TORONTO – A pair of independent analyst reports published to investors last week both identified Shaw Communications and Videotron ltée as the two companies best-prepared to bid for wireless spectrum during the advanced wireless spectrum auction in early 2008.
Of course, the rules surrounding the auction have not yet been released (the best we can tell you is that they’ll be out before Christmas) and both sides are busily lobbying. Companies who want AWS to possibly build their own networks like Quebecor (owners of Videotron) or expand nationally like MTS Allstream, want some special breaks in the auction such as spectrum set-asides which the incumbents can’t get at, mandated roaming on incumbent wireless networks and even mandated tower sharing.
The big three national incumbent wireless operators, Rogers Wireless, Bell Mobility and Telus, all want an open auction where anyone can bid for the spectrum being made available.
“We do not see the need to help new entrants,” reads the report from Genuity analyst Dvai Ghose who believes the companies that want in have plenty of resources to compete and win spectrum in an open auction.
Plus, these companies had an earlier shot at wireless and walked away. Shaw and Videotron both sold their stakes in Microcell (Fido) and sold when wireless was unprofitable. MTS owned a piece of Inukshuk and sold it. Any of the companies could have made a run at Microcell in 2004 when Rogers purchased it, too Ghose noted.
“It is not Industry Canada’s mandate to rectify the lack of strategic insight that these companies had when it came to wireless in the past. Conversely, we believe that the wireless incumbents should be rewarded for their vision and their absorption of wireless financial risks in prior periods,” he wrote.
The report also noted that there is more competition in wireless than in fixed voice, pay television and Internet and that many developed countries (like Japan and France) have but three wireless players. “(W)e note that while the top two carriers in Canada have around 68% market share of subscribers, this is much less than Japan at 79%, France, Finland and Korea at 81-82% and Germany-Italy at 72-73%,” said the Genuity report.
The second report, from UBS, posits Videotron and Shaw potentially becoming regional operators, not national, and launching wireless service in their cable-covered geographic regions. (This is something Videotron does in Quebec already through an MVNO with Rogers.)
Both reports speculate the cost to build out a regional network in the West and Quebec would cost somewhere between $450 million to $500 million. A national build would cost about $2 billion.
As for MTS, “We fail to find an economic rationale for MTS Allstream to expand its wireless operations nationally,” says the UBS report authored by its lead telecom analyst Jeffrey Fan. His report also doubted Shaw would even be a player in the auction, while commenting that it is well-positioned to get into the wireless game.
Assuming there is a newcomer or newcomers to wireless, the incumbents will take a hit. “Under a downside scenario, wireless incumbents could each lose $1.4-$2 billion of value – assuming a new entrant 1) reduces incumbent ARPU by 3%; and 2) raises incumbent churn, (cost of acquisition) and (cost of retention) by 3%, we estimate lost value of 1) $2 billion or $3 per share for Rogers; 2) $1.5 billion or $4 per share for Telus; and 3) $1.4 billion or $2 per share for BCE,” reads the Genuity report.
However, BCE will probably be a private company by the time the auction happens.
Even such a hit, however, “We conclude that RCI and Telus are well-positioned to tackle new entrant risk,” wrote Ghose. “However, post (buyout) a highly leveraged BCE could be more exposed."
– Greg O’Brien
