Three of Canada's small wireless carriers were the biggest beneficiaries of the country's latest spectrum auction, securing valuable airwaves for a fraction of what the national players will pay and prompting speculation that lower cellular data prices could be on the horizon.
The federal government said Friday that Wind Mobile Corp., Videotron Ltd. and Eastlink Wireless all won significant blocks of AWS-3 (advanced wireless services) spectrum covering most of the country for a combined total of less than $100-million, while Telus Corp. and BCE Inc. together will spend about $2-billion for the licences they won.
Wind – which ultimately faced no competition in the auction from fellow Toronto carrier Mobilicity – was able to secure licences for airwaves in Ontario, B.C. and Alberta at the reserve price of $56.4-million and increase its spectrum holdings by 180 per cent.
Videotron won licences in Quebec and Eastern Ontario for $32-million.
Eastlink will spend $10-million for spectrum in Atlantic Canada.
In its continuing bid to encourage competition in an industry dominated by three national companies, the auction was structured to favour new players in provinces where they already offer service.
Greg MacDonald, of Macquarie Capital Markets Canada, said the provisional results show the new entrants "have gained a significant business cost advantage relative to [the] incumbents."
"We think the advantage will result in lower price/byte offerings in the market within a year and that incumbents will lose pricing power and experience a period of slower revenue growth as a result," he said in a note.
He expects Wind and Videotron to make full use of "their now-rich spectrum portfolios." He predicts that having won the licences for such low costs, their future deployment of the airwaves could lead to lower retail rates for their own products.
Mr. MacDonald also highlighted the possibility the companies could further reduce prices by leasing spectrum to mobile virtual network operators (MVNOs), a business model Google Inc. is examining in the United States.
The new entrants paid an average of 11 cents per megahertz of spectrum relative to the population covered by the licences they purchased. In contrast, Telus paid $3.02 per MHz/Pop and BCE paid $2.96 per MHz/Pop. Rogers Communications Inc., which spent $3.3-billion to win prime spectrum in an auction in 2014, did not win any licences in the auction.
Mirko Bibic, chief regulatory officer at BCE, said he was happy the company won spectrum he views as "strategically important," but disappointed by the dramatically lower prices paid by the new entrants.
"You wonder, 'Why does Videotron need an $857-million subsidy in this auction alone?'" he said, referring to the wireless division of the Quebec telecommunications and media powerhouse Quebecor Inc. (BCE owns 15 per cent of The Globe and Mail.)
Sixty per cent of the airwaves were earmarked for companies that are already providing wireless services but have less than 10 per cent of national market share and less than 20 per cent of market share by province.
Federal Industry Minister James Moore told reporters in Toronto Friday morning that the goal of the auction was not, "just to release spectrum and raise money for the government … but also to do so in a way that in the long-term will benefit competition and will benefit consumers and create more choice."
Telus said Friday it was pleased with the licences it won in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario and Quebec, for which it will pay $1.5-billion.
BCE, which shares a network with Telus, will spend $500-million for licences in roughly the other half of the country: Newfoundland and Labrador, Nova Scotia, PEI, New Brunswick, Northern Quebec, Ontario, Nunavut, Northwest Territories and Yukon.
Videotron and Eastlink both said they plan to use the new spectrum to continue expanding their LTE (long-term evolution) networks. Wind's chairman Tony Lacavera said the new airwaves will finally give the company a path to upgrading to LTE, a necessary step to compete with the higher-quality networks offered by the Big Three incumbents. He noted that that will require about $300-million in capital investment over the next four to five years.
"We're going to assess all of our different financing alternatives – public, private, debt, equity – but we're doing it now from a position of strength for the first time in the company's history," Mr. Lacavera said. Five-year old Wind surpassed 800,000 customers in December and was recapitalized in a deal the government approved in November with backing from a number of Canadian and U.S. investors.
AWS-3 airwaves are adjacent to the AWS spectrum that was licensed in Canada's 2008 auction. Both share similar features: They are considered "mid-band" spectrum with more limited propagation characteristics than the 700-megahertz spectrum auctioned last year, but the ability to carry large amounts of data.
There is not yet an ecosystem of handsets compatible with the AWS-3 frequency. However, the United States just concluded its own auction of airwaves in that band, raising a record $44.9-billion (U.S.) in committed bids, and industry observers expect the ecosystem to develop within the next two to three years.
Mr. Lacavera is more optimistic, estimating handsets will be available by the end of 2015 or early next year. Yet, Wind could still see some value in securing more of the AWS-1 spectrum it purchased in the 2008 auction and currently operates its network on. Plus, Wind did not win AWS-3 spectrum in the Ottawa area, where Videotron secured the licence.
An industry source with knowledge of the company called the auction results a "big win" for Wind. But, noting the need to upgrade to LTE, the source added, "It is still just one step towards the government's vision of a fourth wireless player. Wind will undoubtedly want to speak with Shaw [Communications Inc.], Videotron and Mobilicity as soon as the rules allow for it."
Like Wind, Mobilicity owns AWS spectrum in Ontario, British Columbia and Alberta. Shaw Communications Inc. owns AWS spectrum in Alberta and B.C., but never launched a wireless business and the airwaves have not been used. Videotron also has unused AWS spectrum in the Toronto area.
Auction rules bar participants from engaging in merger and acquisition discussions but neither Mobilicity nor Shaw are registered to bid in the second auction of airwaves in the 2,500 MHz frequency band, which will begin on April 14.
The AWS-3 auction brought in a total of $2.11-billion, though accounting rules require the government to record the revenue raised in increments over the 20-year period of the licences, rather than all up front.
The last spectrum auction Canada held in early 2014 raised $5.3-billion, but the 700 MHz spectrum in that case was in a lower-frequency band, making it extremely sought-after for its ability to travel longer distances and more easily penetrate buildings.
The AWS-3 auction used a sealed bid, second-price format, which means each licence winner pays whatever the second-highest bid was or, if there was no other bidder, the amount of the reserve price Industry Canada set for the licence. The provisional winners announced Friday must pay 20 per cent of the total owing by March 20 and the balance by April 21.
While Mobilicity made an effort to take part in the auction, winning approval from a judge in its creditor protection proceeding to raise $65-million in new financing and allow it to place a deposit, the company was unable to come up with more funding and did not end up bidding in the auction.