700 MHz cap regime lowers government auction revenues: Analyst

Industry Canada rules that cap each incumbent wireless carrier to a single block of “prime” 700 MHz spectrum will lower the federal government's proceeds from the auction to $2.6 billion, Scotia Capital analyst Jeff Fan forecasted in a research note to clients. Fan, who in a March 5 research note to clients projected the auction would generate $3.5 billion in proceeds, in a research note in April lowered that projection to $2.6 billion as a result of an Industry Canada framework that caps how many spectrum licences Canada's deep-pocketed incumbents can buy. “I think without caps, the competition would have been more fierce because the incumbents would all try to get more than what they’re now capped at,” Fan said in a phone interview last week. On March 14, Industry Minister Christian Paradis said national incumbent carriers BCE Inc., Rogers Communications Co. and Telus Corp. will each be limited to a single block of “prime” 700 MHz spectrum in each licence area for an auction of 700 MHz spectrum next year. Regional incumbents SaskTel and MTS Allstream will also be capped in Saskatchewan and Manitoba, respectively. Paradis said in March the rules will ensure at least four carriers obtain a block of prime spectrum in each market. The prime blocks are coveted due to their compatibility with devices built for major U.S. carriers AT&T Inc. and Verizon Communications Inc. Fan said the caps will artificially lower incumbent demand for licences and ensure the supply of prime spectrum blocks outweighs or matches demand. “When demand matches supply, it’s hard to see how this will be that competitive,” he said. The research note's projected $2.6 billion in proceeds from the 700 MHz auction said that works out to a cost of $1.11 per megahertz per capita. Scotia Capital said the auction rules do not encourage “independent new entrants” to competitively bid for prime blocks and that “e believe foreign strategic interest is not very strong at the moment.” Industry Canada is still consulting on “several matters that will impact the bidding rules that could affect the price,” the research note added. “Some of the areas of consideration include the possibility of a 'blind' auction, the amount of credits each bidder has, and minimum bids. But based on the auction policy framework already released, we believe it is appropriate to reduce our expectation at this time,” it said. An auction of spectrum in the 700 MHz band in the U.S. in 2008 raised $19 billion US from the licensing of 52 MHz worth of spectrum. Scott Wallsten, vice-president of research with the Washingon, D.C.-based Technology Policy Institute, calculated that the 2008 auction of 700 MHz spectrum in the U.S. averaged $1.10 US per megahertz per capita, putting it pretty close to Scotia Capital's forecast. In an emailed statement, Wallsten said “it's worth noting that lots of things affect the value of the licenses in addition to the overall economy and demand for wireless services.” One of the biggest factors, Wallsten said, is competition for the licences, which could diminish as a result of auction rules. “Sometimes regulators believe that the benefits of increased wireless competition resulting from restricting the ability of dominant incumbents to bid exceeds the cost of lower auction revenues,” he said. Industry Canada issued a consultation in April on the licensing framework for the auction and proposed opening bids for five paired and two unpaired blocks of 700 MHz spectrum in each licensing area, or market. The department proposed that opening bids for the paired blocks, including the four prime blocks, range from $284,000 in the northern territories licence area to $69.32 million for the Southern Ontario market. The opening bids for all blocks in all 14 licence areas total $897.3 million, the consultation document says. Fan said he expects the total auction revenues to fall short of the $4.25 billion the government earned from a 2008 AWS (1700 MHz and 2100 MHz) auction, mostly because there is less spectrum available. Independent technology analyst Carmi Levy said he believes the auction, planned to take place in the first half of next year, will generate more revenues than the 2008 AWS auction due to increasing demand for mobile data services and supporting spectrum frequencies. He said he believes the value of the auction is underestimated because there the 700 MHz band has “truly unique properties” to support the mobile data demands placed on carriers and their networks. “The ability to penetrate buildings and deliver high-speed data throughput via a more efficiently laid out terrestrial tower network could be a game changer for the industry. When all the bids are counted, expect the dollar figures to exceed the estimates accordingly,” he said in an email. In a phone interview, Levy added that the stakes are “much higher” now than they were in 2008. Cisco Systems Inc. said last week in its annual Visual Networking Index Forecast that global mobile broadband traffic will increase by a factor of 18 between 2011 and 2016, reaching 10.8 exabytes per month. In the 2008 auction, incumbents Bell, Rogers and Telus collectively spent $2.62 billion on 162 spectrum licenses across the country, according to Industry Canada’s website. Those companies have said they will use 700 MHz spectrum licences to help roll out fourth generation LTE networks, which are more efficient and capable of transmitting more data traffic than HSPA networks. The government plans to remove the foreign ownership restrictions for small carriers with less than a 10 per cent share of national telecom revenues. Bill C-38, the federal budget bill that is expected to pass by the end of June, includes amendments to the Telecom Act to remove the restrictions. Under those proposed changes, new entrant wireless carriers Wind Mobile, Public Mobile, Mobilicity, and Quebecor Media Inc. could use more foreign capital to bid for 700 MHz licences than they could during the 2008 auction. (Quebecor, which also has broadcasting assets, would have to restructure its wireless division as a separate company.) Levy said this change will serve as another “significant” factor to help increase auction revenues. “It opens the door, though in a small way, to greater participation, greater levels of foreign capital and possibly the beginning of the end to the 95 per cent ownership of the Canadian market of the three national incumbents,” he said. Wind CEO Anthony Lacavera told The Wire Report in April that foreign ownership for the company is an option. International telecom carrier VimpelCom Ltd., which owns a non-controlling stake in Wind's holding company, Globalive Communications Corp., is said to be a likely takeover candidate. Ken Engelhart, Rogers’ senior vice-president of regulatory affairs, told The Wire Report at the 2012 Canadian Telecom Summit Monday that he does not believe foreign investors will play a major role in driving up auction revenues. Talk amongst new entrants of industry consolidation could deter potential investors, he said. “I don’t think there’s going to be too many foreign entities participating, but what do I know?” he said. According to economic principles, anything that increases the number of potential bidders in an auction should increase the revenues, Engelhart said. “It should help in theory, but will it help in this particular auction? I don’t know. I’m not sure that there’s a whole lot of people who want to jump in,” he said. “Most economists agree that an open auction generates more money than a restrictive auction.” —With files from Nicholas Kyonka in Toronto. news@thewirereport.ca

700 MHz cap regime lowers government auction revenues: Analyst

News | June 5, 2012

Unlock all the Canadian telecom, broadcasting and digital media news you need.

FREE TRIAL

SUBSCRIBE

Inside The Wire Report

Information

Hill Times Publishing

Get in Touch With Us

700 MHz cap regime lowers government auction revenues: Analyst

News | June 5, 2012

Unlock all the Canadian telecom, broadcasting and digital media news you need.

FREE TRIAL

SUBSCRIBE

Related Stories

Freedom plans could drive big three back to subsidies: analysts

Freedom answers to ‘unlimited’, offers $0 phones on select plans

Shaw says patience, not regulation, required to see organic MVNO market

Analysts surprised by Bell’s lack of 600 MHz, incumbent spend

Reuse & Permissions

Inside The Wire Report

Information

Hill Times Publishing

Get in Touch With Us