Ryan Bushell

A look at the 700 MHz wireless spectrum auction: Facts, Opinions and Possible Long Term Outcomes (PART 2):

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!

Opinions and Possible Outcomes:

So who won the 2014, 700 MHz Canadian wireless spectrum auction among the incumbents?  The short answer is that it’s too hard to tell right now.  This spectrum will not be fully deployed for at least 2 or 3 more years and some of it may never be.  Shaw Communications still has unused spectrum from the previous 2 GHz auction in 2008.  Upon first glance it looks like Rogers overspent drastically, however when you breakdown what they actually purchased the results are more interesting.  As mentioned earlier A and B block spectrum can potentially be paired together to create a “super” 12x12MHz wide band.  Rogers bought this “super” band in all key markets nationally while BCE and Telus bought the 12MHz wide band in the non-key markets.  If you breakdown the price paid by each carrier on a $/MHz of paired spectrum (ignores D/E blocs) basis you get the following results:

  • Rogers bought nine 12MHz wide licenses and four 6MHz wide licenses for a total of 132 MHz.  This equates to a price/MHZ ratio of $25.0 million/MHz
  • Telus bought two 12MHz wide licenses, six 6MHz wide licenses, and six 5 MHz wide licenses for a total of 90 MHz.  This equates to a price/MHZ ratio of $12.2 million/MHz
  • BCE bought three 12MHz wide licenses, four 6MHz wide licenses, and seven 5 MHz wide licenses for a total of 95 MHz.  This equates to a price/MHZ ratio of $6.3 million/MHz

Still seems like Rogers spent a lot more right? But now let’s take population into account.  Rogers 12MHz wide bands cover 90% of Canada’s population; compare that with 6.5% for Telus and 3.5% for BCE.  When population is factored in it is a lot less evident who the clear winner was.  Rogers clearly paid more but also got a lot more for their money.  We won’t know who won the 2014 auction for at least 5 years if ever.  Rogers will be the winner if they can turn the A/B block spectrum into a national “super” band that opens up a sustainable competitive advantage over BCE/Telus.  If Rogers can monetize this advantage by charging more to their more affluent consumer base for premium services like streaming video while picking up market share they will be glad they paid up for the best spectrum.  On the other hand, if BCE can get by with the spectrum they purchased in their key markets (ON/QUE), their $600 million price tag will seem like a bargain in comparison to both Rogers and Telus.  Telus finished 3rd place in my mind, given they paid almost twice what BCE paid for a very similar amount of spectrum. In the end I agree that Rogers’ management team has the opportunity to build a sustainable network advantage with the spectrum they purchased, while BCE was the most disciplined investor at the table (Income Later vs. Income Now).  Final verdict: Rogers #1, BCE #1A and Telus #3.

The wildcard in the 2014 700MHz wireless spectrum auction will be Quebecor owned Videotron.  Videotron paid a reasonable price for sub-prime C1 block spectrum covering ~80% of Canada’s population including all key metropolitan markets outside of Manitoba, Saskatchewan and the Maritimes.  Speculation is that Videotron will now look to consolidate Mobilicity and or Wind Mobile and become the 4th wireless player in Canada.  Although the Federal Government would love to see this, it’s an outcome most analysts put a low probability on, and I agree.  Both those players are in balance sheet trouble and are having difficulty gaining traction in competitive 3 player marketplaces.  Another theory is that Videotron will look to hold the spectrum as a cheap asset they purchased in an auction that was suddenly devoid of competition once Wind and Verizon announced that they were taking a pass on the bidding.  The major problem with this strategy is that Industry Canada has repeatedly blocked spectrum transfers to the incumbents from companies like Shaw who bought “protected” spectrum in the previous auction.  The only remaining theory is that Videotron will go it alone and build their own network while asking the Federal Government mandate the incumbents share their infrastructure until such a time that Videotron’s network can be completed.  My best guess is that Videotron’s strategy is a combination of the above.  The spectrum was a cheap asset to acquire facing little competition, the rules at Industry Canada could change at any time, especially in the event of a change at the Federal Government level, and in the meantime they can wait and see what happens to Wind and Mobilicity. All of this gets more complicated in the event of a serious Quebec sovereignty referendum led by the PQ.  Oh and the new “face” of the PQ sovereignty movement?  Well that’s Pierre Karl Peladeau, former President and CEO of Quebecor Inc. which owns Videotron.

To read part 1  click here


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