Next spectrum auction seen as less substantial than previous sales

Canada's third wireless spectrum auction in a little more than a year is set to start Tuesday, and it is generally predicted to bring in far less money than the other two, though at least one analyst feels there is demand for the additional bandwidth an auction like this brings to the market. The 11 approved bidders in the 2500 MHz auction are mobile carriers Rogers Communications Inc., BCE Inc., Telus Corp., Manitoba Telecom Services Inc., Wind Mobile, TBayTel Inc., Eastlink and Quebecor Inc.' Videotron, as well as rural Internet providers SSi Micro Ltd., Corridor Communications Inc. and Xplornet Communications Inc. Mobilicity, in bankruptcy protection since September 2013, said in January that it would not participate in the spectrum auction. Rogers and Bell face restrictions in the auction because of Industry Canada’s spectrum aggregation rules, as both companies already have extensive 2500 MHz holdings in the Maritimes and major cities including Toronto, Ottawa and Montreal individually, and through their Inukshuk Wireless Partnership. According to Industry Canada’s list of 2500 MHz holdings, Xplornet also faces restrictions in parts of Quebec, Ontario and the Maritimes, as the department has placed a limit of 40 MHz on the amount of 2500 MHz spectrum a given company can hold in a particular licence area. Saskatchewan Telecommunications Holding Corp., which holds 2500 MHz spectrum in Regina, Moose Jaw and Saskatoon, did not apply to participate in the auction. Adrian Foster, a spectrum expert with McLean Foster & Co., said in a phone interview that the 2500 MHz spectrum on the block is “not as interesting” as the AWS-3 auctioned in March or the 700 MHz spectrum sold last year, because the carriers have yet to even take full advantage of what they already own to create more LTE coverage and buying blocks of 2500 MHz won't help much in that regard. “When you take look at an LTE deployment map around the country, it's still pretty sparse,” he said. “We still see LTE deployed only really in areas of heavy population density. Is really important for these guys to get LTE spectrum? I wouldn't think so at this point.” The auction divides the 2500 MHz spectrum band into licences in 61 service areas, with three different band plans across the country, including paired 20 MHz blocks and a single unpaired 25 MHz block. The high-band spectrum has technological limitations that make it poor for covering a wide area, Foster added. “There are propagation issues with it,” he said. “Its range isn't great, and there can be rain-fade problems. It's not ideal spectrum for mobile, but it is available.” He added that carriers may need to make significant upgrades to their equipment to take full advantage of the spectrum, and it might not be suitable for providing the fastest services. “I can't imagine that they're going to be using this for LTE,” he said. Foster said 2500 MHz spectrum was originally intended to be only used for fixed-wireless Internet services in places too remote to be reached by cable. In announcing the auction, Industry Minister James Moore said 2500 MHz spectrum is “ideal” for facilitating mobile and fixed-Internet services, particularly in rural areas. “Smaller geographic licence areas will give Internet service providers in rural areas a greater chance of acquiring spectrum and to use it to offer new and improved services and wireless broadband services to both homes and to businesses,” Moore said at a press conference in January 2014. Scotia Capital analyst Jeff Fan said in a phone interview Monday that the spectrum aggregation limits mean Telus will be the big winner in the 2500 MHz auction. "Of the Big 3, I think Telus should have the ability to buy as much as they can along with some of the smaller players," he said. All told, he said, the auction will raise less than $400 million from Bell, Rogers and Telus, compared the $2 billion they spent in the AWS-3 auction in March (Rogers ended up not buying any spectrum in that auction). "We don't see it as being a very competitive auction, because two of the big three are not going to be heavily involved," he said. Despite this being the third auction to begin in 15 months, the incumbents still have an appetite for spectrum, Fan said, and the government is forgoing extra revenue by sticking to the aggregation limit. "If Bell and Rogers were allowed to bid, you would see a pretty competitive auction," he said. "I think the growth in data means you need more spectrum, you need more capacity. If you can pick up spectrum at a certain value, it's better than adding cell sites.” BMO Capital Markets analyst Tim Casey said in a Dec. 18 research note that the 2500 MHz auctioncould raise $535 million, with Telus being the largest bidder at $400 million because of its comparative lack of 2500 MHZ spectrum compared to Bell and Rogers, along with the spectrum aggregation limits. The AWS-3 auction this year raised $2.11 billion, while $5.27 billion was spent in last year's 700 MHz sale. Telus chief financial officer John Gossling said at a Jan. 23 CIBC investor conference in Whistler, B.C., that the 2500 MHz auction will help Telus catch up to Bell and Rogers. “It has caps in place, which means that Bell and Rogers are not able to bid in certain regions. So that leaves Telus and perhaps some regional players and some new entrants who come in,” he said. “So that feels like that should be a very good outcome for Telus, and help us close the gap. We do have less spectrum than Bell and Rogers, and we do need to get more, so this will be an important year for that.” The spectrum will be sold off via a combinatorial clock auction, the same format as the 700 MHz sale, in which participants have multiple rounds to outbid one another. There is no specific end date on the 2500 MHz auction. Foster dismissed concerns that smaller players could be outbid by national carriers with deeper pockets. "I think the reverse is actually quite possible," he said. "Rather than national players bidding up prices, it's quite possible for regional players to be bidding up prices. It may well be that it's the regional players, if they're only interested in acquiring some spectrum in their region, they may very well bid prices up higher than the national player would perceive the value of that spectrum to be." — With reporting by Peter Henderson at phenderson@thewirereport.ca and editing by Derek Abma at dabma@thewirereport.ca

Next spectrum auction seen as less substantial than previous sales

News | April 13, 2015

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