Industry Canada reviewing R&D provision for wireless spectrum licence holders

Companies argue it should be dropped

Industry Canada's long-standing requirement that holders of wireless spectrum licences spend a minimum of 2% on R&D could be discontinued if Canada's largest wireless operators convince the government that the provision is no longer necessary. Industry Canada is currently reviewing the condition of licence as part of its Consultation on Revisions to the Framework for Spectrum Auctions in Canada and submissions to the department from industry are uniform in their opposition to maintaining the provision.

The condition of licence stretches back to 1983 and the awarding of a cellular licence to Cantel (now Rogers) that became an industry-wide requirement when the wireless industry was in its infancy. Established to stimulate R&D in the telecommunication sector, the provision is seen as a key policy instrument for establishing Canada as a telecommunications R&D heavyweight.

By mid 2009, there were approximately 22 million wireless subscribers in Canada in a sector dominated by Bell Mobility, Telus Mobility and Rogers Wireless. Companies and their industry associations argue that not only is the policy no longer required, is muddies the distinction between regulations and industrial policy and that firms will fund R&D when required to remain competitive in a cut throat marketplace.

That marketplace is about to become even more competitive with the entry of several new players who shelled out a total of $5.7 billion last year to purchase the rights to new wireless spectrum through an Industry Canada-held auction.

over $1 billion spent since 2% rule began

It's estimated that wireless companies in Canada have spent in excess of $1 billion during the time that the 2% provision has been in place, with the three largest players exceeding the target on average. Companies are required to submit audited R&D statements annually to Industry Canada. (RE$EARCH MONEY requested the data as well as interviews with departmental officials. Repeated phone and email requests did not elicit a response).

The industry view of the development of the wireless industry is that cluster of wireless expertise grew because of innovation and competitive pressures and not the 2% provision.

"The provision should be discontinued. It's an artifact from a previous era," says Jim Patrick, VP government affairs for the Canadian Wireless Telecommunications Association. "Back in the 1980s, it was a non-existent industry. Since that time, there is no shortage of advancements in wireless technology in Canada and around the world."

recent reports urge discontinuation

The CWTA and others point to two recent reports to bolster their arguments for discontinuing the provision. The Telecommunications Policy Review Panel's final report (2006) and the OECD's Telecommunication Regulatory Institutional Structures and Responsibilities report both argue that the R&D clause in the regulatory structure governing wireless firms is a creature of Canadian industrial development strategy rather than regulation. Apparently no other jurisdiction applies a similar R&D obligation to licensees.

"We've talked to senior Industry Canada people and this provision is a paper tiger. They have to spend time on it and so does industry. It stimulates paperwork but not R&D," says Patrick. "

Rather than impose R&D spending requirements, Watson says Industry Canada and Canadians would be better served if policies were put in place to encourage network enhancements. Several new players will be entering the market in the coming months and each will be required to spend massively on establishing national networks.

"The best way to stimulate R&D spending from the carriers' point-of-view is spending in networks. Network enhancements are where the government should put its focus by providing incentives to invest in networks," he says. "They're spending a lot in this area, well in advance of 2% on R&D … R&D is clearly diverting money away from network infrastructure."

While the proponents of leaving R&De expenditures to market forces have dominated the discussion to date, there is support for retaining the 2% provision Mark Goldberg of Mark H Goldberg and Associates Inc — a telecommunications consultant and former industry executive who started his career at Bell Labs in the 1980s — argues that public ownership of spectrum and the importance of corporate R&D makes the 2% R&D provision an important public policy tool.

"Spectrum is still a public resource and the CRTC looks for public benefit whenever licences are awarded or change hands," says Goldberg. "It's reasonable for Canada to set certain standards like R&D. They're good for companies and they're good for Canada."

Goldberg says it's important for profit-oriented corporations to engage in R&D, even fundamental research, since they are best positioned to determine what's required in the marketplace and can assess the potential of disruptive technologies. During the era of the centralized corporate lab, large companies often devoted a portion of their R&D budgets to so-called curiosity-driven research, often with remarkable results. He cites a recent article in Business Week (August 27/09) that argues forcefully for a return to an emphasis on research as well as development. Many observers contend that virtually every major breakthrough driving the telecom revolution of the 20th emanated from Bell Labs over a 70-year period.

"The nice things about these types of requirements is that they help encourage a long-range vision. You can't view it as a tax or you just flush it," he says. "It should be ‘How can I spend 2% and make 5% back.' It needs to be viewed strategically."

As part of Rogers Wireless' past R&D expenditures, it contracted with Ericsson Canada to develop critical software for its network and transmission equipment. That relationship, according to Goldberg, was important in building up Ericsson's Montreal operations to the point where they are run one of the largest R&D labs in Canada with a staff of more than 2,000.

"In the late 1980s, Ericsson conducted R&D based on Rogers' R&D requirements and now the scale of Ericsson is huge. They can attract world products mandates for software products," he says "By setting standards, governments try to encourage companies to do the right thing ... For companies, it's often difficult to remember long-range planning when they're putting out fires."

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