Spectrum auction for airwaves aims to develop a competitive wireless market for all
Smaller wireless players including Shaw Communications Inc.’s Freedom Mobile are celebrating the federal government’s decision to give them an advantage in the upcoming auction for spectrum, the airwaves that power mobile communications, as a win for competition.
Incumbents, however, are less impressed by the rules released Wednesday by Innovation, Science and Economic Development (ISED) for the March 2019 auction for 600 MHz spectrum – a desirable low-band frequency for next-generation 5G networks given its ability to penetrate buildings in dense urban areas and travel long distances in rural communities.
It’s the latest chapter in the debate over whether Canada’s wireless market is competitive enough and how much action the government should take to address the issue.
The framework sets aside 43 per cent of spectrum for regional operators and potential new entrants, which will result in lower prices than if they had to compete in an open auction against the Big Three of BCE Inc., Rogers Communications Inc. and Telus Corp. ISED cited the need for more competition, which it in turn expects will boost affordability, when it announced the framework.
The decision “affirms the government’s commitment to true competition and the long-term benefits it will bring to all Canadians,” Shaw CEO Brad Shaw said in a statement, adding it “will drive a more dynamic, competitive wireless market in Canada.”
Shaw argues the move will correct a “significant imbalance” in low-band spectrum holdings between the Big Three and smaller players whose networks are decidedly not as fast or reliable. The incumbents currently hold over 90 per cent of low-band spectrum, which Shaw said reflects a “concentration of market power” including about 90 per cent of Canadian wireless subscribers.
Incumbents, on the other hand, argue the market is already competitive.
“The wireless market is fiercely competitive with four facilities-based service providers with multiple brands in virtually every market competing to win the hearts and minds of Canadians,” David Watt, Rogers senior vice-president of regulatory, said in a statement.
Fourth players include Shaw’s Freedom Mobile, Quebecor Inc.’s Videotron and Bragg Communications Inc.’s Eastlink, all of which got their start thanks to government advantages in the last major spectrum auction in 2008.
“The startups of a decade ago are now well-capitalized regional players who do not require government assistance,” Watt said. “Going forward, we hope the government recognizes this and adopts more balanced auction rules as the country gets ready for 5G.”
Eros Spadotto, executive vice-president of technology for Telus, said the decision “compromises the potential for Canadians living in rural or remote communities to have access to future 5G technology.”
“The carriers who will be granted spectrum under extremely favourable conditions in this decision are very regional and are highly focused on urban markets, in contrast to carriers such as Telus who have a proven track record of providing extensive coverage over vast geographies.”
Bell called the set asides “far too generous” considering the “slow pace of service rollouts” from the cable companies that first acquired spectrum in 2008.
“The government calls them regional players but these are billion-dollar corporations already well established in wireless, and they don’t need ongoing taxpayer subsidies to be able to bid for spectrum,” said Bell spokesman Marc Choma.
The rules came as no surprise to the market, with stock prices for the Big Three, Shaw and Quebecor remaining relatively flat as of Thursday morning. The framework is consistent with the 2008 spectrum auction, so was widely anticipated and expected to be neutral for stocks, RBC Capital Markets analyst Drew McReynolds noted to clients.
The government plans to earn at least $1.5 billion from the auction based on the opening bids for spectrum, which will be licensed for 20 years. Smaller players will not be allowed to sell spectrum to national incumbents for five years. Rules around when the spectrum must be deployed vary between five years to 20 years after it’s issued.
These rules intend to stop spectrum flipping. Both Shaw and Quebecor Inc., which owns regional competitor Videotron, have made hundreds of millions of dollars selling unused spectrum in the past.
Last year, Videotron made a profit of about $330 million from selling spectrum licences it never used. It sold spectrum it bought in the 2008 auction to Rogers and sold out-of-Quebec spectrum it bought in 2014 and 2015 to Shaw.
Shaw, meanwhile, has earned about $250 million by selling unused spectrum licences. It bought spectrum in 2008 that it ultimately sold to Rogers in 2015 before entering the wireless business in 2016 when it acquired Wind Mobile. Wind also sold unused spectrum in 2015.
Desjardins analyst Maher Yaghi expects Shaw and Quebecor will each buy blocks of spectrum in the regions they operate without major competition. He estimates they’ll spend about $410 million and $202 million, respectively, if no new entrants bid against them. That’s a “significantly lower price” than incumbents are expected to pay.
“Quebecor and Shaw need this spectrum to continue growing their wireless subscriber base,” Yaghi wrote in a note to clients. “Indeed, these companies want to get that spectrum, but they also want to make sure no one else enters the market or sells the spectrum to incumbents in the future.”
Barclays analyst Phillip Huang believes “none of the key wireless players in Canada are really starved for spectrum” given well-established network partnerships, one between Bell and Telus and the other between Rogers, Quebecor and Eastlink.
“Having said that, Shaw still has the smallest spectrum portfolio compared to its peers, and we believe the 600MHz auction is most important to Shaw,” Huang said in a note to clients.