TORONTO – Despite how the rules to be applied to the auction of 700 MHz wireless spectrum have yet to be announced, one telecom industry analyst believes (taking all variables into account) the federal government can expect to earn about $3.5 billion when that auction finally does take place.
In a note to clients last week, Scotia Capital analyst Jeff Fan took into account potential changes to foreign investment rules, the possibility of a cap on the amount of spectrum to be purchased by any one company and the potential for certain blocks of spectrum to be set aside for newer/smaller wireless competitors, but used the American auction in 2008 as a guideline for what companies will pay for certain blocks of that coveted spectrum.
A cap, noted Fan, would be a positive outcome for the incumbents “because it opens the path for them to acquire the AT&T or Verizon bands. The extent of the benefit to the incumbents and the impact on the new entrants depend on the size of the cap,” he wrote. “We believe acquiring the AT&T or Verizon bands will help provide certainty regarding device availability and cost.”
However, there is a danger for Rogers in a cap scenario, since Bell and Telus share/pool their network resources to serve their respective customers (something Rogers has complained about already). “(I)f BCE and Telus are treated as separate bidders in the auction, it would put Rogers at a disadvantage against Bell/Telus, as they would be able to combine their frequencies to offer greater data capacity relative to Rogers,” said Fan.
And when it comes to that set-aside the new entrants have demanded? “We believe only a set-aside of the AT&T or Verizon bands for the new entrants would be a win for the new entrants. Other set-aside scenarios would not help (them).”
Fan explains the reason why the bands in use by the U.S. market’s “big two” are so desired (see U.S. 700 MHz band plan image, from Fan’s report, source: FCC): “The AT&T bands (lower B and C) are the most highly coveted bands by all operators because they would help align with AT&T on 4G/LTE and 3G/HSPA+ devices. AT&T paid a very high price at $2.98/MHz POP in the (U.S.) auction for the lower B bands to ensure it captured 24 MHz of contiguous lower B and C licences to maximize capacity. So we believe $3/MHz POP for the lower B and lower C bands is not an unreasonable estimate as a start for Canada.
“The Verizon bands (upper C) are also popular, although not as popular as AT&T’s. The reason is VZ’s handsets are backward compatible to CDMA (not compatible with Canadian carriers). To leverage VZ’s bands, some modifications to either the AT&T handsets or the VZ LTE handsets would be necessary. Thus, for the bidder, the cost of the modifications would have to be factored into the price of the licence. VZ paid a relatively lower price for the upper C at $0.77/MHz POP.”
However, Fan continues: “We do not believe the Canadian auction will see a price that low for the upper C bands. We assumed the bidding for the upper C bands would be competitive (as was the case with the advanced wireless services [AWS] bands in Canada in 2008) but not as competitive as the AT&T bands. As a start, we assumed the AWS weighted average price of approximately $1.50/MHz POP for the upper C bands would be more appropriate.”
Then, Stateside, “the unpaired lower D and E bands were acquired by Qualcomm prior to the March 2008 U.S. 700 MHz spectrum auction, and the licences have subsequently been sold to AT&T for a weighted average price of $0.87/MHz POP. These are unpaired bands (i.e., for one-way data communications or for broadcast only).” Fan writes. “We believe only the Canadian incumbents (specifically Rogers and BCE because they are also broadcasters) would have interest in using these bands for mobile TV broadcast. We assumed the same $0.87/MHz POP.
So, taking all of that into account “we estimate that the Canadian 700 MHz auction will generate proceeds of approximately $3.5 billion, which would equate to approximately $0.9 billion per incumbent and $0.9 billion for the new entrants combined,” reads the Scotia Capital report (see chart above).
For Quebecor, which Fan assumes will remain focused on its home province, his report estimates the cost will range from $160 million to $212 million for 10 MHz, and $320 million to $425 million for 20 MHz. “Based on the national weighted average cost across all licences, we estimate QBR’s cost will be approximately $160 million for 10 MHz and $320 million for 20 MHz. This assumes Quebec’s $/MHz Pop is $2.00, or 18% higher than the $1.70 national average, similar to Canada’s 2008 AWS auction, and QBR acquires one-third, or 20 MHz, of spectrum covering Quebec to prevent other new entrants from accessing the province.”
Will it pan out this way? We won’t know until the federal government releases its auction rules. Some believe it will happen before the March 29th federal budget, some believe it could be mentioned as part of the budget and still others say it will be soon after the budget. The longer it is delayed, the more it looks like a 2013 auction.
– Greg O’Brien
