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9 August 2021

Canadian 3.5 GHz auction raises $7.2bn amid familiar concerns

What goes around seems to come around for cellular spectrum auctions, certainly since the early days of 3G when the first inflationary sums were paid by operators, especially in Europe. There is, then, a sense of deja-vu in the aftermath of Canada’s 3.5 GHz 5G auction, just completed.  As so often before, large sums were paid amid the usual complaints of extortionate cost of spectrum from operators, and concerns expressed over impact on the competitive landscape.

In this case CAN$8.9bn (US$7.2bn) was raised, which was high for the amount of spectrum involved. This varied by region, because there were existing holders in some areas that were allowed to retain some of the airwaves previously allocated for broadband wireless and WiMAX.

While 200 MHz in the 3.5 GHz band was being freed for ‘flexible use’ licensing – for services which could be mobile or fixed wireless – the amount actually available varied between 30 MHz and 140 MHz across 172 areas, mainly based on the licence area type. Canada has four tiers – Tier 4 is local, Tier 3 regional, Tier 2 provincial and Tier 1 national.

There were several sub-plots, the biggest concerning Shaw, which is Canada’s fourth MNO but is facing impending takeover by fellow cable/mobile player Rogers for $26bn. That deal is still waiting for regulatory approval and will not close until 2022, but meanwhile Shaw’s mobile operating subsidiary, Freedom, was absent from the auction, leaving the big three – Bell Mobility, Rogers and Telus – as dominant bidders. Rogers acquired the most, spending C$3.3bn (US$2.7bn), followed by Bell Mobility at C$2.1bn (US$1.7bn) and Telus at C$1.9bn (US$1.5bn).

That remaining 18% was split among emerging players, just enough for the government to claim its objectives of fostering more diversity were met. “As intended, small and regional providers have gained access to significantly more spectrum, meaning that Canadians can expect better wireless services at more competitive prices, which has never been more important for working, online learning and staying connected with loved ones,” said minister of innovation, science and industry, François-Philippe Champagne.

Many independent observers were less sanguine and indeed Rogers itself indicated that it had fully achieved its objectives, which might not quite coincide with those advocating greater choice on a national basis.  “We went into this auction with a clear plan and acquired the spectrum we need to continue driving the largest and most reliable 5G network in Canada and to deliver long term value for our customers, shareholders and Canada,” said Joe Natale, president and CEO of Rogers Communications. However, although Rogers narrowed the gap, Bell remains the biggest operator.

Even in the unlikely event that its merger with Rogers is blocked, Shaw is out of the equation at the moment, so the question of whether the competitive status quo is at least preserved rests on the emergence of another credible fourth national player.

To an extent that was achieved in the auction, with Videotron consolidating its position as the country’s fourth largest, albeit still well behind the big three. The company already had 1.5m subscribers in Quebec, being owned by Quebecor, a telco whose operations have mostly been confined to that province so far. But more than half of Videotron’s investments in the recent auction were outside Quebec, in southern and eastern Ontario, Alberta, Manitoba and British Columbia, so it is on course to build a national footprint.

“This major investment paves the way for large-scale projects in Quebec and other Canadian provinces in the coming years,” said Pierre Karl Péladeau, president and CEO of Quebecor.

Videotron spent C$830m (US$670m), a considerable sum, but this still leaves the question of whether it will be able to compete as a major force in those new markets outside Quebec. The experience of Shaw suggests that the gravity of consolidation is tending towards three rather than four major players.

There is another factor, spectrum sharing, which could allow Videotron’s new spectrum outside Quebec to act as a lever into becoming a significant player. Back in May 2013 Quebecor struck a deal with Rogers to build a joint LTE network in Quebec. Given this now long-standing relationship with Rogers in Quebec, it is quite possible they will now collaborate again to share spectrum across the rest of Canada. This would have mutual benefit, helping Rogers compete more strongly with its two big competitors, while giving Videotron enough spectrum to be viable as a fourth operator, building on its newly acquired rather meager assets.

5G is not purely about mobility and the rural operator Xplornet has indicated it will focus on delivering broadband outside the cities primarily. With this end in mind, it spent C$244m (US$195m) on 263 smaller licenses, the most it has ever spent in a cellular auction. The aim is to become a major ISP in some areas on the back of fixed wireless access, which really becomes competitive with fixed wired cable or telco DSL for the first time with 5G.