WHEN THE FEDERAL GOVERNMENT relaxes foreign investment regulations for the telecom sector and sets out the rules for the 700 MHz wireless spectrum auction (there’s widespread hope Industry Minister Christian Paradis will say something about both next week), there aren’t many scenarios that present a rosy future for the newest Canadian wireless companies, according to research by Scotia Capital telecom analyst Jeff Fan.
Former Industry Minister Tony Clement said prior to the last election that when the 700 MHz auction rules are set out, the plan was to also address the limits we in Canada have on foreign investment in our telecom sector. However, since Minister Paradis has said very little publicly, it’s hard to know for sure if this is still the plan. The minister is speaking on Tuesday at the International Institute of Communications Canadian chapter conference in Ottawa and most observers would be shocked if he didn’t at least hint at what the federal government has in mind on 700 MHz and foreign ownership, if not actually officially set out the new rules and regulations. (Cartt.ca will be there as we are the official media sponsor of the event.)
Whatever the feds have planned, Fan set out a dozen differing scenarios that contemplate a telecom foreign investment policy change or no change at all, and various options on what the 700 MHz auction might look like. Should the level of allowable foreign investment be relaxed for all and increased to 49%, which is not much of a change – and if the auction rules cap the amount of spectrum Rogers, Telus and Bell can purchase, this still presents a gloomy scenario for the likes of Wind Mobile, Public Mobile and Mobilicity, he writes.
“(W)ith either an open auction or a spectrum cap, we believe the probability of independent new entrants acquiring meaningful spectrum positions would be very low. Without additional spectrum, we believe there is a low probability that the independents would remain independent after 2014 when their AWS licenses become transferable to incumbents,” notes Fan.
What about a wide open auction and relaxation of foreign ownership rules? Again, good for the big three, not good for the newbies. “(W)ith an open auction, we believe the relaxation of the foreign ownership rules would not encourage independent new entrants to bid as it would be difficult for non-Canadian investors to finance a ‘lost cause’ with incumbents incentivized to capture the 700 MHz bands (as was the case with Verizon Wireless and AT&T securing over 95% of population adjusted 700 MHz bands in the U.S.). There is real possibility that the independent new operators would effectively ‘skip’ the auction.”
Even a phased foreign ownership shift (where, for example, companies with less than 10% of the market could raise far more money outside of Canada than the big incumbents) along side a spectrum cap on what the big three could buy wouldn’t be good enough for the independent wireless companies. “With a cap, we believe there is low probability that the independents would be able to capture the ‘AT&T bands’ as those would be highly coveted by the incumbents to align their device ecosystems,” writes Fan. “The effect is almost the same as an open auction. While the independent wireless operators would be able to acquire some 700 MHz spectrum, these bands would likely not be consistent with AT&T's device roadmap, which would put them at a competitive disadvantage on device selection and cost. While the independents may not ‘skip’ the auction, their competitive position could remain very weak due to the device issues.”. However, because Public Mobile is going the CDMA to LTE route and taking a different approach than Wind and Mobilicity, which are both HSPA, the scenario is a positive one for Public.
Even a set aside of spectrum for new, independent wireless companies is a negative for them if not paired with more liberal foreign investment regs, he adds.
The only scenario which is good for the two biggest newcomers, Wind and Mobilicity, is a change in the foreign ownership rules along with a spectrum set-aside. That is the worst-case scenario for the incumbents, of course. “With foreign ownership relaxation and spectrum set-asides, we believe there is a high probability of independent wireless operators participating in the auction. If the government places transfer limits on these new licenses to incumbents (similar to the AWS that expires 2014), it would also ensure that there would be at least one independent wireless operator in the market beyond 2014. These two scenarios are the only ones that would have negative bias on incumbent wireless estimates and valuation multiples,” writes Fan.
However, the 700 MHz auction is not the AWS auction of 2008. As desirable as the 700 MHz band is (great for rural, video and building penetration), there is far less of it than in the last auction (50 MHz vs. 105), making a set-aside very difficult. Industry Canada is expected to auction five bands, but really only two to three will be of real, commercial interest.
So what’s the end game in all of this?
“Even with a spectrum cap, which may provide some room for independent wireless new entrants to acquire 700 MHz spectrum (if the cap is low enough), they would likely be left with less attractive bands that would put them at a permanent device access and cost disadvantage,” notes Fan. “Public Mobile is the only independent new wireless operator that may not be affected by this as it can leverage Verizon Wireless' device roadmap operating in LTE/CDMA. Under a spectrum cap scenario, Public Mobile could remain as the only independent operator beyond 2014.
“Under all scenarios, we believe independent new entrant consolidation is a likely outcome regardless of what the government decides. It would be rational to enter the auction as a combined group as opposed to bidding against each other. Whether it is a cap or set-aside, the government can incorporate limits on transferability of the licenses to incumbents to ensure that there is at least one independent wireless operator remaining independent beyond 2014,” he adds.
Minister Paradis speaks at 4 p.m. on Tuesday in Ottawa. We’ll have reaction afterwards and will likely live-tweet the speech, too. Follow on Twitter with @gregobr.
