By Christine Dobby, Financial Post July 29, 2013
Even George Cope, a wireless insider since the dawn of the cellphone, was blown away by the sector’s ravenous appetite for invisible radio waves when the government put new spectrum on the block five years ago.
“If you had told me the proceeds of the last auction in 2008 were going to be $4-billion – I was off by a couple billion,” says Mr. Cope, president and CEO of BCE Inc., the parent of Bell Canada.
Mr. Cope joined the industry at 23, built and sold a startup and helped launch Clearnet Communications Inc., the cellular provider Telus Corp. acquired in 2000 in a blockbuster $6.6-billion deal. He learned early in his career that it was a “big capital” business, but admits demand for mobile technology has outpaced his projections and continues to surge as the industry reinvents itself every 12 months or so.
“It all changed when the Internet went wireless – it really changed with smartphones. Now it’s all about video on wireless devices and ultimately it’s going to be a wallet and location services,” Mr. Cope says. “It is the Swiss Army Knife of technology.”
In an interview with the Financial Post this week, Mr. Cope made clear just how much he values protecting BCE’s access to the radio waves known as spectrum in an upcoming auction, echoing recent comments from his counterparts at rivals Rogers Communications Inc. and Telus.
The chief executives of Canada’s three national carriers are incensed with Ottawa’s policy on the wireless sector, which they say could lead to a U.S. giant running off with half of the most valuable spectrum to become available since the 1980s and leaving one of the trio empty-handed.
On the other side of the ring, the federal government says it is crafting policy to spur healthy competition and protect the interests of Canadians indignant over high monthly phone bills, onerous contract terms and no real choice between three players in an oligopoly.
Compared to European countries with well over one mobile device per person and even the United States, which has a cellphone penetration rate of more than 100%, the number of subscribers per capita in Canada is about 80%.
Many consumers hope that would change with the arrival of a company like Verizon Communications Inc., which they envision bringing ramped up competition and lower prices.
Right now Rogers, Telus and BCE together control 85% of the wireless spectrum the government has already handed out, while a handful of smaller players lay claim to the balance with none holding more than a 3% block.
“The biggest issue is just getting more spectrum,” says Alek Krstajic, the chief executive of Toronto-based startup carrier Public Mobile. “The government is essentially saying, ‘These highways, we’re not going to let the incumbents control them.’”
Gregory Taylor, principal investigator for Canadian Spectrum Policy Research, a research team at Toronto’s Ryerson University, says with 20-year licence terms at stake, decisions on spectrum policy being made now will shape Canada’s digital infrastructure for a long time to come.
“A key point has got to be that this is a public resource and we often forget about that,” he says.
Industry insiders, fond of analogies to describe the importance of securing lots of spectrum, often compare it to a system of roadways that can handle fast-moving and high-volume traffic when expanded to four wide lanes but jam up when restricted to meandering one-lane roads.
There is, therefore, a strong impulse among all players in the wireless industry to capture the largest block of spectrum they can get their hands on, according to Stuart Jack, partner at Ottawa-based strategy consulting firm Nordicity.
“In every market in the OECD that’s the trend we’re seeing. There is a concerted effort to make sure in the future that they will have enough spectrum to do what they want,” he says, adding that mobile data consumption habits help explain their voracity.
For example, Cisco Systems Inc. projects that by 2017, consumer mobile data traffic in Canada will grow tenfold from where it stood in 2012, increasing at a compound annual growth rate of 57%.
Canadians will have 255 million networked devices by 2017, up from 140 million last year, according to Cisco, and monthly mobile traffic will be 122 Petabytes, akin to streaming 30 million DVDs per month.
These numbers represent a huge opportunity and lend context to why Canada’s largest mobile providers as well as regional operators and even the financially stressed startup carriers are prepared to spend billions between them at the next spectrum auction.
If wireless airwaves are all like beachfront property, mobile operators say, then low-band frequencies are the priceless — and prized — Malibu shoreline.
Mobile services operate on specific frequency bands between 300 and 3000 megahertz along the electromagnetic spectrum. Other bands of spectrum in the same range are designated for uses such as air traffic control, search and rescue and GPS (global positioning system).
Transmitters at cellular sites – whether installed on rooftops, hydro poles or specifically designed cell towers – reuse different spectrum frequencies to deliver service to mobile phones.
For their part, handsets contain chip sets specifically designed to communicate with frequencies in certain bands and while some can function across a number of bands, that tends to put a drag on battery life.
Since radio spectrum has many possible uses, if countries did not use the same frequency bands for complementary purposes, cellular services across borders could be a disaster. So an agency of the United Nations, the International Telecommunication Union, designates certain bands for cellular use and countries around the world allocate spectrum in those bands at roughly similar times.
The spectrum Canada first licensed for mobile cellular services in the 1980s was in the lower end of the range in the 800-megahertz band, known as the cellular band. Lower-frequency radio waves have longer wavelengths and can travel longer distances and penetrate buildings and other obstacles with ease.
That also means operators can build fewer cellular towers than they would have to with higher-frequency spectrum with less optimal propagation qualities.
In later decades, the government allocated spectrum in higher frequencies and while operators were happy to build networks with those airwaves, they are more enthusiastic about the next auction of spectrum in the 700-megahertz band, which used to be allocated to over-the-air television and became available after its transition to digital.
“We need 700 spectrum in order to be able to provide LTE cost effectively to our rural customers,” says John Meldrum, vice-president of regulatory affairs at Regina-based SaskTel. He says the provincial carrier (which has built an HSPA network, a form of third-generation digital transmission) wants to upgrade to long-term evolution or fourth-generation technology.
“We could do it without adding extra towers if we could get the 700 spectrum,” he says, adding that SaskTel sees that as crucial to ensuring rural customers have access to quality service.
“I don’t think I’m exaggerating when I say 700 is the best spectrum the government has ever made available for wireless services,” says Mirko Bibic, chief legal officer at BCE.
The last time a comparable spectrum band was available was when cellular technology was in its infancy in the 1980s. While the government now sells spectrum to the highest bidder (taking in $4.3-billion during the 2008 auction), in 1983 it awarded spectrum on the basis of a competitive review, a process often referred to as a “beauty contest.”
Cantel, a company formed by a group of telecom entrepreneurs including Ted Rogers, won a national licence and the government awarded the remaining half of available spectrum on a regional basis to local telephone operators.
The government handed out more licences in 1995, this time for a higher-frequency band known as PCS (personal communication system) spectrum between 1850 and 1990 megahertz.
To encourage new competition it granted airwaves to two new players – Clearnet and Microcell Telecommunications Inc. – as well as existing licence holders.
Through a wave of consolidation throughout the 1990s, Telus was formed out of the Alberta Government Telephones Commission, the city of Edmonton’s telephone company and a merger with BC Tel in 1998, capped off with the Clearnet acquisition in 2000.
Ted Rogers initially put his own money into Cantel; but by 1989 Rogers Communications invested about $1-billion from the sale of U.S. cable assets into the wireless business. In 2004, Rogers bought out the remaining interest in Cantel for $1.8-billion and acquired financially struggling Microcell for $1.6-billion.
When Ottawa was formulating the rules for the 2008 auction of AWS (advanced wireless services) spectrum in the 1700- and 2100-megahertz frequencies, it set aside 45% of the licences specifically for new entrants to the wireless market in an effort to promote new competition.
Those licences were sold at a discount and included a ban on their sale or transfer for five years, a moratorium period that is set to expire at various points next year depending on when the owners registered the licences.
Since then Quebecor Inc.-owned Videotron has built a wireless business in Quebec, regional players SaskTel and MTS Inc. have enhanced their cellular services and Nova Scotia-based cable operator Eastlink Inc. launched LTE services earlier this year.
Startup carriers Wind Mobile and Mobilicity both won set-aside spectrum licences in Ontario, Alberta and British Columbia, but beset by a series of challenges, both are now for sale.
Stewart Lyons, president and chief operating officer of Mobilicity, says interest in the company — including a bid by Telus shot down by Ottawa — has come primarily due to its spectrum holdings: “We always believed it would be relatively valuable real estate.”
The third of the trio of startups, Public Mobile, bought a block of rarely used spectrum in the 2008 auction and built a network in Ontario and Quebec. Last month it announced a recapitalization with new backing from Thomvest Ventures as some of its original investors got out. While Thomvest has committed to support the company until it is cash-flow positive, Mr. Krstajic says he is open to sale opportunities.
The regional players have had some success, but the dismal prospects of the new entrant carriers in Ontario, Alberta and B.C. have been a disappointment for the government, which has become more determined over the past six months in its call for at least four players in every region.
And while spectrum auctions always present an opportunity for investors even if they don’t plan to build, Ottawa’s policy on the wireless file and the way it has structured the auction rules have also drawn the interest of U.S. telecom giant Verizon.
The rules around investment in the telecommunications sector changed last year, and now foreigners can acquire Canadian companies with revenues of up to 10% of the overall telecom market, which was $42.7-billion in 2011, the latest figure available.
The government blocked Telus from acquiring debt-ridden Mobilicity’s spectrum in early June. Ottawa subsequently made clear it will not condone deals that allow the incumbents to purchase new entrants’ set-aside spectrum.
A company like Verizon, however, would be able to buy Mobilicity and its larger peer Wind Mobile and the New York-based company said last week it is indeed considering the opportunity.
Up for auction are four prime blocks of 700-megahertz spectrum but the incumbent players are restricted to bidding on no more than one, while new entrants can bid on up to two blocks.
Verizon, which owns the two “Upper C” blocks of 700 spectrum in the United States, would likely want to acquire the same airwaves in Canada.
Now the big three Canadian carriers are waging a public campaign in protest of what they say are “loopholes” in government policy that have opened a door Verizon could soon ram a truck through.
Calling for a “level playing field,” they are asking the government to change auction rules to open up competition before a Sept. 17 deadline for initial bids.
That argument is rich, critics say, coming from companies that control the vast majority of existing spectrum, much of which they received for free in the 1980s and 1990s.
Rogers and its telephone company peers counter that they took huge risks in building those initial networks and have paid expensive annual licence fees for years.
“The average Canadian tends to look at this from how it will affect their monthly bill – so a big company with deep pockets like Verizon can come in and not just participate in the auction but possibly dominate it and become instantly a large carrier across the country,” spectrum researcher Mr. Taylor says.
But he adds that there are real concerns about the U.S. carrier’s long-term commitment to Canada and whether it would build in rural areas.
Plus, while it has huge buying power due to its 100 million wireless subscribers and could provoke price competition in Canada, financial analysts note that Verizon is a premium carrier in the United States and not likely to bring a discount model north of the border.
“I think that to look upon the arrival of Verizon as some sort of saviour of the Canadian system is a bit naïve,” Mr. Taylor says. “On the other hand, most Canadians have no great love for the domestic incumbents either.”
Update: This story was updated from an earlier version to indicate Canadians had 140 million networked – not mobile – devices in 2012, according to Cisco Systems Inc.
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