AWS-3 auction format to yield quick results

The sealed-bid, single-round format of this week’s AWS-3 auction means the results will be known much quicker than in previous spectrum sales, while at least one analyst says it will also result in cheaper prices that will benefit smaller carriers. In the auction that starts Tuesday, the big three — Rogers Communications Inc., BCE Inc., and Telus Corp. — can bid on 20 MHz of AWS-3 spectrum across the country, along with Saskatchewan Telecommunications Holding Corp. and Manitoba Telecom Services Inc. A further 30 MHz is set aside for operating new entrants in each region: Wind Mobile and Mobilicity in Ontario; Alberta and British Columbia; Quebecor Inc.’s Videotron in Quebec; Bragg Communications Inc.’s Eastlink in the Maritime provinces; and TBayTel Inc. in northern Ontario. Unlike last year’s 700 MHz auction and the upcoming 2500 MHz auction, which both operated using the combinatorial clock format, in which all licences are auctioned at once over multiple rounds, the AWS-3 auction will use a sealed-bid format, where all participants submit a bid in single sealed envelope, and the highest bidder on a particular block wins the licence. "The government wants a consolidation scenario," Macquarie Capital Markets analyst Greg MacDonald said in a phone interview. "They don't want these new entrants to blow everything on this spectrum, so I'm assuming that rationale is built into the design of the auction." With a multiple-round auction, new entrants bidding against one another — such as Mobilicity and Wind Mobile — might raise the price higher than they would with a single bid, MacDonald noted. Industry Canada said in its technical framework for the AWS-3 auction that other formats would be more "time-consuming to implement." The auction will occur eight months after the government first announced its intention to sell AWS-3 spectrum. The 2500 MHz auction, on the other hand, is starting on April 14, a year and three months after it was first announced. The government set rules for the 700 MHz in March 2012 and, at the time, said it would be held in the first half of 2013, though it did not end up taking place until early 2014. Results for the AWS-3 auction are due to be announced Friday, three days after the auction begins. The 700 MHz auction results were not revealed for more than a month after that sale began. There is no set date for when 2500 MHz auction results will be announced. Paul Goodrick, a policy analyst with Canadian Spectrum Policy Research, said the simplicity of the AWS-3 format likely reflects an effort by Industry Canada to have the auction wrapped up well before the 2500 MHz auction gets underway next month, given that many of the same companies are involved in both. "You want to give all the bidders the chance to re-evaluate: What did they get? What did their competitors get? How does that update their models?" Goodrick said in a phone interview. Bidders in the AWS-3 auction will pay the amount of the second-highest bid, or the minimum bid if there is only a single bid in a given area. Industry Canada said in its AWS-3 framework that this rule "promotes a more efficient outcome by increasing the incentive for bidders to bid in a way that is consistent with how they truly value the licences. Bidders, knowing that they will only be required to pay the amount determined by the second-price rule, will have a greater incentive to bid truthfully." In its filings to Industry Canada, Rogers said it opposed a second-price rule along with a sealed-bid system because that could lead to limited bidding by the new entrants on the set-aside spectrum. Several others, including Bell, Telus and Wind, supported the second-price rule, the government said. Smaller carriers, including Wind and TBayTel, as well as regional players such as MTS and SaskTel, all supported the use of the sealed-bid format, according to Industry Canada’s technical framework. Both Rogers and Telus asked the department to use a multi-round format. The two companies wanted a format in which prices are revealed to the other bidders, and one that allowed them to better judge in which regions they could be the top bidder. The two companies were worried that “bidders may not be successful in assembling the geographic footprint that they require to support their business case,” Industry Canada said. Bell asked the government to delay the auction for one or two years so that carriers could concentrate on making the best use of the 700 MHz spectrum auctioned last year. SaskTel, though it supported the sealed-bid format, also called for a delay, as did the Public Interest Advocacy Centre (PIAC). In a research note in late January, Canaccord Genuity analyst Dvai Ghose predicted the AWS-3 auction will generate about $2.4 billion, or $1.56 per MHz per person, well short of the $3.40 Cdn generated this year through an auction of the same kind of spectrum in the United States. Reasons for this include the spectrum set-aside in Canada, the auction format and Rogers' "high debt leverage and strong spectrum position," after it spent $3.3 billion of the $5.27 billion raised in last year's 700 MHz auction, Ghose said. Nevertheless, Ghose predicted that Rogers would be the top spender in the AWS-3 auction, winning new licences across the country for a total of $1.05 billion. He said Bell and Telus would follow, each spending about $525 million for spectrum in most regions. Videotron would the get cheapest rate of about 10 cents per MHz per person, or $30 million in total, as it would be unchallenged in buying set-aside spectrum in Quebec and the Ottawa area, he said. Ghose said Wind could pay $273 million and shut out Mobilicity for set-aside spectrum in B.C., Alberta and southern Ontario. The AWS-3 auction includes 30 MHz of set-aside spectrum for companies that meet the government’s definition of “operating new entrants,” those with less than a 10 per cent national market share and less than 20 per cent of the market share in a region. According to Industry Canada, that group includes auction registrants Wind Mobile, Videotron, Mobilicity, TBayTel and Eastlink. The operating new entrants are also eligible to bid on the open 20 MHz blocks sought by the incumbents. All three national incumbents criticized the set-aside in their filings to the government. Rogers, for example, said it amounted to "subsidized access" to spectrum that will result in a "foregone benefit for the Canadian taxpayers." Wind, on the other hand, said reserving that much spectrum for newer entrants will “help to ensure that AWS-3 spectrum is made available in a manner that maximizes the economic and social benefits for Canadians.” In his January note, Canaccord's Ghose estimated the amount of the "subsidy" to newer entrants in the AWS-3 auction would amount to $2.6 billion. Goodrick said that, in the overall scheme of things, aspects of the AWS-3 format, such as the sealed-envelope bidding and the second-price rule, are likely to result in less money being raised in the auction, but the impact of these factors will be minimal in deciding what companies will end up with what spectrum. Operationally, Goodrick said one of the biggest aspects of the AWS-3 auction will be giving newer entrants the ability to launch LTE services, an area in which they've lagged in comparison to the incumbents. Videotron said it began providing some LTE service in August. Wind Mobile chairman Anthony Lacavera told The Wire Report in October that establishing an LTE network in the coming years is the company's top priority. — With reporting by Peter Henderson at phenderson@thewirereport.ca and Derek Abma at dabma@thewirereport.ca and editing by Anja Karadeglija at akarad@thewirereport.ca

AWS-3 auction format to yield quick results

News | March 2, 2015

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