Canadian 700 MHz Spectrum Rules: Caps but no Set Asides.

I want to quickly summarize here the rules for the Canadian 700 auction which were recently released by Industry Canada (IC).

  1. The 700 MHz auction will occur in the first half of 2013.
  2. A total of five paired bands (three 6 MHz and two 5 MHz) will be auctioned along with two 5 MHz unpaired bands for a total of 60 MHz.
  3. Tier 2 service areas will be used to license all frequency blocks. There are a total of 14 such areas as shown in the figure below.
  4. The adopted band plan is a modified version of the US band plan, namely with the US upper 700 MHz C band is split into two 5 MHz paired bands – C1 and C2.
Canada 700 MHz Band Plan

Canada 700 MHz Band Plan

US 700 MHz Band Plan

US 700 MHz Band Plan

Block

Frequency

Pairing

MHz

A

698 – 704 MHz / 728 – 734 MHz

Paired

6+6 MHz

B

704 – 710 MHz / 734 – 740 MHz

Paired

6+6 MHz

C

710 – 716 MHz / 740 – 746 MHz

Paired

6+6 MHz

D

716 – 722 MHz

Unpaired

6 MHz

E

722 – 728 MHz

Unpaired

6 MHz

C1

777 – 782 MHz / 746 – 751 MHz

Paired

5+5 MHz

C2

782 – 787 MHz / 751 – 756 MHz

Paired

5+5 MHz

Canada 700 MHz License Areas

Canada 700 MHz License Areas

I think there was little doubt that IC would follow as close a band plan to the US band plan. This allows cross border frequency coordination, minimizes cross border interference which is a significant issue due to the close proximity of major Canadian population centers to the US border, leverages economies of scale on equipment, and facilitates roaming.

Now, on to the issue that made headlines during the process leading up to the release of the rules. There will be no set asides for Canada’s small, new entrants, who got their first licenses with the AWS auction in 2008. Rather, IC decided to impose caps on the amount of spectrum that can be obtained through auction. The caps are:

  1. Two paired frequency blocks in the 700 MHz band (blocks A, B, C, C1 and C2) is applicable to all licensees.
  2. One paired spectrum block from within blocks B, C, C1 and C2 is applicable to all large wireless service providers (companies with 10% or more of national wireless subscriber market share, or 20% or more wireless subscriber market share in the province of the relevant license area.)

There are no caps on the unpaired D and E bands of the lower 700 MHz.

The deployment conditions in each license area where a licensee holds two or more paired blocks of spectrum in the 700 MHz band:

  1. Cover 90% of the population of its existing HSPA network footprint within five years from the date of the issuance of the 700 MHz license; and
  2. Cover 97% of the population of its existing HSPA network footprint within seven years from the date of the issuance of the 700 MHz license.

For background, the AWS new entrants (Wind, Public Mobile Mobilicity, Videotron) mainly operate in urban areas and have about 3% of Canadian subscribers. The national incumbents (Rogers, Bell & Telus) have 93% of subscribers, with the remainder allocated to regional incumbents such as MTS Allstream and SaskTel.

I can see why the decision would upset some incumbents, like Wind, but in many respects, I see it as a crafty decision. In essence the caps operate like a set aside. Consider first that the A band is susceptible to interference (and hence was excluded from the one band limit imposed on large carriers), all carriers will gun for the B, C, C1 and C2 bands, leaving 4 operators per region. Hence, 3 incumbents will coexist with one of the new entrants if we assume that all incumbents (national or regional) will muscle their way to a license (and there are no more than typically 3 in any major region).

In a region like Toronto where 3 new entrants operate, the decision will leave them fighting for potentially one license – not a nice outcome! So, the squeeze is on the new entrants in any case. For this, the proposed rule to allow greater foreign investment and ownership is good news for these companies. This should potentially lead to consolidation among the new entrants. Consolidation is a fact of life and would be essential for the survival of these small entities (to put it into perspective, Wind has about 360k subscriber in comparison to over 9 million for Rogers and about 100 million for Verizon! Wireless infrastructure is expensive and needs to be amortized over a large subscriber base if a carrier is to be successful).

Another point to consider is the value of the different bands. LTE is more efficient operating in 10 MHz channel which means that the B band when paired with the A band can be very attractive. However, the A band is susceptible to interference from the lower adjacent band and there are slightly different RF requirements for these bands that makes them less attractive. It will be interesting to watch what different operators will gun for when the time of the auction comes.

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About Frank Rayal
Technology strategy, markets and M&As

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