Experts disagree on stringency of AWS-3 build-out rules

While some observers are saying the deployment requirements for the upcoming AWS-3 spectrum auction are the strictest the industry’s ever seen, others say they’re pretty much in line with those of previous auctions. The government released proposed rules surrounding next year’s auction late last month. The deployment requirements state companies must deploy spectrum reaching between 20 and 50 per cent of the population in Tier 2 service areas within five years, and between 10 and 50 per cent of the population in additional areas within 10 years. Canaccord Genuity telecom analyst Dvai Ghose said in a phone interview that the deployment requirements for the auction are Industry Canada’s “most stringent ever,” and their effects “shouldn’t be ignored.” He explained that while the AWS auction in 2008 had requirements linked to a five-year deadline, those requirements were necessary only to secure in-region roaming rights. “It a condition to enjoy the privilege of mandated roaming,” he said. “You only had to meet that five-year if you wanted to maintain in-region roaming, not to maintain your license. Now it’s a condition of licence,” he said, noting that the government extended those five-year roaming requirements indefinitely. Industry Canada spokesman Michel Cimpaye said companies in the upcoming AWS-3 auction will effectively have five years to reach the level of deployment they had 10 years to reach after the 2008 spectrum sale. “AWS-1 had deployment conditions within 10 years, ranging from 20 per cent to 50 per cent of the population, depending on the licence area,” he said in an email. “AWS-3 has deployment conditions to be met within five years and 10 years of the licence term.” Adrian Foster, an Ottawa-area-based spectrum expert with McLean Foster & Co., said the five-year requirement related to roaming in the 2008 AWS auction functioned as a condition of licence. “I really don’t see a big difference with the two I guess the only difference is the type of licence,” he said, noting that AWS-3 has added rules to ensure that coverage is extended to smaller towns. “They’re trying to promote and ultimately ensure there is coverage in these smaller communities,” he said. Gregory Taylor, principal investigator at Canadian Spectrum Policy Research, said in a phone interview that the there are a lot of similarities between the two auctions’ requirements and the numbers “generally measure up.” He said that the AWS-3 requirements actually aren't strict on the rural deployment requirements. “Basically, what we’re seeing is a continuation of the policy in 2008 that didn’t necessarily bring a lot of new service into the country,” he said. “The government obviously doesn’t want to put strict conditions on this that might hurt the development of a fourth player, so they’re going pretty easy on the rural build-out conditions on this one,” he said. Barclays analyst Philip Huang said in a research note that the AWS-3 conditions were “onerous,” and they are a reason why Verizon Communications Inc. is not coming to Canada. Referring to information obtained in a meeting a U.S. Barclays analyst had with Verizon management, Huang said Verizon is "unlikely to make a major acquisition in Canada" due to issues including Verizon management considering "some of the nationwide build requirements for Canada relatively onerous despite comparatively low spectrum cost." Ghose noted that Shaw Communications Inc. holds spectrum in Western Canada that it has never used, while Quebecor Inc. holds Toronto-area spectrum it has not deployed, and the government’s aim in establishing the rules for the AWS-3 auction is to stop companies from holding onto or reselling spectrum. In the consultation document, Industry Canada said the objective of the build-out rules is to “ensure that the AWS-3 spectrum is deployed in a timely manner” to “deter the acquisition of spectrum licences by speculators and those whose intent is to prevent access to the spectrum by their competitors.” Ghose said the government is upset with companies such as Shaw and Quebecor that are not using the spectrum they have, “and I think they’ll be a lot more stringent about this build requirement.” “I don’t think people should ignore the five-year build requirement,” Ghose added. He noted that with five years to build coverage, “your first problem will be that, for the first two or three years, you won’t have any devices that work on that spectrum because the U.S. hasn’t even licensed AWS-3 yet.” “So it’ll be a couple of years, I think, before you get an ecosystem, which makes it in some ways hard to justify the build, but you still have to do the build, so you gotta basically build by Year 2 or 3, even if you don’t have any devices.” BMO Capital Markets analyst Tim Casey said in a phone interview that no company will buy this spectrum to just “sit on it.” Because of increasing demand for wireless services, more spectrum will be necessary in the future, given increasing usage of services like video, Casey noted. “AWS-3 will be one more component of the strategy for wireless operators to meet that consumer demand,” he said. Having build-out requirements set to five years instead of longer affects under-capitalized companies more than others, he said. “It matters if you’re a capital-constrained company. It doesn’t matter if you have capital,” he said. “Those build-out requirements are based on population, so if , or , if any of them buys that other block, that will fit into their spectrum plans. That will be one more component. If the fourth player is under-capitalized, presumably they’re going to have to deploy that spectrum anyway.” He added that “if somebody comes in and finances the fourth player, then maybe it won’t be an issue. That’s unlikely.” Whatever the effect of the rules, Jean-Francois Mezei, a telecom consultant with Vaxination Informatique, said in a phone interview that they could still change. He said the consultation document released by the government “is just an opening bid on what they want.” “There’s going to be some convergence at the end of the year, and I think we have to be patient to see how things are going to turn out,” he said. “I’m pretty convinced the AWS-3 spectrum rules will be adapted based on the outcome of the wholesale wireless .” — With reporting by Anja Karadeglija at akarad@thewirereport.ca and editing by Derek Abma at dabma@thewirereport.ca

Experts disagree on stringency of AWS-3 build-out rules

News | August 14, 2014

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Experts disagree on stringency of AWS-3 build-out rules

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