Rural Canadians could be the biggest winners in Ottawa's latest auction of public airwaves, as an East Coast Internet provider grappling with the need for more capital has pledged to increase speeds for some of the country's most underserved populations.
Woodstock, N.B.-based Xplornet Communications Inc. paid $25-million to win 42 new licences for the airwaves used to carry wireless signals in an auction for spectrum in the 2,500-megahertz frequency.
The federal government announced provisional results Tuesday, revealing the auction raised $755-million, with cellular carriers Telus Corp. and Videotron Ltd. spending the most for new licences at $479-million and $187-million, respectively. But rural Internet providers such as Xplornet can also use the 2,500 MHz airwaves to deliver broadband service to homes and businesses in areas that cannot easily be reached by traditional service over wires.
"We're not speculators, so this is entirely about putting this precious resource to work," Xplornet chief executive officer Allison Lenehan said in an interview Tuesday, taking a light jab at telecom companies that have failed to deploy spectrum in rural areas in the past.
"It will tie very well into the commitment we made last year," he added, referencing a plan the company announced to offer broadband Internet service with download speeds of 25 megabits per second (Mbps) to 100 per cent of rural Canadians by July, 2017.
The company has 280,000 subscribers and has so far focused primarily on Southern Ontario, Alberta, Quebec and New Brunswick, but plans to expand in those and other provinces after acquiring this spectrum. Reaching more people and offering higher speeds will mean upgrading radio equipment on existing towers and securing additional towers in new areas. The capital demands will be "extensive," Mr. Lenehan said.
"The more growth we want to do, the more access to capital we evaluate. And there's certainly private and public options today," he said when asked whether the private company would consider an initial public offering. "We haven't declared we'll do anything, because we've had very supportive private investors to this point."
Xplornet's investors – which include the Barrett family from New Brunswick, New York-based Sandler Capital Management and McKenna Gale Capital Inc. in Toronto – have committed or spent more than $1-billion since the company launched in 2004, he said.
Even as Xplornet works to upgrade to higher-speed services, it has faced criticism in recent months from New Brunswick resident Brooke DeCosta Young, who is behind grassroots lobby group Citizens for Rural Wire-Line Broadband Internet. In dozens of e-mails to federal and provincial politicians and policy-makers, the group has expressed concerns about Canadians in rural areas not having access to the higher Internet speeds and capacities offered by fibre-optic-cable-based systems.
Not including satellite services, 84 per cent of rural households had access to Internet service with download speeds of between 1.5 Mbps and 5 Mbps in 2013.
While the U.S. federal communications regulator has set the target of 25 Mbps download speeds for Internet service to be considered "broadband service," Citizens for Rural Wire-Line has argued Canada is not doing enough to keep up. The CRTC is set to conduct a review of basic services next year, but it currently has a lower target of 5 Mbps for download speeds expected to be available nationally by the end of 2015.
Meanwhile, last year, the federal government committed $305-million over five years to extend services of at least 5 Mbps to 98 per cent of Canadians (it will begin to announce projects that qualify for that funding this spring).
Mr. Lenehan said he supports "anybody interested in furthering rural broadband," but added that "it isn't easy to do rural broadband."
"We've been at it a long time, we think we've done some good things, but we also know that broadband continues to evolve and we need to keep pace with it. That's why we're making this investment today," he said, adding that the company has considered wired services but believes it can deliver faster speeds at lower prices with wireless Internet using spectrum and satellite coverage in more remote areas.
Through the Industry Canada Twitter account and a press release Tuesday, the government said the auction results would mean better and cheaper service for Canadians "especially those in rural areas."
In another sign that more cellular competition could be on the horizon, Quebecor Inc.'s Videotron acquired licences across in Quebec as well as Toronto, Edmonton, Calgary and Vancouver, adding to speculation that it could partner with fellow upstart Wind Mobile to challenge the Big Three. Videotron has been considering an expansion outside of Quebec since it purchased spectrum in Ontario, British Columbia and Alberta in an auction last year, and said Tuesday it is still "analyzing various options."
"We will continue patiently and carefully analyzing our options, it being understood that the financial and/or operating conditions will have to fall within acceptable parameters," CEO Pierre Dion said in a statement.
Wind founder and former CEO Anthony Lacavera said he believes "it continues to be important, from my perspective, that new entrants continue to co-operate." Wind did not win any 2,500-MHz spectrum licences.
Barclays Capital analyst Phillip Huang suggested the outcome could encourage renewed discussions between the companies. "By acquiring more key spectrum across Canada, Videotron is effectively increasing its bargaining chips to negotiate a partnership with Wind in the future," he wrote in a research note.
Telus's two national rivals, BCE Inc. and Rogers Communications Inc., spent $29-million and $24-million, respectively, in the auction. (BCE owns 15 per cent of The Globe and Mail.)
The 2,500-MHz auction did not include a provision setting aside airwaves specifically for new players, but it did cap the amount of spectrum one player can own at no more than 40 MHz in each service area. BCE and Rogers were already at or above that cap in many areas across the country.
The 2,500-MHz auction started on April 14 and followed a more complicated "combinatorial clock" bidding process. It wrapped up one week ago after 50 rounds of bidding that saw participants win a total of 302 licences.
It was the second auction of the year, coming close on the heels of the AWS-3 (advanced wireless services) auction in March, which attracted $2.11-billion through a sealed bid process.
Regional wireless players Manitoba Telecom Services Inc., Eastlink Wireless and Tbaytel also won licences, while Saskatchewan Telecommunications Holding Corp. did not participate as it was already at the cap in Saskatchewan. Corridor Communications Inc., another rural Internet provider, spent $2-million on 13 new licences.
The revenue from this auction, as with the AWS-3 auction and last year's 700-MHz auction, will be recorded in increments over the 20-year period of the licences rather than all up front.