Review of the Spectrum Cap Applied to Providers of Personal Communications Services Canada Gazette Notice No. DGTP

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1 January 22, 1999 BY and REGULAR MAIL Michael Helm Director General Telecommunications Policy Branch Industry Canada 300 Slater Street Ottawa, Ontario K1A 0C8 Re: Review of the Spectrum Cap Applied to Providers of Personal Communications Services Canada Gazette Notice No. DGTP and Receipt of Additional Information Concerning an Application for Temporary Relief of the Application of the Spectrum Cap Canada Gazette Notice No. DGTP Dear Mr. Helm: Microcell Telecommunications Inc. ( Microcell ) is pleased to submit the attached comments in response to Canada Gazette Notices. With respect to the issues raised in Review of the Spectrum Cap Applied to Providers of Personal Communications Services, Microcell strongly recommends that the Department not rescind the Spectrum Cap, as it remains a necessary and effective safeguard against the real and persistent threat of dominance in the mobile wireless services market. Microcell agrees with those who argue that the Spectrum Cap will have to be increased to accommodate the current Second Generation service providers in their plans to provide Third Generation wireless services on a commercial basis. However, we consider that there is no immediate justification for raising the

2 Spectrum Cap, nor can any reasonable assessment be undertaken of the level to which the Spectrum Cap should be raised until further technology tests are completed and the Department has made known its plans for Third Generation spectrum. We recommend that the Department reaffirm the Spectrum Cap at its current level for the time being, but undertake to evaluate the level to which the Spectrum Cap should be increased as part of its anticipated consultation on Canadian implementation of Third Generation wireless services. With respect to the issues raised in Receipt of Additional Information Concerning an Application for Temporary Relief of the Application of the Spectrum Cap, Microcell is of the view that Clearnet Communications Inc. ( Clearnet ) has not provided a convincing explanation for why it is has not pursued or is not currently pursuing engineering solutions that would permit it to operate within the existing Spectrum Cap constraint. We consider that to grant the requested relief would allow Clearnet to postpone deployment of engineering solutions that it would have to deploy in any event, and as such cannot be justified on the grounds of efficiency or fairness. Furthermore, Microcell is concerned that to grant the requested relief under the terms proposed by Clearnet (most notably, a twenty-four month time frame for readhering to the Spectrum Cap should permanent relief not be forthcoming), would amount to the granting of quasi-permanent relief, and would remove any incentive upon Clearnet to actively pursue the necessary engineering solutions noted above. Microcell considers that Clearnet has not provided adequate justification for interim relief from the Spectrum Cap. Should the Department choose nevertheless to approve Clearnet s request, we recommend that Clearnet be provided with a maximum of three months to re-adhere to the Spectrum Cap should permanent relief not be forthcoming. Microcell appreciates the opportunity to make its views known to the Department on these matters. Yours very truly, Microcell Telecommunications Inc. DP/des enc. Dean M. Proctor Vice-President, Regulatory Affairs

3 COMMENTS IN RESPONSE TO REVIEW OF THE SPECTRUM CAP APPLIED TO PROVIDERS OF PERSONAL COMMUNICATIONS SERVICES Canada Gazette Notice No. DGTP AND RECEIPT OF ADDITIONAL INFORMATION CONCERNING AN APPLICATION FOR TEMPORARY RELIEF OF THE APPLICATION OF THE SPECTRUM CAP Canada Gazette Notice No. DGTP MICROCELL TELECOMMUNICATIONS INC. JANUARY 22, 1999

4 INTRODUCTION Microcell Telecommunications Inc. ( Microcell ) is pleased to provide the following comments in response to Industry Canada s Gazette Notices No. DGTP , Review of the Spectrum Cap Applied to Providers of Personal Communications Services and No. DGTP , Receipt of Additional Information Concerning an Application for Temporary Relief of the Application of the Spectrum Cap. REVIEW OF THE SPECTRUM CAP APPLIED TO PROVIDERS OF PERSONAL COMMUNICATIONS SERVICES (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? The original purpose of the Spectrum Cap was to assist in satisfying the Policy Objectives for Personal Communications Services at 2 GHz, as defined in Section 4 of the Policy and Call for Applications - Wireless Personal Communications Services in the 2 GHz Range - Implementing PCS in Canada (the Policy and Call ), dated June 15, The following policy objectives were specified: a) the stimulation of additional choice in the provision of cellular-like mobile radiotelephone services and the support of new technologies and facilities of high security and low cost which could compete with existing local wireline services; b) the provision of additional and innovative personal communications services at 2 GHz, rather than only the replication by similar services of the mobile services currently operating below 1 GHz; c) the facilitation of national, North American and world-wide service offerings, to enable both Canadian equipment suppliers and consumers to benefit from the availability of larger markets, and to allow Canadian users the opportunity to make use of wide-scale roaming capabilities; d) the stimulation of competitive and comprehensive service offerings, provided through the utlization of both existing and new facilities, through, among other measures, the non-discriminatory access by third parties to networks, thereby also promoting value-added services and content; e) the support of the provision of services to the greatest possible number of Canadians; and

5 Page 2 f) the promotion of jobs and investment in Canada, through the support of research and development activities in Canada and the concomitant development of expertise for international trade and investment opportunities. The specific role played by the Spectrum Cap in helping to satisfy these objectives was elaborated in Section of the Policy and Call, wherein the Department subscribed to the view that eligibility restrictions (in the form of a Spectrum Cap) were necessary to facilitate new entry. New entry, in turn, was associated with more aggressive deployment and implementation strategies, greater price competition, and more rapid introduction of new services. Industry Canada s policy decisions, including imposition of the Spectrum Cap, have shown themselves to be fundamentally sound. Two new mobile wireless service providers have established a foothold in the Canadian marketplace, and together with the two cellular incumbents, are competing vigorously on price and functionality, to the demonstrable benefit of Canadian consumers. However, no one should be under the illusion that fair competition in the mobile wireless services market has somehow been permanently entrenched, or that government need no longer concern itself with the state of competition in this industry. The broader Canadian telecommunications marketplace continues to be characterized by the overwhelming presence of the incumbent local telephone companies and their affiliates. Their near absolute dominance of local telecommunications markets cannot be denied, even though some limited competitive entry has taken place. Their ability to extend this dominance to neighbouring telecommunications markets, through preferential access to financial resources and exclusive bundling arrangements, also cannot be denied. One need only ask Canada s independent internet service providers about the consequences of unrestricted entry by the incumbent telcos into a market that at one time appeared to show signs of healthy competition, to know that the exercise of dominance is not an idle threat. Microcell urges the Department to proceed with great caution in pursuing any modifications to its existing competitive safeguards. Evidence of emerging competition in a particular telecommunications market should not be taken as proof that a sustainable competitive structure has permanently installed itself in that market. Given the dominance that currently pervades the Canadian telecommunications marketplace, Microcell considers it reasonable to assume that whatever telecommunications spectrum becomes available in the near term, whether by

6 Page 3 departmental allocation, corporate acquisition, or secondary market transaction, is more than likely to fall into the hands of the local telephone incumbents and their affiliates, unless appropriate spectrum caps are in place. In this regard, we note that the Department has proposed the application of a spectrum cap in the upcoming auction for 24/38 GHz fixed wireless spectrum. We respectfully suggest that it would be an error to rescind the existing Spectrum Cap for mobile wireless services, as such a move could potentially undermine the hard won competitive gains that the Spectrum Cap was intended to facilitate in the first place. This leaves the question of whether a modification, or more precisely an increase, in the Spectrum Cap might be justified. Microcell considers that it would be consistent with the policy objectives enunciated in the Policy and Call for the Department to entertain proposals to increase the Spectrum Cap, but only to the extent that these proposals are supported by a demonstrable intent to provide new, innovative services. Planned entry into the Third Generation mobile wireless services market is the one event we foresee that would clearly justify an increase in the Spectrum Cap for existing Second Generation service providers. Many of the Third Generation mobile wireless services that are currently being contemplated are broadband in nature and, as their name suggests, represent a marked leap in functionality from existing Second Generation services. Second Generation service providers that seek to enter the Third Generation market can be expected to make use of additional spectrum resources. The Department s plans for Third Generation spectrum, however, have not yet been set, and will not be set for some time, in part because of the need to coordinate policy decisions with other national regulators. The Canadian Preparatory Committee for Third Generation ( CPC ), which is the group that will represent Canada at the World Radiocommunications Conference in 2000 ( WRC-2000 ), is in the process of preparing its input for this congress. It has established Sub-Working Groups ( SWGs ), which in turn have formed drafting groups ( DGs ) to perform detailed assessment work. In particular, SWG-B1 was formed to examine the question of calculating the spectrum requirements of International Mobile Telecommunications 2000 ( IMT ) services, from both the terrestrial and satellite points of view. This Sub- Working Group has four drafting groups, of which DG1 is using an International Telecommunications Union ( ITU ) recommended method to calculate the spectrum required by IMT-2000, and of which DG2 is trying to identify the spectral bands into which this requirement could fit. These two DGs are not expected to complete their work before March Once drafted, their work has to be formally approved by

7 Page 4 SWG-B1, SWG-B and eventually the CPC before it is accepted as a Canadian document. Significant hurdles remain to the development of a Canadian position on these issues, as various communities of interest are involved, e.g. the fixed wireless, fixed satellite and amateur radio communities. Once Canada has formally approved this document, it can be tabled at the WRC for consideration by the world community. No doubt other countries will table documents at the May 2000 Congress that will raise questions, as well as potential conflicts. Thus, international allocations for IMT-2000 are not likely to occur in the near future, which implies that spectrum for Third Generation services will be allocated at the earliest a year and a half from now. Furthermore, even if allocation were to begin at that time, it is well understood that a phased introduction of Third Generation spectrum will occur. To summarize, there exists no immediate justification for raising the Spectrum Cap. Whereas the planned entry of Second Generation service providers into the Third Generation mobile services market would constitute a legitimate reason for the Department to raise the existing Spectrum Cap, no reasonable assessment can be undertaken of the level to which the Spectrum Cap should be raised until further technology tests are completed and the Department has made known its plans for Third Generation spectrum. We recommend that the Department reaffirm the Spectrum Cap at its current level for the time being, but undertake to evaluate the level to which the Spectrum Cap should be increased as part of its anticipated consultation on Canadian implementation of Third Generation wireless 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? As described above, Microcell considers that removal of the Spectrum Cap would open the door to an anti-competitive concentration of spectrum resources in the hands of the incumbent local telephone companies and their affiliates. Simply put, rescinding the Spectrum Cap would be antithetical to competition. In the event that it is necessary to strengthen service providers, which we interpret to mean allowing service providers to offer a wider range of new and innovative services, such a requirement can be accommodated through an increase in the Spectrum Cap, provided such an increase is supported by a demonstrable intent to

8 Page 5 provide such new and innovative services. Whereas there exists no immediate justification to increase the Spectrum Cap, this is expected to change once the Department has made known its plans for Third Generation spectrum. With respect to the Department relying upon the Competition Act, Microcell does not believe that the legislation in its current form provides sufficient safeguards against anti-competitive industry concentration in the telecommunications industry. In exercising his mandate under the Radiocommunication Act, the Minister of Industry is invited to have regard to the statement of Canada s telecommunications policy that is found at section 7 of the Telecommunications Act. This policy was developed in the specific context of the contribution that telecommunications can and should be expected to make to Canada s social and economic fabric. The policy statement carefully balances objectives that have been traditionally met by a highly concentrated industry structure with a clear injunction to place greater reliance on competition as a means of protecting the interests of Canadians. In practice, this link to the objectives of the Telecommunications Act permits the Department to consider the actual state of competition in various sectors of the telecommunications industry before it determines what use is best made of the public resource that is the radio spectrum. One result of this consideration is the Spectrum Cap currently under consideration. The alternative proposed, of relying on the Competition Act to ensure that Canadian consumers are not detrimentally affected by mergers or by the behaviour of dominant market players, has several defects compared to the existing process. First, with his present powers, the Director can only act to prevent an abuse of dominant position while it is actually taking place or after it has taken place. Because of this constraint on timing, a great deal of damage can occur to the relatively fragile competitors of the incumbent local telephone companies while the Director is conducting his investigation and seeking an order of the Competition Tribunal. It is preferable, in Microcell s view, to clarify what the applicable rules and policy are going to be, before companies plan their actions and cause such significant potential damage to their competitors. Second, even in the case of a merger the result of which is likely to be the substantial lessening of competition, the Director s ability to act in a timely fashion is limited by the procedural and other safeguards contained in the Competition Act. Certainly these procedural safeguards are entirely appropriate in a statute that permits state intervention in the actual activities of specific companies and other economic actors. However, it limits the effectiveness of the Competition Act as a tool to prevent anti-competitive mergers and conduct by dominant players in telecommunications markets.

9 Page 6 The Department should not mistake the protestations of dominant carriers and the existence of regulatory rules permitting competitive entry for the existence of a fully competitive market. The latter state of affairs may need only the degree of regulatory supervision afforded the Competition Act authorities. The former state, which is actually present in Canada today, requires more active policy guidance if it is ever to evolve to become a healthy, competitive environment. The Department should not abandon the tools and principles awarded by the Radiocommunication Act that permit it to set policy, simply because some parts of the industry believe that the potential for competition and an actual competitive environment are one and the same. At this time, Spectrum Caps are the single most effective tool for safeguarding competition in the face of dominance, and are consistent with the Department s legislative responsibilities. In fact, the Department continues to consider the application of such a tool in other frequency bands. (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? As stated earlier, Microcell is of the view that the Spectrum Cap will ultimately need to be increased in order to enable existing Second Generation service providers to offer Third Generation wireless services on a commercial basis. However, we consider that there is no immediate justification for raising the Spectrum Cap, nor can any reasonable assessment be undertaken of the level to which the Spectrum Cap should be raised until the Department has made known its plans for Third Generation spectrum. (d) What would be the effect of the removal of the Spectrum cap on the efficient use of frequency spectrum? The single most important driver for the efficient use of resources, including spectral resources, is a competitive market for the services that employ these resources. Where markets are not competitive, that is to say where certain participants enjoy the benefits of market power, inefficient use of resources can be expected to follow. In an industry where limited spectral resources are required as an input, a dominant firm has an economic incentive to acquire as much additional spectrum as possible in order to thwart competitive entry. However, once this additional spectrum has been acquired, there is no particular incentive to use it efficiently. For example, a

10 Page 7 dominant firm will be reluctant to deploy new or innovative technologies until it is certain that it has extracted the maximum possible cash flow from its existing technologies. It is important to note in this regard that simple use of spectrum does not equate to efficient use of spectrum. A dominant firm may want to make use of its newly acquired spectrum, if for no other reason than to forestall accusations of anticompetitive warehousing, but it has no particular incentive to make efficient or innovative use of this spectrum. Removal of the Spectrum Cap would facilitate the exercise of dominance, reduce competition, and thereby undermine incentives to employ spectrum efficiently. The pertinent question for the Department, therefore, is not whether removal of the Spectrum Cap will encourage the efficient use of spectrum, as it most certainly will not, but rather whether an increase in the Spectrum Cap will encourage efficiency. Microcell is of the view that an increase in the Spectrum Cap would encourage the efficient use of spectrum to the extent that the increase is supported by a demonstrable intent to provide new, innovative services. We expect that this condition will eventually be satisfied in the case of Third Generation services. As noted earlier, many of the Third Generation mobile wireless services that are currently being contemplated are broadband in nature and, as their name suggests, represent a marked leap in functionality from existing Second Generation services. Second Generation service providers that seek to enter the Third Generation market can be expected to make use of additional spectrum resources. Once the Department has made known its plans for Third Generation, Microcell considers that it would be entirely justified in undertaking a review to determine the appropriate level to which the Spectrum Cap should be raised in order to accommodate the efficient entry of second Generation service providers into the new market. (e) What other matters are relevant to this review of the Spectrum Cap? We are of the view that all relevant matters have been addressed in the preceding comments. RECEIPT OF ADDITIONAL INFORMATION CONCERNING AN APPLICATION FOR TEMPORARY RELIEF OF THE APPLICATION OF THE SPECTRUM CAP Microcell has reviewed Clearnet s January 6, 1999 letter to the Department providing additional information in regard to Clearnet s October 22, 1998 request for temporary relief from application of the Spectrum Cap (the Additional Information ).

11 Page 8 In the Additional Information, Clearnet acknowledges the fundamental trade-off between occupying a greater absolute quantity of spectrum and deploying more extensive spectrum re-use solutions. Specifically, in response to the Department s question on how Clearnet would reconfigure its systems to operate within the Spectrum Cap, Clearnet states that it would have to accelerate its cell splitting plan to the degree necessary to accommodate all of its ESMR [Enhanced Specialized Mobile Radio] users within the 200 channel (10 MHz) limit. The operative notion here is one of timing. The deployment of capacity enhancing engineering solutions such as cell-splitting in response to spectral constraints is an unavoidable undertaking on the part of any advanced mobile wireless network operator. A key part of the operator s job is to optimize the timing of deployment. What Clearnet is seeking through its application is the right to delay the deployment of capacity-enhancing engineering solutions that would eventually have to be deployed in any event. It is of course no coincidence that the relief requested by Clearnet, in terms of the proposed increase in the Spectrum Cap, precisely equals the amount of additional spectrum to which Clearnet currently has access. If Clearnet had access to a greater quantity of spectrum, it would request greater relief, thereby securing longer delays. Clearnet acknowledges this much in response to the Department s fourth question, where it states [3.7 MHz] is the amount officially requested in our application for temporary relief as we do not have the additional spectrum available on which to base a larger request. Microcell has serious concerns about the fairness of making ad hoc adjustments to the Spectrum Cap to permit one competitor to delay deployment of capacityenhancing engineering solutions simply because this one competitor has access to additional spectrum assigned to its other lines of business. The Spectrum Cap has existed since before the granting of PCS licences and is unambiguous in its application. All licensees have been subject to the obligation to tailor and schedule their infrastructure deployment so as to live with the Spectrum Cap. We note that Clearnet s assertions regarding the relative spectral efficiency of ESMR and analog Specialized Mobile Radio ( SMR ) systems are irrelevant in this context, as the issue of concern is the comparative treatment of network operators subject to the Spectrum Cap, not the comparative performance of capped networks with those that are unaffected by the Spectrum Cap. Microcell wishes to highlight Clearnet s response to the Department s third question, wherein Clearnet asserts that it would require twenty-four months to re-adhere to the Spectrum Cap were the Department to approve its request for temporary relief then subsequently deny its request for permanent relief. In supporting this assertion, Clearnet states that This timeframe is based on our experience of the typical time

12 Page 9 required to implement a new cell site from the time of inception, including planning, design, site acquisition, municipal consultation process, construction and implementation and site optimization.

13 Page 10 With this response, Clearnet would have us believe that it has not even begun the inception and planning work required to undertake cell-splitting in the Toronto / Golden Horseshoe area the area covered by its current request. This is simply not credible. Microcell has great difficulty accepting that Clearnet would have placed itself in a position where it is in imminent danger of exhausting its spectral capacity, and yet is twenty-four months away from being able to deploy the infrastructure required to relieve the capacity problem. For the reasons just stated, Microcell considers that Clearnet has not provided adequate justification for interim relief from the Spectrum Cap. Should the Department choose nevertheless to approve Clearnet s request, we recommend that Clearnet be provided with a maximum of three months to re-adhere to the Spectrum Cap should permanent relief not be forthcoming. All of which is respectfully submitted.