Ottawa's auction of the 700-megahertz frequency sparked such a frenzy amongst wireless carriers that during some rounds they placed bids totalling more than $7-billion.
The Globe and Mail has learned from a number of sources that overall bidding for those prized airwaves was more heated than analysts originally anticipated; some sources say bidding peaked at $7.439-billion. That astonishing figure suggests carriers collectively placed a much higher value on 700 MHz licences during the bidding process than the total amount they will ultimately pay over the coming weeks.
Industry Minister James Moore announced last Wednesday that carriers would collectively shell out $5.27-billion – a final price that was determined after 108 rounds of bidding over 22 business days between Jan. 14 and Feb. 13, 2014.
The reason for the gap between the peak bids and final prices stems from the auction's format. The rules require that winners pay what the second-highest bidder was actually willing to pay. This type of auction encourages participants to name their best possible price, knowing the winner will ultimately pay no more than the value set by their closest rival.
As a result, Ottawa's final proceeds were more than $2-billion lower than the aggregate of the highest offers during bidding.
A spokesman for Mr. Moore declined comment. Industry Canada is not expected to release details about how the various bidding rounds played out until April when final payments for the spectrum are due from carriers.
Mr. Moore, however, has already suggested that competition during the auction was fierce, telling journalists last week there "was a lot of jockeying" amongst carriers during the bidding process.
"It should also be kept in mind that this was a process where licences were awarded based on a second-price calculation. This means the bids placed during the auction were higher than the $5.27-billion final result," telecom consultancy Lemay-Yates Associates Inc. wrote in a report on Monday.
"Put another way, for Rogers to have won at $3.3-billion, it likely had to place a bid higher than that to secure its winning package, with the second-price discount bringing it down to $3.3-billion."
For its part, Rogers Communications Inc. has told investors that the second-price rule means it paid the "lowest amount we could have paid to secure the spectrum" it ultimately won.
"We do not know exactly whose bids determined our price, but we will have the answers in 30 business days once the full results of the auction have been released by Industry Canada," Rogers wrote in a confidential investor document last Wednesday that was obtained by The Globe and Mail.
The 700-MHz auction used what is known as a "combinatorial clock" format that allowed carriers to bid on packages of spectrum licences. That system was also based on anonymous bidding to limit attempts to game the system, for example, where one participant drives up prices for competitors with nuisance bids.
As part of its efforts to enforce the rules, Industry Canada set up "a highly secure room" in Ottawa to serve as its "operations hub" during the bidding process.
The carriers' auction teams (each company was limited to a maximum of three participants) conducted the bidding over the Internet via "encrypted access" from their respective company's premises.
The auction software was created by Power Auctions, which also provided consulting services to Australia and the U.S. After the bidding ended, the results were verified by an independent mathematical consultancy called Smith Institute.
Notwithstanding those efforts to ensure the veracity of the process, sources say companies were able to use algorithms to decipher the bidding patterns of other bidders. Those same complex models allowed carriers to determine how to drive up the prices for their rivals through "losing bids," while minimizing their chances of getting stuck with unwanted spectrum licences.
Johanne Lemay, co-president of Lemay-Yates, suggested Monday that Bay Street analysts simply underestimated the value that carriers placed on the 700 MHz spectrum, which comprises about 15 per cent of the total commercial mobile airwaves currently licensed in this country.
"A common prediction for the auction had been for low revenues and very few rounds. But, the epic 331-round AWS auction held in 2008 had made it clear that Canadian operators are not shy about duking it out in a slugfest to buy new mobile spectrum capacity," Ms. Lemay wrote in an e-mailed note on Monday. "They did it again in 2014."