A look at the 700 MHz wireless spectrum auction: Facts, Opinions and Possible Long Term Outcomes (PART 1):
Recently the Government of Canada completed the 700 MHz (“mega-hertz”) wireless spectrum auction. Given our large investment in Telecommunications providers we thought we would do a deep dive analysis of the recent auction and attempt to explain the results. This post examines wireless spectrum in great detail and attempts to provide a comprehensive overview of wireless spectrum, the auction, and the possible outcomes. So if you have ever had a question about wireless spectrum, this is your article, and if your questions aren’t fully answered please leave a reply and we’ll get right back to you!
What is wireless spectrum?
In simple terms wireless spectrum is a frequency level allotted by governments primarily to media and telecommunications companies for different uses. Many technologies use spectrum for various purposes including: broadcast television, traditional radio, GPS navigation, and increasingly wireless communications in the form of cellular phones, tablets and other mobile communications devices. The key to spectrum is that it must be allotted specifically to one use in each region to avoid interference from other technologies that would effectively “jam” the signal that is attempting to be transmitted. Due to the explosion in wireless communications this century, the demand for wireless spectrum has gone parabolic, as have the prices. Recently the Canadian government auctioned the 700Mhz spectrum following behind the United States which auctioned their 700MHz spectrum a few years earlier. You can compare 700MHz with your favourite FM radio station which might broadcast at 91.9MHz or 101.3MHz. The total proceeds of the auction exceeded $5 billion dollars, which is more than twice what most analysts expected and a nice windfall for the Canadian government to be sure.
How was the Canadian 700MHz spectrum divided?
The 700MHz spectrum was divided into 5 “paired” blocks (A,B,C,C1, and C2) and two “unpaired” blocks (D and E). The spectrum was then sub divided into 14 population regions per block. Each license purchased lasts for 20 years. See diagram below for results:
Paired blocks are important because for a device to be interactive (i.e. send AND receive data) they need to operate on two distinct but linked bands of spectrum. Blocks A through C2 have this functionality and thus are suitable for most wireless devices, while bands D and E do not. The D and E block spectrum does not have much use for mobile carriers currently and was not even auctioned in the prior US 700MHz auction. There could be some uses for unpaired spectrum like streaming broadcasts of big events (World Cup, Olympics ect..) that broad audiences watch all at once, but suffice it to say that there is not a lot of value associated with D and E block spectrum currently.
Why is the 700Mhz band so valuable and how are prices determined?
There are 2 key reasons that 700MHz (pronounced “mega hertz”) wireless spectrum is so valuable to Canadian wireless carriers:
- US carriers are already using defined blocks of 700 MHz spectrum and handset providers (Apple, Samsung etc) are building the latest devices to be compatible with the 700MHz frequency level.
- 700MHz spectrum is theoretically some of the most useful spectrum to ever be offered due to its ability to penetrate structures (think elevators and parking garages). The 700 MHz band was previously used for broadcast television and has been freed up by the ongoing switch to digital high definition TV. Because lower frequencies travel further they require less infrastructure (towers etc.) while delivering a more consistent service.
The last Canadian spectrum auction in 2008 featured 2GHz spectrum, a much higher frequency, while the next auction is slated for 2015 at the 2500MHz level. The auction is a blind process whereby bidders submit what they are willing to pay in multiple rounds of bidding. Prices paid depend on the level of competition for and the quality of the spectrum. In the most recent auction, the competitive dynamic was not as active as it was in 2008; however the quality of the spectrum was much higher, partially explaining the higher overall price paid. Although Rogers paid far more than Telus or BCE, the auction process dictates that another player (be it Telus or BCE) was willing to pay very close to what Rogers paid for the spectrum they received so it’s not like Rogers’ bidding strategy was completely irresponsible. It will be interesting to see what prices are paid in 2015 given the ~$4.2 billion paid in 2008 and the ~5.2 billion paid this year.
What was all this noise about the bidding rules leading up to the auction?
The Canadian government mandated that the incumbents (BCE, Rogers, Telus,) could only buy one block each of the 4 “prime” spectrum blocks (B, C, C1,C2) and they would have to compete amongst each other for the best ones. The B and C spectrum blocks are 6MHz wide each and are compatible with AT&T in the US, while the C1 and C2 blocks are 5MHz wide each and are compatible with Verizon making the former slightly more valuable. The B block spectrum was deemed to be even more valuable because it came with a “free” equal sized A block spectrum that is currently not considered prime because it has interference issues. These issues could be resolved in the future though and because the A and B blocks border one and other they could potentially be paired in the future to create a “super band” that is 12Mhz wide. Because of the aforementioned competition rules none of the other blocks have the opportunity to be paired into a “super band”. The C1 block was set 4 aside by the government for parties other than BCE, Rogers and Telus to bid on and so the prices paid were less competitive. When Verizon was rumored to be considering an entry into Canada the incumbents were upset that they would be able to acquire a relatively equal block of 700MHz spectrum at a fraction of the price among other factors.
Who bought what in the 700MHz auction and how much did they pay?
- 22 licenses total
- 18 Prime A/B block spectrum licenses in the Maritimes, Southern and Eastern Quebec, Southern and Eastern Ontario, Alberta and British Columbia (>90% of Canada’s population)
- 4 Prime C block spectrum licenses in Northern Quebec, Northern Ontario, Manitoba and Saskatchewan
- No unpaired D/E block licenses
- Total price tag $3.3 Billion
- 30 licenses total
- 4 Prime A/B block spectrum licenses in Manitoba and Saskatchewan
- 6 Prime C block spectrum licenses in Eastern Quebec, Eastern Ontario, Southern Quebec, Alberta, British Columbia and the Territories
- 6 Sub-Prime C2 block licenses in the Maritimes, Northern Quebec, Northern Ontario and Southern Ontario.
- 14 Unpaired D/E block licenses (send or receive only) in Southern and Eastern Quebec, Eastern Ontario, Manitoba, Saskatchewan, Alberta and British Columbia.
- Total price tag $1.1 Billion
- 31 licenses total
- 6 Prime A/B block spectrum licenses in Northern Quebec, Northern Ontario and the Territories
- 4 Prime C block spectrum licenses in the Maritimes and Southern Ontario
- 7 Sub-Prime C2 block licenses in Southern and Eastern Quebec, Eastern Ontario, Manitoba, Saskatchewan, Alberta and British Columbia
- 14 Unpaired D/E block licenses (send or receive only) in the Maritimes, Northern and Southern Ontario, Northern Quebec and the Territories.
- Total price tag $600 Million
- 13 Sub-prime C1 block licenses total
- Videotron bought 6 of the 13 licenses covering Quebec, Southern and Eastern Ontario, Alberta and British Columbia for $233 Million
- Bragg Communications (Eastlink) Bought 4 of the 13 licenses covering the Maritimes and Northern Ontario. Price not disclosed
- Manitoba Telecom bought the C1 license in Manitoba for $9 million while SaskTel bought the license in Saskatchewan (price not disclosed)
- John Bitove’s startup Feenix Communications bought the lone sub-prime C2 block license in the Territories although it is unknown why they bought the C2 (which Telus and BCE may have bid on) instead of the more protected C1 block which went unpurchased in the same region. (price not disclosed)
To Read PART 2: Opinions and Possible Long Term Outcomes
- Equity Market Commentary: Strong Dividend Growth in 2017
- For the Staff of Leon Frazer & Associates, it’s the Season of Giving!
- Douglas Kee on BNN – Market Call Tonight – December 6, 2017
- A Thought-Provoking Discussion on the Overcrowded Private Client Market
- Dona Eull-Schultz, President of Leon Frazer & Associates, Featured in the Wealth Professional Magazine
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