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Report on Business Spectrum auction expected to raise $3-billion for Ottawa, benefit newer entrants

Ottawa stands to take in up to $3-billion in a public auction for cellular airwaves next month that is expected to provide the biggest boost to regional players Freedom Mobile and Videotron.

The government sale of valuable radiowaves − known as spectrum − in the low-frequency 600-megahertz range is the first in a series of three auctions planned for a mix of airwaves meant to support 5G technology, the next generation of wireless service.

This auction, slated to start March 12, is structured to make it easier and cheaper for smaller players to win licences, by blocking the three national carriers, BCE Inc., Rogers Communications Inc. and Telus Corp., from bidding on more than 40 per cent of the available airwaves.

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This comes as the federal government is conducting a cybersecurity review to determine whether to allow Canadian carriers to use radio network equipment made by Chinese vendor Huawei Technologies Co. Ltd. in 5G networks. Bell and Telus have used Huawei gear extensively in their current 3G and LTE networks.

Ottawa wants to encourage more competition in the wireless industry and the auction framework means regional operators such as Quebecor Inc.'s Videotron and Shaw Communications Inc.'s Freedom Mobile are likely to acquire new airwaves at a deep discount compared with their national rivals.

The Big Three have objected to the rules, arguing that their regional rivals are well-capitalized legacy cable companies who don’t need a government handout. Yet, the newer entrants have only been in the wireless business for about a decade and have nowhere near as much spectrum as the incumbents, who launched cellular service in the 1980s.

“Newer/regional operators, Shaw and Quebecor, need 600 MHz more than the incumbents,” wrote Scotia Capital analyst Jeff Fan in a December report after the government published a list of auction participants. “For the incumbents, we believe 600 MHz is a ‘nice to have’ and not a ‘must have,' ” he added.

Low-frequency airwaves are useful for offering broad coverage as they travel long distances and can penetrate into buildings. Rogers alone spent $3.2-billion during the 2014 auction for 700-MHz spectrum.

But the national carriers have been amassing spectrum for the past three decades and already have a trove of low-band licences, so they aren’t expected to bid as aggressively in the March auction.

Plus, next-generation or 5G networks will require a mix of low-band, mid-band and super-high-frequency airwaves, with higher-frequency spectrum that can quickly carry vast amounts of data complementing the low-band coverage. In fact, the Big Three are already looking ahead to next year’s auction of mid-band 3,500-MHz spectrum, which is expected to be crucial for early 5G deployments.

“With 5G on the horizon, we believe each of the wireless operators places high importance on 3,500-MHz spectrum, suggesting a relatively robust auction will take place [next year],” RBC Securities analyst Drew McReynolds said.

Analysts forecast that the 600-MHz auction could bring in about $2.5-billion to $3-billion, with various estimates predicting Videotron will pay between $180-million and $200-million while Freedom Mobile will spend between $400-million and $440-million.

That’s because Videotron operates in Quebec while Freedom Mobile serves British Columbia, Alberta and Ontario and they will generally not have to bid against each other (their coverage area only overlaps in the city of Ottawa). They will likely be able to purchase licences for the opening bid prices set by the government, while the Big Three will have to outbid each other for the remaining airwaves.

Other small carriers with less than 10 per cent of the market share − which includes Eastlink, SaskTel, TBayTel and Xplornet – will also qualify for the reserved spectrum.

There are seven blocks of “paired” spectrum (meaning one section of airwaves is used for downloads and the other for uploads) up for grabs, with three reserved for small players and four left for the incumbents to bid on.

BMO Capital Markets analyst Tim Casey said he expects Videotron and Freedom to acquire three blocks each. “Of the remaining four blocks up for open bidding, we expect the Big Three to secure at least one block each nationally,” he said.

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Mr. Casey noted that BCE and Telus have a spectrum- and network-sharing agreement, which means Rogers could be a “more motivated bidder” for two blocks nationally. “Should Rogers bid on two blocks to counter BCE and Telus’s spectrum sharing arrangement … Rogers could pay north of $1-billion, with some auction tension,” he said.

Mr. Fan similarly estimates Rogers will pay $1.1-billion while BCE and Telus could each spend $550-million.

The 600-MHz auction will follow a “combinatorial clock” format, which allows for bidding on packages of licences, rather than competing for each one individually, with the goal of ensuring continuous coverage. Such auctions can last for multiple rounds with no firm end date and Mr. Casey noted that the 700-MHz auction and a 2,500-MHz auction in 2015 lasted for five weeks and four weeks, respectively.

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