Analysts: result of wireless auction may not increase competition

When the Canadian government announced last October that it would be allocating additional PCS wireless spectrum through an open auction, it did so because it believed, “our open entry policy will foster competition, provide opportunities for existing companies to get additional spectrum and will open up opportunities for new entrants with viable business plans.”

Analysts, however, say last month’s auction will not succeed in increasing the amount of competitors provisioning wireless services to Canadians.

Though the five winners of the available 52 licences did contribute almost $1.5 billion to Industry Canada’s coffers, neither of the two new entrants vying for spectrum managed to secure any of the most prized licences. The result is that Canada is still left with only four major PCS carriers to compete for customer contracts.

Of the two new entrants, Montreal’s W2N Inc., led by entrepreneur Joe Church, paid slightly more than $11 million for three licences in B.C., Alberta and eastern Quebec. The second, a numbered Nova Scotia company backed by Westwood, Kan.-based Sprint Corp., dropped out of the race entirely after complaining that bids for the lucrative southern Ontario region were becoming too high.

Canada’s three largest mobile carriers, Mississauga, Ont.’s Bell Mobility, Calgary’s Telus Mobility, and Toronto’s Rogers AT&T Wireless spent more than $1.2 billion (or 83 per cent of the auction’s total revenues) to split the four blocks of available spectrum in the southern Ontario region, which encompasses the vital Greater Toronto Area.

Without the customer base located in southern Ontario spectrum, analysts don’t believe W2N will be able to sustain the costs necessary to built out its planned data-centric network.

“My gut feeling is the (infrastructure) is going to be too expensive to roll out the data services they want in Calgary and Alberta,” suggested Jeff Leiper, an auction analyst with Decima Research in Ottawa.

“Our prediction is that we’re probably going to see W2N try to sell this spectrum,” Leiper said, adding that Bell Mobility has already told him they are interested in acquiring the spectrum if W2N is selling.

Telecommunications analyst Eamon Hoey, of Fox-Hoey Consulting in Toronto, was less speculative.

“If Joe Church is successful with the licences that he’s got, I’ll eat my hat,” Hoey said bluntly.

Though Church said he is pleased to have won the three licences, he admitted, “It’s less than we expected and hoped to win, so now we’re assessing what we can do with these spectrum blocks.”

Before the auction even started, Church had expressed disappointment that Industry Canada had not set aside spectrum for new entrants and entrepreneurs.

When the original 1.9-Ghz PCS spectrum was allocated in what Church termed a “beauty pageant” in 1995, his previous company, LanSer Wireless, was refused a national 30-Mhz block. At the time, Industry Canada decided to only give Clearnet PCS (which was bought out by Telus Corp. late last year) and Montreal’s Microcell Telecommunications Inc. the 30Mhz of spectrum. The government held on to 40Mhz of spectrum it originally planned to distribute, with former Industry Minister John Manley noting, “the decision would promote a strong base from which to enhance competition in the provision of telecommunications services.”

Numbers not important

Industry Canada Minister Brian Tobin’s office would not comment, but spokesperson Earl Hoeg said the government has never defined competition by the number of actual competitors.

“Effective competition means that there is true competition – that no company can set prices (and) that all companies are price takers, they’re not price makers,” Hoeg explained. “And when you have a competitive market for the provision of telecommunications service, then you ensure that consumers get the best prices and the most innovative services.”

By that definition, Decima’s Leiper said Canadian wireless consumers have been well-served by the existing PCS players. As proof, he cited a Yankee Group in Canada report from last year that revealed Canadians are paying the lowest digital air time costs in the world.

Hoey, who described the PCS auction as “an abject failure,” disagrees with Leiper.

“There’s no (digital) coverage,” he said. “Try getting competitive services in (northern Ontario city) Timmins. Why should we deny the good folks in Timmins the same kind of service we have in downtown Toronto? After all, this is supposed to be the policy of the government, to have even telecommunications services throughout the country.”

Hoeg responded that the government was satisfied with the fact that, though digital coverage areas are based around major markets, PCS services are available to 83 per cent of the Canadian population.

Since 1995, Canada’s wireless carriers have maintained that the market cannot withstand any more competitors. It doesn’t appear that they are changing their tune, despite the fact that analysts predict more than half of Canadians will own a wireless phone in the next five to 10 years – double the current amount.

“It’s a pretty hyper-competitive industry as it stands, and nobody was eager to see a new entrant in the market,” said Telus spokesperson Mark Langton, whose company paid more than $350 million to secure licences in Nova Scotia and Prince Edward Island, southern Quebec, Manitoba, and eastern and southern Ontario.

Rogers paid only $40 million more than Telus, but managed to secure 18 more licences, bringing its spectrum levels up to the cap in some parts of each of the provinces.

However, Leiper said Bell was the big winner. The BCE Inc. subsidiary paid $720 million to secure 20 licences across the country; $550 million of that went towards two southern Ontario licences. Canada’s other competitor, Microcell, pulled out of the auction early, saying it was satisfied with the 30Mhz of spectrum it already holds nationwide.

No set requirements

Industry Canada’s Hoeg said the government did not set any requirements for the PCS auction winners regarding network and service roll out, but it appears that all of Canada’s four major players are ramping up their networks in anticipation of the introduction of third-generation (3G) wireless in the next few years.

Microcell and Rogers say they will begin offering faster 56Kbps data rates on their general packet radio services-equipped handsets by this summer. And Bell and Telus say they have successfully conducted trials on their code division multiple access-equipped handsets, with data rates transmitting at up to 144Kbps.

Though these so-called 2.5G wireless transmission rates pale in comparison to the much-hyped 2Mbps 3G rates, it does represent a step up from the pokey 14.4Kbps rates most existing handsets currently transmit.