High spectrum costs could be driven by competition for set aside: analyst

Industry analysts are declining to speculate too much on what caused the Canadian telecom sector to have so far spent $8 billion on the 3500 MHz auction, more than double what they were predicting, however, they are not surprised to see high spending this year. On Wednesday, the Globe and Mail reported that to date $8 billion has allegedly been spent on the auction, citing unnamed sources. Cormark Securities analyst David McFadgen noted although $8 billion is “a big number," it is not so surprising, he said in an email, pointing to BCE Inc.'s relatively small spend in the 700 MHz auction and its decision to sit out the 600 MHz auction. Following the 600 MHz auction, Bell said it didn’t need the low-band spectrum to deliver 4G or 5G services, given it already has sufficient low-band spectrum. However, this time around, the spectrum for auction is widely seen as crucial for the deployment of 5G networks. No other “meaningful” data has been revealed for the analysts, leaving them speculating where the surge in spending came from. According to Canaccord Genuity analyst Aravinda Galappatthige, looking at trends from prior auctions, Rogers Communications Inc. and Telus Corp. are the two companies that “tend to surprise” during auctions by “being more aggressive on the spectrum”. “So it's possible it's one of those two, or maybe both of them, that would have driven the bulk of that inflation,” Galappatthige said in a phone interview with The Wire Report. Galappatthige said another possibility, and what would be more interesting to the industry, is if the price inflation came from “more action than everyone would have expected” in the set-aside component of the auction. If competitive bidding was the case, he said, “that means it's going to be a crowded field on the new entrants front” “Because that's where the new competition comes in,” he said, noting that Shaw Communications Inc. sat out the auction this year after it was announced that Rogers intended to acquire the company. “Shaw is not bidding. So the question is who got Shaw’s spectrum?... Was it all Quebecor? Was Cogeco aggressive beyond its footprint? Was there a third party that we don’t know about that came in?” Bidding in the weeks-long auction opened June 15 and is expected to close July 23. Galappatthige added that he doesn’t expect the final numbers to come in at that much more than $8 billion. Already, he said, that comes out to around $3 per MHz per pop, whereas last year’s similar auction in the United States saw rates around $1.25. “That was considered highly expensive so it’s very surprising to be even more than that,” he said. At the low end analysts were predicting $2.8 billion would be spent on the auction to $3.9 million on the higher end. Deloitte Canada’s director of technology, media and telecommunications research Duncan Stewart, said in a phone interview with The Wire Report that it is no surprise that spending was so high because in the last year, globally, almost all spectrum auctions “have been coming in well ahead, way higher than people thought maybe a year or two ago.” He added that the valuations in the Canadian market are largely driven by what happens in the United States because the two wireless cellular markets are considered “extremely similar” in terms of churn and ARPU average. “So for the Canadian number to be basically double what people were expecting, double is kind of absolutely reasonable and certainly not outside of what people would have expected,” he said. Stewart said the higher global spending on spectrum shows that there is a trend that companies around the world are thinking about how to monetize 5G and a fear that if they do not get in on it, they will be at a disadvantage. The long-term trend, according to Stewart, is that customers will want 50 or 500 gigabytes of wireless data per month, which “would be really expensive to do that at 4G” whereas if companies have enough 5G spectrum, their “cost per gigabyte is over time would be 80 or 90 per cent -- or maybe even more -- lower.” “If you don't have enough, that's going to be a bad thing over the long run,” he said. “So a good reason why this spectrum is attractive is not that we could “monetize” it, but it lowers the cost of data, and therefore makes more profitable.” -- Reporting by Jenna Cocullo at jcocullo@thewirereport.ca and editing by Michael Lee-Murphy at mleemurphy@thewirereport.ca CORRECTION: An earlier version of this story quoted an incorrect statement that BCE Inc. did not purchase any spectrum in the 700 MHz auction. The story has been corrected.

High spectrum costs could be driven by competition for set aside: analyst

News | July 15, 2021

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