Analysts, carrier question policy on AWS-3 set-asides

Analysts are split on the wisdom of Industry Canada’s rules for the upcoming AWS-3 auction, which appear to put valuable spectrum in two provinces out of reach for any carrier. The spectrum rules, detailed on July 28, set aside 30 MHz of the 50 MHz on offer in every region for “operating new entrants,” defined as companies with less than 10 per cent of the national market share and less than 20 percent of the regional market share. The rules also limit carriers from bidding on set-aside spectrum outside of the provinces in which they already provide service. Stephan Meyer, director of technology at strategic policy and analysis firm Nordicity, said the AWS-3 auction rules appear to exclude regional players such as Manitoba Telecom Services Inc., Sasktel, and Quebecor Inc.-owned Videotron from buying set-aside spectrum outside their regions, as well as prevent the Prairie carriers from buying that spectrum in their home provinces. Both carriers are far above the 20 per cent regional market share threshold for the set-aside spectrum, although they only make up four per cent of the national market. According to the CRTC’s 2013 Communications Monitoring Report, which covers the 2012 calendar year, MTS had more than half, 53 per cent, of the wireless market in Manitoba, while Sasktel had almost three quarters, 71 per cent, of the market in Saskatchewan. Under the current rules, Meyer said, it appears the set-aside spectrum in Saskatchewan and Manitoba cannot be bid on by anyone. “If a provider is not operating in that region, they can't bid,” Meyer said. “There is a broad definition of operation, but at this point it certainly appears that there could be a situation where there could be no bidders in certain areas.” For Meyer, the auction rules reflect confusion in the government’s approach to encouraging competition. “I think the devil's in the details here,” he said. “Is the goal to have a fourth national player, or is it to have four providers in every region? They’ve used the language for both. It really depends on what their ultimate policy objective and what they themselves interpret the rules and the spirit of the rules to be.” Jessica Fletcher, spokeswoman for Industry Minister James Moore, said in an email that the spectrum auction rules are “structured to encourage more competition in the wireless market.” The set-aside 30 MHz block, she noted, does not prevent regional incumbents from bidding on the open 20 MHz block. “Spectrum is a valuable public resource and it’s the Government’s responsibility to allocate it in such a way that encourages robust competition in our wireless market,” she said. “We will not speculate on the auction outcome however, as per previous spectrum auctions, any remaining licences would be allocated in a future licensing process.” Meyer said the difference between one national carrier and a fourth carrier in each region is significant, as any new national carrier would have to consolidate some of the smaller players, such as Wind Mobile or Mobilicity, in order to even bid on AWS-3 and would still be unable to buy all spectrum it needs. “If you buy into the argument that there has been a design intent here, which is that they would expect a hopeful national carrier to purchase Wind or purchase whomever, that doesn't even work,” he said. “Wind is not in operation in those provinces. You would expect Industry Canada had thought this through and would come to the realization that this means no one can bid in Saskatchewan and Manitoba. But it's not evident from their consultation document that they have a plan on that.” Meyer said the announcement of the auction seems well timed to bolster the business models of Wind Mobile and Videotron as the Quebec company looks to expand. “You've got carriers, new entrants, some of which were perhaps in some trouble and requiring financial backing, but their financial backers will be very worried if they don't think there's a future business plan,” he said. “Suddenly this comes in as a white knight solution as oh well, let's have extra spectrum for the new carriers so suddenly they become attractive. But they haven't looked at the entire puzzle for this, they're trying to push this through and get it done.” The consequences for regional carriers, such as MTS and Sasktel, he said, don’t seem entirely thought through. “It seems hastily put together,” Meyer said. Canaccord Genuity telecom analyst Dvai Ghose said in an interview last week that the government has consistently pursued a policy of competition through encouraging new entrants into the telecom market, which means lowering the barrier to acquiring spectrum. “What the government has said pretty consistently is, we want you to build facilities, that's why it's a spectrum-based aggregation,” he said. “We'll help you in areas where you don't build as well as in the interim so we'll bring down the roaming rates. But apparently there's not even a qualified new entrant to bid for spectrum in these rural areas.” Ghose said the set-aside rules seemed like a “huge contradiction” in government policy. “In about 80 per cent of Canada's land mass, admittedly a much smaller part of its population, you can't bid for the new-entrant set-aside,” he said. “And yet there's a set aside. Isn't that the most ridiculous thing? In Manitoba there's a set-aside, no one can bid for it. What is the point?” Seaboard Group analyst Iain Grant said in an interview that the AWS-3 auction rules reflect the priority Industry Canada is giving to competition in the larger wireless markets such as Quebec, Ontario, Alberta and British Columbia. “I think you shouldn't underestimate Industry Canada,” he said. “They've been thinking about these things longer and harder than any of us.” Grant said Industry Canada's policy doesn't necessarily hurt the regional carriers in the Prairies, instead delaying any intervention into markets that already support competition through a fourth carrier. “I don't think they consider Saskatchewan and Manitoba to be problem areas, as yet,” he said. “The marketplace is suggesting giving more choice to Canadians in Alberta, British Columbia, and Ontario, which are far more vibrant marketplaces. Their job is to stimulate competition in those areas with an idea that they will get to Manitoba and Saskatchewan later. “Sadly, Saskatchewan isn't anybody's priority except SaskTel,” he added. Sasktel’s John Meldrum, vice-president of regulatory affairs, expressed his displeasure with the AWS-3 auction rules soon after they were announced on July 28 and expanded on his concerns in an interview with the Wire Report a few days later. The government’s new mandatory roaming caps, Meldrum said, are adding to his company’s network, but the government isn’t making it any easier to get the spectrum Sasktel needs to ease congestion. “We understand that maybe they want to make sure that the new entrants get the spectrum at a very reasonable price and maybe they don't want to pass that reasonable price onto us,” he said. “But I think the key is that at some point they have to give us the ability to buy it at a fair price. Because if we're just stuck going toe-to-toe with the big three in these auctions, we're likely to come out on the wrong end of that.” The mandatory roaming provisions, he said, mean SaskTel must carry the domestic roaming calls of its rivals at prices limited by the government’s caps. “The new mandatory roaming provisions essentially make us a common carrier,” he said. “We're expected to carry the calls of Rogers, Wind, Videotron, whoever else might come along, but the federal government has done nothing in terms of getting us any more spectrum to deal with that. They've said we're on our own to sort that issue out.” Meldrum said his company already has a roaming agreement with Bell and Telus, so the biggest beneficiary of the new roaming caps in Saskatchewan is Rogers. The SaskTel network, Meldrum said, is around twice the size of the Rogers network, in terms of geographic coverage. Seaboard Group analyst Grant said the concern about roaming caps was overblown, as the government’s formula for coming to the caps includes a significant margin for profit. “They may not have the same amount of gravy as they used to have,” he said. “But I don’t think anyone is expecting roaming traffic to be carried at a loss.” Meldrum said the set-asides in the AWS-3 auction appear to be aimed at Ontario and Quebec, and have the same sort of unintentional consequences as the roaming deal that don’t take into account the concerns of the regional players. “Their policies aren't very surgical,” he said. “It's going to potentially affect the amount of investment that we can make, it affects economic business cases. Until we reach decision points or we get so squeezed that we're no longer an economic entity, we'll just have to roll with the punches.” — With reporting by Peter Henderson at phenderson@thewirereport.ca and editing by Anja Karadeglija at akarad@thewirereport.ca

Analysts, carrier question policy on AWS-3 set-asides

News | August 6, 2014

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