Canada Sets World Record for Prices of Mid-Band Spectrum Licenses 3500 MHz Auction Results – August 2021 An LYA® ® c-Ahead Report © LYA, 2021 Ò Canada Sets World Record for Prices of Mid-Band Spectrum Licenses 3500 MHz Auction Results August 2, 2021 – Canada’s recently completed auction of 3.5 GHz licenses – results announced July 29, 2021 – blasted through the previous high-water market for mid- band spectrum licenses. The total of C$8.91 billion (US$7.13 billion) in revenues for an average of 125 MHz per market in the 3450-3650 MHz range represents a record C$2.26 per MHz-pop or US$1.81… essentially double the valuations seen on average in the US C Band auction held earlier in 2021, and close to 10x the averages seen in earlier auctions. Canada is often viewed as a country with relatively high retail prices for mobile services. High prices for spectrum paid in auctions may ultimately flow to consumers helping to keep prices high in the future. We discuss herein some of the causes of these prices pertaining to auction rules and dynamics. LYA c-Ahead Report – Canadian 3500 MHz Spectrum License Auction Reproduction or dissemination of this Report in whole or in part is strictly prohibited – all rights reserved. Permission from LYA is required to quote or excerpt any part of this Report. © LYA, 2021 Page 1 Ò We also note how CRTC became a “player” in this auction via the awkward or inappropriate timing of the release of two major decisions impacting telecom carriers across the country. This should provide food for thought and cause a rethink of the two telecom regulators approach, as is currently the case in Canada. Top 4 Take-aways 1. Not Enough Spectrum – Limited Supply Increases Prices There was only 125 MHz available per market on average before considering encumbrances which further reduced population coverage in some areas. Combined with a Set Aside for non-national operators of typically 50 MHz per market – 40% of the spectrum available – it was essentially impossible for any one bidder to acquire 100 MHz per market to optimize deployment for 5G. A better outcome for the industry and ultimately consumers would have been for operators to bid on more spectrum now in the 3.5 GHz band. With this objective in mind, many other countries have focused on maximizing the spectrum available for 5G in the mid-band range, up to 400 MHz from 3400-3800 MHz. In 2018, LYA had assessed ways for an additional 100 MHz spectrum for release in the first 5G mid-band auction in Canada – our 2018 Report can be found here: https://www.ic.gc.ca/eic/site/smt-gst.nsf/vwapj/SLPB-004-18- Rogers_Attachment.PDf/$file/SLPB-004-18-Rogers_Attachment.PDf from mid 2020 to the end of 2021, the fCC in the US will have freed up significantly more mid band spectrum compared to ISED. A more flexible and proactive management by ISED of the auction framework and rules could have helped keep prices at a more reasonable level. At the very least, ISED could have included the 50 MHz of WBS spectrum (3650-3700 MHz) which it announced, prior to the 3.5 GHz auction, is being re-banded to the range 3900-3980 MHz for shared use. Just this small change would have increased supply by 35%-40% on average across different areas of the country. LYA c-Ahead Report – Canadian 3500 MHz Spectrum License Auction Reproduction or dissemination of this Report in whole or in part is strictly prohibited – all rights reserved. Permission from LYA is required to quote or excerpt any part of this Report. © LYA, 2021 Page 2 Ò 2. Hefty Set-Aside Discount The three largest bidders, Canada’s national MNO’s, Bell, Rogers and TELUS, accounted for 82% of the total proceeds, at an average of C$3.28 per MHz-pop (US$2.62). The remaining bidders together accounted for 18% of proceeds at an average price fully 71% lower at C$0.94 per MHz-pop (US$0.75). This was a far higher “discount” for Set Aside blocks relative to Open blocks than seen in the earlier multi-round auction of AWS-1 spectrum in 2008, the most comparable auction in terms of format, when a similar Set Aside mechanism was also employed. The pro’s and con’s of the Set-Aside approach to licensing – as opposed to other mechanisms such as caps – will no doubt continue to be debated. But the last-minute absence of Shaw/freedom as the fourth operator bidder did mean that new players could win licenses without paying “incumbent” prices. A key outcome is that Videotron and other players such as Cogeco, Xplornet are now positioned to fill the void left by Shaw in areas where they had not up to now offered a mobile service 3. Dynamics Amongst the National MNO’s – Bell, Rogers, TELUS Pre-auction Bell and Rogers had retained 50 or 60 MHz (20 or 30 MHz each) in many key markets. The auction provided an opportunity for them to add to these holdings from the limited supply, which they did across the country. To do this, they bid to limit TELUS, which held licenses in only a few markets pre-auction. Somewhat contradictorily, it is Bell and TELUS that have a network sharing agreement. So while the Bell+Rogers incumbency dynamic limited the winnings of TELUS, it is Bell+TELUS that in the end came out ahead of Rogers, when adding all spectrum block acquired. This would have in turn incented Rogers to bid to prevent Bell+TELUS from ending the auction with 100 MHz per market. The above meant Bell, Rogers and TELUS were incented to bid very aggressively and they did, resulting in the setting of a World record for mid-band spectrum prices. LYA c-Ahead Report – Canadian 3500 MHz Spectrum License Auction Reproduction or dissemination of this Report in whole or in part is strictly prohibited – all rights reserved. Permission from LYA is required to quote or excerpt any part of this Report. © LYA, 2021 Page 3 Ò 4. Déjà Vu all over again… The 3.5 GHz Auction Brings Back Memories of 2008 In many areas, including Toronto, the spectrum set aside was split between 2 new players, for example Cogeco and Videotron or Videotron and Xplornet. This is very different than the last 4 auctions (700 MHz, AWS-3, 2.5 GHz and 600 MHz) where in general only one new entrant acquired new spectrum in most areas. The 2021 result bears similarities to the 2008 AWS-1 results where there were 3 AWS-1 winners in Toronto (Videotron, Globalive and DAVE) plus 1 PCS G Block winner (Public Mobile), for a total of 4 new entrants, of which 3 were eventually launched. The results of the 2008 auction led to significant upheaval in the Canadian mobile market and to a consolidation of new entrants in the 2012-2015 timeframe. In 2021, the competitive dynamic in the near future is complicated by the range of possible outcomes of the Rogers/Shaw acquisition… from a clear refusal of the transaction by regulatory authorities to numerous asset divestiture possibilities. However, it does appear that there could be multiple bidders for Shaw assets, should the regulatory authorities decide to choose this path. While we do not believe that the future following the 3.5 GHz auction will be a repeat of the 2008-2015 period, it implies that the regulators will need to be extra careful in crafting a Rogers/Shaw decision, assuming they are intending to preserve or even enhance competitive dynamics in many key markets currently served by Shaw. LYA c-Ahead Report – Canadian 3500 MHz Spectrum License Auction Reproduction or dissemination of this Report in whole or in part is strictly prohibited – all rights reserved. Permission from LYA is required to quote or excerpt any part of this Report. © LYA, 2021 Page 4 Ò Auction Details The spectrum available ranged from 30 MHz up to 200 MHz per Tier 4 license area. Of the 172 Tier 4 areas covering the country, 12 areas had 140 MHz available. These were generally large markets and accounted for 61% of the available MHz-pop. As the first auction since 2005 to award licenses on the relatively small Tier 4 areas, the auction attracted a record 23 bidders, 15 of which ended the auction winning licenses. The auction had a “set aside” of frequency blocks for non-national operators, i.e. bidders other than Bell, Rogers and TELUS. The Set Aside was 50 MHz (5 blocks of 10 MHz) in most but not all markets. A few markets only had set-aside spectrum while others only had open blocks. Who the bidders were Or notably who they were not. Just before the auction application date (April 6, 2021), it was announced that national incumbent operator Rogers would be acquiring Shaw’s freedom Mobile. freedom Mobile is/was the fourth operator in Ontario and much of Western Canada. LYA c-Ahead Report – Canadian 3500 MHz Spectrum License Auction Reproduction or dissemination of this Report in whole or in part is strictly prohibited – all rights reserved. Permission from LYA is required to quote or excerpt any part of this Report. © LYA, 2021 Page 5 Ò This move by Rogers resulted in Shaw not participating in the auction, leaving much of Canada wide open for new players notably in attractive markets such as Toronto, Vancouver and Calgary. With no evident individual large bidder that would target all of the Set Aside blocks in key markets this led to different sets of smaller bidders carving up the 50 MHz of Set Aside spectrum area by area, a similar result to the 2008 AWS-1 auction, which used a similar mechanism.