Countdown to spectrum

A little more than 30 million people live in Canada. Though the country has 13 provinces, the majority live in Quebec, Ontario, British Columbia and Alberta. Wireless carriers don't want the rest of the country to fall victim to the digital divide, so they are fighting to serve all residents and gain the spectrum needed to roll out third generation technology.

When Industry Canada - comparable to the FCC in the U.S. - recognized the increased demand for spectrum in November, it raised its spectrum cap from 40 to 55 MHz. That meant Telus Mobility, Bell Mobility, Rogers Wireless, Clearnet Communications and Microcell Telecommunications could get additional licenses. The auction was to take place by this fall but currently is up in the air - and not only because spectrum is involved.

On March 1, Industry Canada received letters from the different providers with suggestions about how the auction should run. While some had similar viewpoints, each player had suggestions on how the policy for licensing the spectrum should read.

During the first PCS license auction in 1996, Telus and Bell Mobility each won the rights to spectrum in opposite halves of the country. Telus covers British Columbia and Alberta in the west and Bell Mobility covers Ontario and Quebec in the east, but each offers service outside its territory through resale agreements. Now each wants to be a facilities-based provider, and to do so, each must own spectrum in the other's territory. For Clearnet and Microcell, this would be contradictory to their belief that the country should have a four-carrier strategy.

"We have been doing a lot of neat things that have been made possible because of the rational industry structure," said Dean Proctor, vice president of regulatory affairs with Microcell. "If [Industry Canada] messes up the structure, then they will take away innovation."

Although Rogers Wireless executives agree that a new entrant may disrupt the industry's current structure, they believe that today there is a five-carrier structure. In effect, Telus' and Bell Mobility's resale strategies in each other's territories add a fifth competitor to the wireless landscape in both halves of the country. However, the carrier opposes Telus and Bell Mobility using the auction to extend their facility-based networks beyond their existing licensed territories.

In its statement to Industry Canada, the carrier said, "These companies did not enter either the cellular or PCS licensing process as national carriers and ought not be permitted to unilaterally expand their licenses by bidding on additional spectrum outside their respective operating territories now."

Some analysts do not foresee the government limiting the amount of competition in the industry. "[The government] might stretch the competition too thin, but maybe because it is a free market, they will take the stance that the industry is free to fail," said Iain Grant, managing director of The Yankee Group in Canada. "We predict there will be more competition, and then there will be a shakeout where the big carriers will buy the weak. However, we have been predicting this for four years, and it still has not happened."

When Industry Canada awarded PCS licenses in 1996, Clearnet and Microcell were new entrants. Each received 30 MHz nationwide. In its letter to Industry Canada, Clearnet presented its view that because there are only 30 million people in the country and because many of them are dispersed, it would be detrimental to the goal of connecting all of Canada's residents if there is a fifth facilities-based provider.

"It will be bad policy if we do not get the right decision. We need to maintain the city markets in order to be able to serve the second- and third-tier markets," said John Phillips, executive vice president of carrier relations and general counsel for Clearnet.

If Telus wants to go after the second- and third-tier markets, it also likely would have to serve large cities in order to keep up its revenue stream, he said. That would mean an additional competitor in some markets. As a result, Clearnet would have to up the ante in its large markets, which might be detrimental to its plan to expand into the smaller markets, Phillips said.

Telus has been serving some rural markets and will continue to do so. "We have proved that it is not a problem to serve the [more rural areas of] Alberta and British Columbia, which enhances our ability to be successful in the industry if we can provide service in rural areas," said Willie Grieve, vice president of government and regulatory affairs for Telus.

Unlike Clearnet and Microcell, Telus is certain that the Canadian wireless market can support five or more players. In addition, the provider wants to be recognized as a national player. "We need to be able to buy spectrum outside of our territory so we can create two national carriers," Grieve said.

Telus already has customers via resale deals in the markets where it does not own spectrum, and now it is only a matter of building out the physical network.

"There is no reason they need to build their own second generation network six years after everyone else built theirs," said Microcell's Proctor. "This would not advance the industry structure for Canada."

Although it has not been labeled so, the auction is causing carriers to focus on next generation technology. "This is a 3G auction for us," Phillips said. "Although we have enough for the near-term, we need fresh spectrum for high-speed data."

The carriers that already have national networks believe they could roll out next generation services faster than building a next generation network from scratch. Microcell has taken the stance that the amount of network buildout should be limited, and all current networks in place should be forced to open up for resale. "Consumers would benefit greatly from this," Proctor said. "Carriers do not need their own infrastructure to provide competitive services."

What the operators do agree on is that new spectrum is necessary. "We also see the spectrum as being used for next generation services, and we cannot do everything with the current spectrum. It is not enough," Proctor said. While additional spectrum will be forthcoming, all eyes currently are focused on this auction that Industry Canada is considering, he said.

"It is vital that we get additional PCS spectrum where we do not have it because we need it to complement our suite of telecommunications services," said Ed Prior, director of public policy and government regulatory affairs for Telus.

Until Industry Canada presents its policy, which is expected sometime in June, the carriers must play the waiting game while taking care of the "simple stuff, like making sure there are no holes in our coverage," Phillips said. Perhaps it is not that simple because such tasks take up more than 100% of the carrier's time, he said - although it is easier than deciding how to move forward with 3G plans, considering the carriers must wait to find out if they can bid on additional spectrum and ultimately afford it.

Now Industry Canada must weigh the carrier statements and decide what the policy will be going into the spectrum auction, which could take place by September.

"Sure, we have argued in our best interest, but how we go forward will be the result of the government policy outcome," Phillips said. "Hopefully they will want to give the last-time new entrants a chance to remain competitive."