A NEW REPORT FROM BMO Capital Markets, which dives deep into what will affect investment in the telecom and media space in Canada in 2013, takes a good look at the possibilities and assumptions heading into the auction of the 700 MHz spectrum everyone assumes will take place mid-year.
The report, by analyst Tim Casey, says what most believe – that the big winners in the auction, which will be expensive. will be the big three of Rogers, Telus and Bell, but that the latter two have an advantage over Rogers since Bell and Telus share the operation of their national wireless network. This auction is a very big deal because these particular blocks of spectrum (formerly used by TV stations) easily pass through buildings and travel long distances better than higher frequencies.
“The likely losers are AWS pure-play wireless new entrants given their strained balance sheets,” writes Casey of Public Mobile, Wind and Mobilicity.
Other auction points the report makes include:
• Quebecor is also well positioned and should be bidding unopposed in its core market.
• As for specific spectrum blocks in the auction itself, it is not inconceivable that Rogers will want to secure alignment with AT&T’s Lower B and C blocks given their mutual GSM/HSPA heritage. Following AT&T’s band plan may potentially provide greater optionality for spectrum capacity longer term, given AT&T’s plans to use carrier aggregation technology to deploy its 700MHz spectrum unpaired Lower D and E blocks.
• Bell and Telus, which have a CDMA network that they can leverage for voice, could align themselves with Verizon’s Upper C block.
• A cost-efficient outcome would be for Rogers to acquire the Lower C block (along with the contiguous unpaired Lower D and E Blocks), and BCE and Telus to acquire the Upper C1 and C2 blocks (to facilitate network sharing and to align with Verizon). See chart below for a good explanation.
• The report expects Upper C1 and C2 blocks to be less attractive than Lower B and/or C blocks. On this basis, expect the AWS new entrants to acquire the Lower B Block, with Quebecor focused on Quebec and EastLink for Atlantic Canada.
• The natural bidder for the reserved blocks outside of Quebec and Eastern Canada is the entity that emerges from the expected (read inevitable) consolidation of Wind, Mobilicity and Public Mobile, reads Casey’s report.
• It assumes each of the big three incumbents will spends about $750 million for spectrum in 2013.
• As noted in the chart, writes Casey, there are five paired blocks (A, B, C, C1 and C2) and two unpaired blocks (D and E) up for bid. With AT&T and Verizon driving the 4G LTE ecosystem on 700MHz spectrum, there is clear visibility on LTE equipment/device availability supporting the Lower B and C blocks (the “AT&T band”) as well as the Upper C1 and C2 blocks (the “Verizon band”).
• However, there is currently no visibility on LTE equipment/device availability supporting the Lower A block (partly due to potential technical issues from Channel 51 broadcasting interference).
• Industry Canada adopted a dual spectrum cap framework on paired blocks where: (1) a spectrum cap of one “prime” paired block (blocks B, C, C1 and C2) is applicable to all “large wireless service providers”; and (2) a spectrum cap of two paired blocks (blocks A, B, C, C1 and C2) is applicable to all licensees. Unpaired lower blocks D and E are not subject to a spectrum cap. “Large wireless service providers” are defined as companies with 10%+ national wireless subscriber market share or 20%+ wireless subscriber market share in the province of the relevant licence area, reads the report. That means Rogers, Bell, Telus, MTS and SaskTel all fit the definition of a “large wireless service provider,” and thus are subject to the one “prime” paired block (B, C, C1 and C2), which effectively sets aside one “prime” paired block for AWS new wireless entrants Videotron, Wind, Mobilicity, Public Mobile, EastLink and Shaw.
