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A photo illustration shows the Verizon wireless logos on a mobile phone screen in California on June 6, 2013. Verizon’s potential entry into the Canadian market could make waves at an upcoming spectrum auction.Mike Blake/Reuters

A new battle is brewing over wireless spectrum.

Spectrum refers to the radio waves that telecom carriers use to provide cellphone service. It is the marrow that brings smartphones to life.

And since it exists in scarce amounts, some big Canadian carriers have a big problem with federal rules that allow large international players, like Verizon Communications Inc., to bid as new entrants in an upcoming auction.

Verizon is mulling Canadian expansion. It has tabled an initial $700-million offer for Wind Mobile and is in early-stage talks with Mobilicity, according to sources. It is also considering whether to participate in next January's auction of the 700 Megahertz frequency.

Those spectrum licences are considered especially valuable because that frequency is critical for carriers to provide high-speed data services that Canadians are consuming in ever-increasing amounts.

To ensure that at least four competitors will be able to buy wireless licences in each regional market, Ottawa plans to limit the amount of so-called "prime spectrum" that incumbents can purchase in the 700 MHz band. Specifically, incumbents are capped at one prime block, while new entrant carriers can bid on two blocks.

Given that Verizon's market capitalization is almost twice that of BCE Inc., Rogers Communications Inc. and Telus Corp. combined, some incumbents are seeing red.

"Bell can always compete, but we're obviously concerned if a big U.S. company gets favoured over Canadian operators. We'd never get the same in the U.S.," said BCE spokesman Mark Langton in a statement on Friday.

"It's time for the Minister to focus on closing a massive loophole in the upcoming spectrum auction framework," he added. "Major international companies like Verizon can take advantage of rules intended for small start-ups and unfairly buy twice as much spectrum as Canadian companies at a fraction of the price."

(BCE owns a 15 per cent stake in The Globe and Mail.)

Verizon has declined comment on whether it plans to bid in the auction. It has, however, confirmed that it is considering a potential Canadian entry.

Analysts say that Verizon's participation in the 700 MHz auction would drive up the price of spectrum.

"Given Verizon's control of the 'upper C' blocks in the U.S. it is reasonable to assume that it would look to bid aggressively in Canada. This could shift incumbent demand to the lower premium and also impact Quebecor's bidding price. We estimate an extra $600–900m in spectrum costs could result," wrote Greg MacDonald, a telecom analyst with Macquarie Capital Markets Canada Ltd., in a note to clients this week.

Telus, meanwhile, is doubtful that Verizon would use 700 MHz spectrum to provide service in rural Canada – another key policy objective of the federal government.

"I don't think you are going to see any international carrier come in and go into rural Canada," said Josh Blair, Telus's chief corporate officer.

Earlier this week, the federal government clamped down on what carriers are allowed to communicate to each other prior to the auction's application date of Sept. 17.

It is now a big no-no for carriers to make any statements that give their competitors any insight into whether they plan to bid nationally or regionally. Those who break the rules can be kicked out of the auction.

"Statements that indicate national or particular licence areas of interest will generally be found to be in contravention of the rules on prohibition of collusion. As this level of clarity was not provided previously, this will be applied to all communication going forward," Industry Canada said.

"Any entity interested in applying to participate in the auction is advised to carefully consider any communications regarding its participation."

(Rita Trichur is a Globe and Mail Telecom Reporter.)

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