHz spectrum gives us one shot at bringing next generation network connectivity and all its benefits to rural Canada, and rural Canadians cannot afford to miss this opportunity.

Rural is Different

With the exception of the mandatory telephone voice provision of the old Public Switched Telephone call network, telecom policy has failed rural Canada miserably.  This is because the incremental revenue does not cover incremental infrastructure expenses and the incumbent telcos simply do not invest in rural Canada irrespective of their “promises”.  The original copper telephone lines were built under a regulated monopoly framework through which the rural network costs were pooled with urban costs.  This pooling approach has never applied to broadband, so rural residents and businesses have been left behind. 

Now, with the smart phone reliance on data traffic more than voice traffic, rural mobility options are becoming limited to the mobility service provided by the telephone incumbent because competing mobility networks that can handle large data traffic only exist in the urban areas.  

Absent regulation of the broadband service sector, rural residents are subordinated to an unregulated monopoly incumbent carrier charging whatever the market will bear on both its legacy copper network and its mobility wireless network unless there is an alternative supplier of broadband services.

The foundation of a lasting optimal rural broadband service solution must have the following characteristics:

·       An independent broadband service sector that can compete with the incumbent on a sustained basis.
·       Open Neutral Access to a fibre backhaul grid that is not controlled by the incumbent and is priced on the same basis as exists in metropolitan markets. (This eliminates the distance dislocation of the rural community.)
·       Access to economics of shared towers that are not under the control of the incumbent. (Rural markets cannot support duplicated tower infrastructure or incumbent monopoly tower access pricing.)
·       Access to the 700 MHz spectrum in rural markets without the burden of a licence purchase fee.  (The licences should be awarded based on a competitive bid in respect of quality, cost and the coverage of the broadband service.)

This approach would maximize the rural coverage for broadband without depending on the government for grants and ongoing financial support. 

The auction solution is simple

There is a remarkably simple solution.

First, structure the auction blocks into rural and urban regions, such that the urban licences do not interfere with rural areas, and allow all of the entrants to compete for all of the urban licences.

Second, set aside the rural areas for a new kind of auction. The significant cost of reaching Canada’s unserved rural regions – creating the infrastructure of fibre and towers – does not allow for any capital to be spent on acquiring spectrum. Instead, bidders should be required to bid three parameters for each geographical region and each frequency “block” of rural spectrum they want in that region:

·       The percentage of rural customers in that block that will be reached.
·       The service options including quality and quantity that will be offered to the rural customer.
·       What fees that they will charge for their services.

Spectrum should then be awarded to those bidders with the best mix of these parameters and winning bidders should be given a finite time period in which to meet those obligations. Bidders could include any organization willing to make the commitments, and should explicitly include interested jurisdictional governments.

Alberta has a head start

The Government of Alberta has taken a leadership position on solving the rural broadband issue through its Rural Broadband Initiative and therefore may be best positioned to leverage the 700 MHz spectrum for the benefit of rural Albertans.  Alberta already has an independent broadband service sector, a provincewide fibre backhaul grid and has made a start on the tower pool.  Consequently, Alberta is uniquely positioned to leverage the 700 MHz spectrum for the benefit of rural Albertans.

I believe that in Alberta (or in any other province that shows such leadership), the provincial government or its agent should be given all of the rural 700 MHz spectrum under a rural set-aside, at no cost to government, provided that:

·       The government in turn does not charge mobile broadband application providers for it.
·       The government makes it available to its independent broadband service providers in an open access model similar to that which is the foundation for the Alberta SuperNet. It would be made available on an ongoing basis to allow for incremental growth in coverage, and to allow smaller providers equal opportunity at bidding for access.
·       The government seeks the widest possible, economically practical rural coverage and agrees to return any spectrum to Industry Canada for any rural areas not eventually covered by some licensed service provider.  

The incumbent would simply have to compete with the independent sector in the rural market

In Alberta there is a growing wireless service provider sector comprised of more than 70 independent WISPs that create an alternative to the incumbent.  Key enablers for the Alberta independents are backhaul and tower access services provided by Axia.  Axia’s services are enabled by a provincewide fibre grid that interconnects Alberta’s rural communities with the metro communities called the Alberta SuperNet.  In addition, Alberta is implementing a provincewide emergency first responders’ wireless communication system that uses frequencies in the 700 MHz spectrum.  This system will add substantially to the wireless tower infrastructure in rural Alberta.

This approach would also create the shared infrastructure economics for the licensed mobility sector that is intended to compete with Telus but otherwise would be relegated to roaming on the Telus network in rural Alberta.

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