Canada spectrum auction analysed

One of the most important auctions in Canadian history is underway.

The federal government began taking bids for 5G wireless spectrum at 10 a.m. Ottawa time on June 15. The closed-door process is expected to last several weeks, as two dozen hopefuls battle for the right to carry the signals that will facilitate the next phase of the country’s shift to a digital economy. So while it’s safe to say the government is in line to make billions of dollars, it will be a little while before we know who will come away with the rights to provide the super-fast internet that will power the near future.

However, we’ve all had plenty of other things to think about over the past year. If you’re a latecomer to the high-stakes telecom auction, here’s a primer that will help bring you up to speed.

What is the spectrum auction?
Let’s clear up exactly what spectrum is. In simple terms, spectrum refers to the radio frequencies that devices such as your smartphone or even cable TV use. There are three ranges of spectrum: low-band, mid-band and high-band. The higher the range, the more devices it can handle; however, it has a smaller coverage area. The lower the range, the fewer devices it can handle but the coverage area is larger.

For this auction, the government is offering up mid-band spectrum at 3500 MHz, which is suitable for 5G, the critical ingredient to launching the economy into the future. The Canadian Radio-television and Telecommunications Commission (CRTC) controls the auctions for broadcast, which the government has managed since the 1990s, when demand exceeded spectrum supply. Cable, phone and internet companies will bid over the several weeks that the CRTC says will be needed to complete the auction. Companies will be fighting over 1,504 licences, which cover 172 service areas across the country.

Spectrum is highly prized as it’s core to the business operations of cable and internet companies. The major players, such as BCE Inc., No. 22 on the Financial Post’s latest ranking of Canada’s 500 biggest companies, are willing to pay a lot of money for licences. At the last auction in 2019, Rogers Communications Inc. (No. 35 on the FP 500 list) forked over more than $1.72 billion for 52 licences. With this in mind, the CRTC has decided to preserve at least a third of the licences for smaller regional companies such as Halifax-based Eastlink Inc. and Woodstock, N.B.-based Xplornet Communications Inc.

What’s the big deal about this auction?
The main reason there’s so much chatter surrounding this auction is because the world is shifting to 5G internet, which can’t be delivered on the spectrum most telecommunications companies currently own. 5G will help the future economy as technology advances, facilitating easier communication between devices (think self-driving cars), allowing more devices on the network and faster speeds.

Another factor that is particularly important to the government is rural connectivity. In the 2021 budget, the Finance Department said Ottawa will spend $2.75 billion to bring more rural Canadians high-speed internet with the ultimate goal of making high-speed access available to all of Canada in the next nine years.
For this auction, the CRTC is “imposing (its) strongest deployment requirements to date to ensure that this spectrum is put to use sooner in rural areas,” a spokesperson told reporters at a briefing ahead of the auction. Essentially, in buying a licence, winners of spectrum will have to agree to deployment schedules for 5G coverage. For example, in rural areas, the company must set up the networks to deploy enough spectrum to cover at least 20 per cent of the population within seven years and 60 per cent within 20 years.

Companies that have existing infrastructure will be expected to implement 90 per cent of the spectrum within seven years and 95 per cent within 10 years in sparsely populated areas.

Who are the key players?
Twenty-three companies have registered to participate in the auction. The main players are well known: Toronto-based Rogers; Montreal-based BCE, which owns Bell Canada; and Vancouver-based Telus Communications Inc. But there are also a number of smaller companies that will be seeking to secure their regional strongholds, including TBayTel of Thunder Bay, Ont. and Sogetel Inc. from Nicolet, Quebec.

The CRTC is offering spectrum on a more localized basis this time, unlike previous auctions, where the prizes aligned with provincial boundaries. This will allow companies to “target their bidding to particular service areas rather than requiring them to bid on large regional licences that may not fit their business plans,” a government briefing note says.

In other words, participants will be able to target specific rural areas, which likely will be a strategy that Rogers deploys. In March, Rogers announced it would acquire Shaw Communications Inc. for $26 billion. The deal has to go through government antitrust scrutiny before it gains approval, as it eliminates the fourth-largest competitor in the market. To spur a favourable outcome, Rogers promised to invest a combined $3.5 billion in Western rural connectivity. It will need licences in those sparsely populated areas to do so.

Investors will also have their eyes on the larger regional players, especially Cogeco Inc. and Quebecor Inc., which owns Videotron Ltd., a dominant cable and internet provider in Quebec.
Cogeco and Videotron both own spectrum, but have held off on investing in infrastructure due to the expensive price tag, plus the high rates that incumbents demand to rent network access in areas outside Cogeco’s and Videotron’s territories. However, both secured a favourable ruling from the CRTC in April, when the regulator ordered the Big Three to drop their wholesale prices for companies that also promise to add to the national network. Cogeco and Videotron meet that criteria.

Originally, 24 companies were set to compete for the available spectrum; however, Ontario-based TekSavvy Solutions Inc., the largest independent internet provider with 300,000 customers across Canada, dropped out of the auction after a separate CRTC ruling effectively raised wholesale prices for internet providers whose main business strategy is reselling access to the networks owned by Bell, Rogers, and Telus. A TekSavvy executive called the decision “a tombstone on the grave of telecom competition.”

Shaw, which owns Freedom Mobile, said it will not be participating in the auction, likely because of its pending sale to Rogers.

When will the CRTC announce the winners?
When the auction will end is anyone’s guess. The last auction went through 54 rounds of bidding and in 2008, there were 331 rounds, Bloomberg reported. With 3500 MHz critical to 5G rollout, this auction could be a frenzy and raise more than the $3.5 billion the government received in 2019. Once it concludes, the government will announce the winners and how much each spent within five business days. Financial Post