The federal government's auction of wireless airwaves — which will usher in new cellphone providers — kicked off on March 10, when bid applications were due. While wireless spectrum is a highly technical issue that makes most people's eyes glaze over, it is extremely important to Canada's future prosperity.
With only about 60 per cent of Canadians subscribing to a cellphone service, Canada is well behind the rest of the industrialized world in adopting mobile communications. That means we are missing out on numerous business, educational, entertainment and cultural advances that are happening elsewhere.
In other countries, more workers are experiencing the benefits of being freed from their desks. People are saving time by shopping or banking on their cellphones while taking public transit to and from work. Some are catching up on their television shows by watching episodes on their phones. Lives are also being saved through medical information transmitted over wireless networks.
The government has blamed this lag on the lack of competition in Canada's cellphone market. The upcoming spectrum auction, beginning on May 27, is its effort to correct the problem.
What is spectrum?
Spectrum is a catch-all term for the radio airwaves that many wireless gizmos use to communicate information. Radios use spectrum, as do the rabbit-ear antennas on older television sets. The CBC, for example, is broadcast free to many parts of Canada using a part of the electromagnetic spectrum. Cellphones, of course, also use it.
Spectrum is divided into different frequencies and measured in units called hertz.
Why is it being sold?
Spectrum is a public resource that is managed by the government through Industry Canada. The government extracts big revenue from selling spectrum licences to cellphone companies, because those licences are limited while demand is high. Canada's cellphone industry made $12.7 billion in 2006, 95 per cent of which went to the big three providers, Rogers Communications Inc., Bell Canada Inc. and Telus Corp. Other telecommunications providers would like to offer cellphone services but can't, because they don't have a spectrum licence.
The licences are for 10 years and can be renewed by owners within two years of their expiration. The auction is expected to earn the government at least $1 billion, but likely a good deal more.
Who currently holds spectrum licences for cellphone services in Canada?
The nation's big three cellphone providers — Rogers Communications, Bell Canada and Telus — all hold licences. A number of smaller regional companies, including Winnipeg-based Manitoba Telecom Services Inc. and Regina-based SaskTel, also have licences and offer cellphone services.
How long will the auction take?
The auction has no set duration and will continue until there are no more bids. Most estimates expect it to take about a month or two.
What are the rules?
A 105-megahertz band of spectrum is being auctioned. The majority of it — 60 per cent — is open to bids from anyone, while the remaining 40 per cent is reserved for new entrants to the cellphone market, which Industry Canada defines as any company that currently earns less than 10 per cent of the nation's total cellphone revenue.
The spectrum has been divided into blocks based on geography. Auction participants will have to bid on these different geographic blocks. In the case of those aspiring to launch a Canada-wide cellphone service, they will have to buy a series of these geographic blocks to patch together a national service.
New entrants will also benefit from two other Industry Canada rulings. Existing carriers will have to rent out space on their cellphone towers at reasonable rates to new players. They will also have to sign agreements that allow the customers of newcomers to "roam" on their networks, again at reasonable rates.
How will the auction work, exactly?
There are 6,510 bid points that are up for sale. These are divided by population density, so a rural bid point will cover much more geographic area than an urban point. Industry Canada has set a minimum bid for each point.
Potential bidders had to specify how many bid points they had their eyes on before the auction and supply letters of credit showing they were good for at least their minimum value.
The auction will proceed in rounds, with the first round happening on May 27. Initial rounds will take a few hours but will eventually take as little as half an hour. Participants will bid on spectrum through an internet-based system and will have a phone number they can call as a backup in case of problems.
Participants will be required to bid on 75 per cent of the bid points they applied for in the first round. Industry Canada will raise that percentage in successive rounds in order to move the auction along and avoid having participants hold off on making bids. The auction will end when no new bids are received on any bid points.
Will bidders be able to determine how much they want to bid?
No, Industry Canada will control bid amounts. After the first round, it will raise the amounts on licences that have received bids by 15 per cent. Amounts will be raised after each successive round after Industry Canada gauges the interest level, among other factors, on relevant bid points.
What happens when the auction is over?
Winning bidders will have to pay for 20 per cent of the spectrum they've won within 10 business days of the end of the auction, as well as 100 per cent of any penalties incurred. Participants can incur penalties by withdrawing bids. The remaining 80 per cent must be paid within 30 days of the auction ending.
Can participants team up to bid?
No, Industry Canada is enforcing anti-collusion rules that prevent bidders from talking to each other about partnerships or transfer of ownership of spectrum until 30 business days after the auction ends.
Why are new entrants being favoured?
The government in November 2007 ruled that cellphone rates were higher and services poorer in Canada than in most of its peer countries, and that this was because there wasn't enough competition. Instituting special breaks in the auction was the government's way of spurring competition.
Can anyone bid?
Bidders face Canadian ownership restrictions, which state that a company must be at least 54 per cent Canadian-owned. This is keeping most big foreign players, such as Britain's Vodafone Group and Germany's T-Mobile, out of the auction.
Industry Canada will examine all winning bids after the auction to determine if they satisfy Canadian ownership rules.
Who are the potential new entrants?
Before the auction, MTS Allstream Inc. formed a consortium with the Canada Pension Plan Investment Board and U.S. private equity firm Blackstone Group with an eye to starting a national cellphone provider. The consortium fell apart just before the auction began, and MTS, which is the operating unit of Winnipeg-based Manitoba Telecom Services Inc., said it may still bid on its own.
Quebecor Inc. is also going to bid. The Montreal-based communications and media company, which operates cable and internet provider Videotron in Quebec, also has its eye on a national network.
Calgary-based Shaw Communications Inc., the nation's second-biggest cable company, has applied to bid as well. Shaw, however, says it won't necessarily build a cellphone network if it wins spectrum. The company could hold on to it and sell it at a profit a few years later.
Halifax-based Eastlink has also applied to bid. The company is the largest cable provider in the Maritimes.
Toronto-based Globalive Communications, which resells phone and internet services through its Yak brand, has applied to bid in conjunction with two foreign companies. Egypt-based Weather Investments, which owns cellphone companies in Italy and Greece, as well as Novator, which has funded new wireless entrants in its Iceland home as well as Poland, are part of Globalive's bid.
Toronto entrepreneur John Bitove, with support from Vulcan Inc., an investment company run by Microsoft co-founder Paul Allen, is also bidding.
For a complete list of applicants, see the Industry Canada website.
Who are the favourites?
Before its consortium fell apart, MTS Allstream was seen as the odds-on favourite to acquire enough spectrum to launch a national carrier. Quebecor and Eastlink are expected to win enough spectrum to start networks in their home regions. Shaw's intentions have mystified observers, and no one is quite sure what to make of Globalive, since the company's participation comes as a surprise.
Rogers, Bell and Telus are all expected to acquire portions of spectrum that are not reserved for new entrants, as well.
When are the new cellphone companies expected to set up shop?
Most spectrum auction winners are expected to begin some sort of operations by early 2009, although they will likely offer services only in larger cities at first.