Cellphone market poised for shakeup as spectrum auction ends

The government is $4.2 billion richer with the conclusion of the cellphone spectrum auction on Monday, while customers stand to win as five new companies are now well positioned to launch services over the next few years.

The windfall is considerably larger than the original $1.5 billion many industry analysts had predicted before the auction began on May 27. But after eight weeks and 331 rounds, the government's haul from the 292 licences sold turned out to be nearly triple the original forecast.

Federal Industry Minister Jim Prentice said the competitiveness of the auction exceeded the government's expectations, and that consumers should benefit as a result.

"I hope the industry keeps this competitive spirit alive as it enhances and expands its services with improved access to the spectrum," he said in a statement. "The industry now has an unprecedented opportunity — thanks to the government’s Advanced Wireless Services policy and auction — to develop products and services that offer choice to Canadian consumers and businesses. We think consumers will be the big winners in this auction."

When asked what the auction windfall would be used for, a spokesperson for Prentice pointed to the 2008 budget, which said the proceeds would go toward debt reduction. She did not respond to requests for clarification as to whether the entire amount would be spent on debt.

Prentice is to hold a news conference at 11 a.m. EST on Tuesday, where he is expected to announce what will be done with the proceeds.

Calls have emerged over the past few weeks to spend the money on a national broadband strategy. The Liberals and NDP, as well as several industry commentators, have urged the government to use some of the proceeds to roll out high-speed internet access in rural communities so that businesses there can compete on a global level, and to prevent Canada from falling behind the rest of the world in broadband.

The auction was designed to encourage new competitors to established giants Rogers Communications Inc., Bell Canada Inc. and Telus Corp. by reserving for them 40 per cent of the 105 megahertz of airwaves up for sale. Prentice, in announcing the rules last November, said new competitors were necessary to bring down the high costs and poor service offered by the big three in Canada.

Globalive big winner among new entrants

The big winner among potential new entrants was Toronto-based Globalive Communications Inc., which currently sells home phone and internet service under the Yak brand. The company has emerged from the auction positioned to launch a national cellphone service with 30 licences broadly distributed across the country, with the exception of Quebec.

Globalive is on the hook for $442 million and, like all licence winners, has 30 days to pay Industry Canada. The company is backed by two foreign billionaires — Naguib Sawiris of Egypt through his Weather Investments firm, and Iceland's Thor Bjorgolfsson through his London-based Novator Partners.

Industry Canada will spend the next few weeks examining the corporate structures of licence winners to ensure they conform with Canadian laws, which bar foreign companies from owning and controlling more than 47 per cent of a telecommunications provider. Globalive has not yet announced its plans for offering services, or how its cellphone provider will be structured.

Through Weather Investments, Naguib — who is ranked No. 60 on the 2008 Forbes list of the world's most wealthy with a net worth of $12.7 billion US — runs the Wind cellphone brand in Italy and Greece. He is also chairman of Egypt's Orascom Telecom, which runs cellphone providers in Egypt, Pakistan, Algeria, Tunisia, Bangladesh and Iraq.

'I can speak for myself as a consumer. I'm confused by my bill.' — Anthony Lacavera, CEO of Globalive

Bjorgolfsson, meanwhile, is ranked No. 307 on the Forbes list with a personal fortune worth $3.5 billion. Through Novator, the Icelandic billionaire holds stakes in telecommunications companies in Finland, Bulgaria and Poland.

Globalive could potentially offer better deals than those currently on the market, given that Naguib and Bjorgolfsson both earned their telecommunications pedigrees through offering lower-cost cellphones. Customers of Wind in Italy and Greece paid less than $27 US a month for service in 2007, compared to $59.30 US or $55 US paid by Telus and Rogers subscribers, respectively.

Globalive chief executive officer Anthony Lacavera was excited but tight-lipped about his company's plans because of strict Industry Canada anti-collusion rules, which prohibit auction winners from communicating with each other for 30 days. He did hint, however, that Globalive's offerings would likely address some of the factors most hated by Canadian cellphone subscribers: complex services, complicated contracts and high prices.

"Our current customers are enjoying simple offerings that have no surprise fees. We're going to continue that track record in the wireless world," he told CBCNews.ca. "Canadians are unhappy about the costs, the complexity of the billing. I can speak for myself as a consumer. I'm confused by my bill."

Lacavera could not comment on how the company would be structured, but said Globalive would fall within Canadian ownership requirements.

"We're aware of the rules. You're either complying with them or you're not," he said. "They're relatively simple tests."

Services could be up by Easter

The new entrants are widely expected to build third-generation networks based on global system for mobile communications (GSM) technology, which is what Rogers and its Fido subsidiary use, or its newer fourth-generation offshoot, long-term evolution (LTE).

Iain Grant, president of the Seaboard Group telecommunications consultancy, said a national carrier could be up and running by Easter at a cost of $500 million, although other estimates say a launch could take a year or two. The trickiest part of starting up will be negotiating rights for transmission sites, many of which will either be on top of tall buildings or on towers owned by Rogers, Bell and Telus.

New entrants will, however, benefit from Industry Canada rules that force existing cellphone carriers to offer reasonably priced roaming on their own networks and rent space on their towers for equipment, which will allow them to expand their coverage quickly.

Montreal-based Quebecor Inc. was also a big winner in the auction, having won bids on 17 licences, mainly in Quebec but also in eastern Ontario and Toronto, and is on the hook for $554 million. The company, which currently resells access to the Rogers network in Quebec through its Videotron subsidiary, has been vocal about launching its own service.

'The prospect of increased competition in the near future will exert downward pressure on prices.' — Robert Dépatie, CEO of Videotron

The company said it would announce details of its offering as soon as the 30-day Industry Canada gag order expires.

"The outcome of the auction is good news for consumers," said Videotron president and chief executive officer Robert Dépatie in a statement. "The prospect of increased competition in the near future will exert downward pressure on prices. We have much to do, particularly in terms of building out our advanced, state-of-the-art third generation network, but we already know that we will be able to raise the level of competition in Canada’s wireless marketplace a notch, for the benefit of our businesses and consumers."

Calgary-based Shaw Communications Inc. also won 18 licences, primarily in Western Canada, for a total tab of $189 million. Halifax-based Bragg Communications Inc., which operates Maritime cable provider Eastlink, came away with 19 licences, mainly in Eastern Canada, but also in Ontario, at a cost of $25 million.

Toronto-based Data & Audio-Visual Enterprises (DAVE) also won 10 licences in Ontario, as well as a few western cities, including Vancouver and Calgary, for a total of $243 million. The company is run by Toronto entrepreneur John Bitove, who founded the Raptors NBA basketball team and operates the Canadian arm of XM Satellite Radio, and has some funding from Vulcan Inc., an investment vehicle of Microsoft Corp. co-founder Paul Allen.

Existing players also won additional licences in the blocks not reserved for new entrants, with all three broadly spending across the country. Toronto-based Rogers was the biggest contributor to the government's kitty with $999 million spent on 59 licences, while Vancouver-based Telus kicked in $879 million on 59 licences. Montreal-based Bell spent $740 million on 54 licences.

Winnipeg-based MTS Allstream Inc., which had designs on taking its Manitoba cellphone service national but saw its key bidding alliance dissolve just before the auction, ended up with three new licences, all in its home province. MTS's licences are worth $40 million.

The company's chief executive officer, Pierre Blouin, hinted at the Telecom Summit in June that it might seek a partnership with other winners after the auction ended. Auction winners, however, are prohibited from speaking to each other until their licence fees have been paid.

Regina-based SaskTel, a provincial Crown corporation, also picked up three licences in Saskatchewan for $65 million.