Government moves in Canadian and U.S. telco space benefit the marketplace

In a society that depends on a free market to drive economic growth, government regulation tends to be frowned upon. Occassionally though, unusual circumstances force government to step in and steer companies in a particular direction to maintain a competitive marketplace, a la Microsoft. Two recent government moves in the telecommunications space, one in Canada, the other in the U.S., are examples of interventions that benefit the market economy.

The Canadian example is Industry Canada’s decision to auction off spectrum that can be used for so called third-generation cellular services, which will support much higher wireless data transfer rates than existing cellular networks. The auction will be similar to last fall’s auction of wireless broadband spectrum, with Industry Canada dividing the country into spectrum blocks and selling those blocks to the highest bidder. For the purposes of the auction, Canada will be divided into 14 regions with four spectrum blocks available in each region.

What is different from last fall’s auction is the fact that incumbent cellular carriers will be allowed to bid on the new cellular spectrum. Incumbent local exchange carriers (ILECs) were not allowed to bid for broadband wireless spectrum last fall. At least one entrepreneur has cried foul over this decision, asserting that the incumbent carriers will gobble up all of the new cellular spectrum and stifle competition.

Competition, however, already exists in the Canadian mobile phone market. Mobile prices are lower now than they’ve ever been and mobile penetration continues to increase. It’s difficult to see how auctioning spectrum off to non-incumbents could help the mobile market in Canada. It’s in everyone’s best interests to have several strong national providers in competition with one another, rather than a patchwork of regional players, each with a different set of services and pricing. The government’s decision to allow incumbents into the auction appears to be a solid call.

In the U.S., government also made a solid call in preventing Worldcom Inc.’s acquisition of Sprint Corp. by launching a federal lawsuit. In the suit, the government accused Worldcom of attempting to dominate the U.S. telecommunications market through the merger – an assertion borne out by the numbers. The U.S. Justice Department determined a Worldcom/Sprint combination would control at least 55 per cent of the national frame relay market and a startling 70 per cent of the ATM services market. Clearly competition in both the frame relay and ATM markets would have suffered as a result of the proposed merger.

While the Sprint/Worldcom split doesn’t have much direct impact on the Canadian market, it does set a useful precedent for the Canadian government. Once foreign ownership restrictions of Canadian telecommunications firms are dropped – and most observers expect them to be dropped in the next few years – foreign telcos will gobble up, or form binding alliances with, the existing Canadian players. The Canadian government must do all in its power, as the U.S. government did with Sprint/Worldcom, to ensure that no one player obtains too much control of the market. After all, no one likes a monopoly.