Canada's spectrum cap heads north: Cross-border mergers still rumored

Following the FCC's recent review of the spectrum cap issue in the U.S., Canadian regulators took a second look at its spectrum caps. But while the U.S. decided to leave the cap at 45 MHz per carrier, Industry Canada raised its cap from 40 to 55 MHz.

The regulatory body also decided to auction off an additional 40 MHz of PCS spectrum by the fall of 2000. The changes may affect the Canadian marketplace in a number of ways, but it still leaves the door open for some rumored cross-border marriages to occur.

Some operators, including Clearnet, lobbied for complete removal of the spectrum cap, which was put in place to allow new entrants to compete against incumbents. Those new entrants have found success, so the caps are no longer necessary, a Clearnet spokesman said.

Although the raised cap is helpful because it lets operators aggregate more spectrum, it's limiting. Incumbents Telus and Bell Mobility originally were only allowed to purchase PCS licenses that covered half of the country. Industry analysts had envisioned mergers between either of those companies and Clearnet as a way to achieve a nationwide footprint. But with a 55 MHz cap, those operators would exceed the limit in areas they already serve with PCS after such a merger.

Clearnet's stock dropped after the spectrum cap news, possibly because the merger opportunity was removed.

"Their stocks had been up on rumors of takeovers," said Ian Angus, president of Angus Telemanagement Group. Microcell, another independent PCS operator in Canada whose stock also has risen because of takeover rumors, wasn't affected as much because the Microcell rumors have revolved around an American GSM operator, such as VoiceStream, and the spectrum cap wouldn't impede such a merger.

Industry Canada chose to set the new cap at 55 MHz to maintain a competitive market while allowing growth toward next generation services. "The department believes that a spectrum cap of 55 MHz is sufficiently large to allow incumbent PCS operators the certainty to plan the aggregation of spectrum for the continued growth of their 2G services and the implementation of 3G PCS services," Industry Canada's new policy reads.

To allow for the continued aggregation of spectrum for next generation services, Industry Canada also said that it would auction off more PCS spectrum. Overall share prices on most Canadian wireless concerns dropped after that news. "That's a reaction to a possible fifth entrant," said Johanne Lemay, co-president of Lemay-Yates Associates. The auction could result in a fifth or even a sixth entrant to the market, decreasing the potential value of all players.

The auction process is new to Canada, which currently is holding its first auction for broadband licenses (Telephony, Oct. 25, page 10). Industry Canada said that it would not necessarily always use the auction process in the future. Nonetheless, its decision to distribute PCS spectrum via auction didn't come as a surprise, Lemay said. Angus also expected that auctions would be used. "At this point it looks like the government sees it as a terrific way of making money," he said.

New entrants have opposed the decision to use auctions, citing concerns that they make it harder for new companies to enter the market. Clearnet, for example, suggests that it wouldn't exist as a company today had the original distribution of licenses been done via auction.