Wireless auction Day 2: Maritimes get static

After four rounds of bidding in the wireless spectrum auction Wednesday, several things were clear:

–Ottawa will get at least $700,952,480 from the event, which is the total of the highest bids so far on the 292 available licences

[UPDATE: The total is now just over $1 billion after Thursday’s eighth round. The 2005 auction raised $56.5 million.]

— The soaring prices may have caused several would-be operators to pull out. Among them is Triple Five, owned by the wealthy Edmonton Ghermezian family;

–MTS Allstream has put itself in a troubling position by losing almost 1,600 of its bidding points, says one industry analyst;

–So far no one wants spectrum in Atlantic Canada.

And for the rest of the week the pace of the bidding will only pick up. Four one-hour rounds are scheduled for today and Friday, after two days with two, two-hour rounds.

The latest results of each round can be found at Industry Canada’s site here.

For those keeping score of who has the greatest number of high bids on all the licences so far, after Wednesday’s fourth round Rogers Communications was on top with $111.2 million.

Surprisingly, a consortium called 6934579 Canada, has the second number of high bids with $107.3 million. This group’s Canadian ownership fell into flux just before the auction opened. It had been led by Montreal’s investment firm Novacap, and includes several U.S. venture capital firms experienced in wireless startups as minority participants. But this group now says its Canadian partners will be a consortium including BMO Capital and Rho Capital Ventures, which has offices in Montreal, New York and Palo Alto, Calif.

It’s one of a number Ottawa is counting on to create at least one new national wireless operator to challenge Bell Mobility, Rogers Communications and Telus. Ottawa even set aside spectrum strictly for those not already holding licences specifically to encourage newcomers.

Other newcomers looking to do that as well are Videotron ($60.7 million in high bids as of the fourth round), Shaw Communications ($51.1 million) Data & Audio-Visual Enterprises Wireless Inc. (DAVE, $31.3 million) and Globalive Wireless ($24.2 million).

Arranged by the number of standing high bids they hold going into Thursday morning’s fifth round were Telus (64), Bell Mobility (46) and Shaw (37).

[UPDATE: After Thursday’s four sessions, Rogers still held the greatest number of high bids at $343 million, but two new entrants have begun bidding aggressively. Globalive has become the second top bidder and leader of the newcomers with $293 million, while DAVE, has lept into fifth place with $232 million in bids. Telus is in third place with $287 million, followed by Shaw with $234 million. The 6934579 Canada consortium has bid $226 million.]

The contest is in some ways between the incumbents (Bell, Rogers, Telus and MTS) and the newcomers. The incumbents are trying to protect their turf as well as scoop up spectrum for future demand and the newcomers trying to figure out if they should try now for licences across the country (and if so, where) or get the best they can and then partner after the auction with another bidder.

Under government rules participants are forbidden from talking strategy until the auction is over to make sure prices are free to rise as high as possible. Trying to discern trends in the bidding is hard because it’s still early, with bidding expected to go at least three weeks. Some bidders are likely saving their money for later rounds.

“These are the qualifying rounds,” said Canadian carrier consultant Mark Goldberg of Thornhill, Ont.

“Nobody’s winning yet. There is no block of spectrum where bidding has stopped.”

In fact, he pointed out, the raw dollar totals bid so far can be deceiving. Under the auction process several bidders can tie for top bids on a licence when a round ends, at which point the Industry Canada computer essentially flips a coin and picks a winner among them. Then the bidding moves into the next round, giving others the opportunity to be the top bidder on each licence.

Bidding goes by rounds within stages. At this point it’s Stage 1, with Round Five beginning this morning. Under the complex rules, the country has been divided into a number of licences, each of which is worth a number of points. To get into the auction participants had to buy points, and they have to bid on licences worth 75 per cent of the that total in Stage 1 – a percentage that increases in the next two stages. Failure to do that in each round results in a loss of points, although participants have a limited number of waivers they can ask for.

But losing points can hurt those aiming at a national network. MTS-Allstream, which saw its consortium fall apart just before the auction started, appears to be one of the casualties, with its eligible points dropping from 2,643 to 1,072. Another was Rogers, which started out with 4,030 points and has dropped to 1,872.

However, Rogers already has a good stockpile of spectrum from previous auctions and won’t likely be hurt by losing points. MTS, on the other hand, wants to go further than its Manitoba base.

“Any dreams they may have had of [operating] from sea to sea with 40 Mhz [of spectrum] is probably out the window,” said Iain Grant, managing director of the telecom consultancy the SeaBoard Group. “But a more focused bid, let’s say for 20 Mhz in the top 15 cities, is still on the table.”

He estimates a bidder needs about 900 points to establish itself in 15 of the country’s largest cities, a good start to create national coverage. MTS still has twice that number of points.

Grant believes MTS “sat on their hands” in the second round rather than use an exemption. A spokesman for the telco said it would have no comment while the auction is ongoing.

Grant was more concerned that the auction started off with a small bit of disarray with the collapse of the MTS and Novacap consortiums and the withdrawal of Mipps Inc, which is a partner with Internet and wireless carrier Primus Telecommunications Canada . He believes the injunction against collaboration, plus foreign ownership rules, caused the partnerships to collapse.

Still, he maintains that all of the well-funded bidders don’t have to fight for national licences. Instead, when the bidding is over they could build regional alliances.

Meanwhile, since the auction started, there have been withdrawals: Triple Five, and two small entries, Telehop and a numbered company. It isn’t known whether the price of licences was too high for these companies, or, as Goldberg wonders, whether last-minute changes to implementation rules announced by Industry Canada have made it harder for smaller companies to be carriers.

Before the auction started Ottawa said incumbents had to allow newcomers share antenna space and allow roaming for five years, with a clarification to be announced. The clarifications are less generous, Goldberg said, so some bidders may have concluded it won’t be as easy, or inexpensive, to be an operator.

Finally, why no one has bid on 20 Mhz or 5 Mhz licences in Newfoundland, Nova Scotia, New Brunswick or PEI, is a puzzle. “It’s quite likely people are focusing on the areas that are easiest for [service] rollout,” said Goldberg, meaning Toronto, Montreal, Calgary, Edmonton, Vancouver and the like. Similarly bidders could be hiding their strategies by going for urban licences first, he said.

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