Observations on the Canadian 700 MHz Auction

Introduction

There has been considerable buzz about the possible entry of the US cellular company Verizon into the Canadian marketplace. This has been generated by hints that Verizon may purchase one or more of the new entrants formed as a result of the AWS (Advanced Wireless Service) frequency auction in 2008 – namely Mobilicity, Public and Wind. Verizon is able to do this because foreign ownership of cellular companies with less than 10% of market share is permitted. The AWS companies meet this criterion. 

Where this gets interesting is that although a purchaser likes Verizon may be huge when compared to the total Canadian market, by purchasing existing operators, Verizon will still be considered a new entrant. This means that Verizon will be able to take full advantage of the special considerations afforded new entrants, in particular spectrum allocation, tower sharing, and roaming agreements.

Needless to say the incumbents are not happy with this state of affairs and have been crowing loud and long about the unfairness of it all with all three CEO’s issuing statements and threats within the last few days about how the market will suffer if Verizon is allowed to proceed and enter Canada.

Vidéotron has now joined the chorus for reasons I cannot fathom because they are considered a new entrant as well as a regional carrier and are fully protected by some of the auction rules.

  

Auction Blocks

The main driver for this outburst of high dudgeon is the upcoming 700 MHz auction. Some background information may help understand the situation.

When Canada (and the US) converted from analogue to digital television a few years ago, it freed up a considerable amount of radio spectrum in the 700 MHz band and it became available for use by cellular services.

In Canada, the available frequency spread was divided into blocks as shown in this chart. The channel numbers at the top of the chart refer to the old TV channel numbers. Channel 51 is still an operational channel and it has the potential to interfere with the lower Block A frequencies. This makes Block A spectrum a little less value. For auction purposes, four blocks are considered “prime” and come with some restrictions as will be explained later.  These are Blocks B, C, C1 and C2.

  

 Canadian plan for the bands 698-756 MHz and 777-787 MHz

 This is the key information in an easier to read format.

The following frequency blocks will be available for the 700 MHz auction:

Block	Frequency	Pairing	MHz
A	698-704 MHz/728-734 MHz	paired	6+6 MHz
B	704-710 MHz/734-740 MHz	paired	6+6 MHz
C	710-716 MHz/740-746 MHz	paired	6+6 MHz
D	716-722 MHz	unpaired	6 MHz
E	722-728 MHz	unpaired	6 MHz
C1	777-782 MHz/746-751 MHz	paired	5+5 MHz
C2	782-787 MHz/751-756 MHz	paired	5+5 MHz

Paired means that there are two blocks separated by sufficient bandwidth to allow one block for download and one block for upload.

Unpaired means the block is standalone and is most valuable for one way transmission.

Coverage Areas

The auction rules set license boundaries for coverage areas.  As explained on the Industry Canada/Spectrum Branch website, these areas, called tiers, are based on Statistics Canada’s Census Divisions and Subdivisions. Four tier sizes have been established to accommodate various wireless services, applications and frequency bands.

·         Tier 1 is a single national service area;

·         Tier 2 consists of 14 large service areas;

·         Tier 3 consists of 59 smaller regional service areas; and

·         Tier 4 comprises 172 localized service areas.

For the upcoming auctions, Tier 2 boundaries will apply.  Northern Ontario is considered one of the 14 large service areas.

There are a total of 7 frequency blocks available for each Tier 2 area. However, the incumbent carriers may only purchase one prime block per area while new entrants can purchase two prime blocks per area. For auction purchases, regional carriers such as Tbaytel, Vidéotron, and EastLink are considered new entrants and may bid on two prime blocks.  This means in theory, one incumbent vendor will be excluded from prime blocks in each Tier 2 area.  

There is nothing in the rules which prevent one or more of the incumbents developing a frequency or network sharing agreements as long as it is made public before the start of the auction. Rogers and Vidéotron have such an agreement now but they have not formally stated it will extend to the auction. None of the incumbents have joint LTE operating agreements, or at least any visible in the public domain.

Where it gets interesting is if we look at how these prime blocks are used in the US marketplace. AT&T uses the B and C blocks while Verizon uses C1 and C2 blocks. This usage becomes critical when Canadian carriers workout roaming deals with US carriers; the handsets need to match the frequencies. There is also the issue of roaming default hierarchy. While both AT&T and Verizon have LTE networks, it is not always available and connections default to older, and often slower, standards. AT&T phones default LTE to HSPA to GSM which is the standard used by Rogers and most of the Canadian new entrants. Verizon phones tend to default downward to their CDMA core network which is the standard used by Bell, Telus and Public.

Most smartphones sold in Canada default to GSM, even the ones sold by Bell. This is why Bell smartphones have limited network access between Sault Ste. Marie and Thunder Bay. While Verizon sells smartphones that can default to CDMA as well as HSPA, I am not aware of any that are sold in Canada.  My Samsung Galaxy SII defaults to AT&T or T-Mobile when in the US. Apple iPhones react likewise.

The bottom line is many observers feel that if Verizon follows through on the auction, they will go after the CI and C2 blocks which they are able to do under the two block rule in order to maintain compatibility with their US operations.

Tier 2 Areas

Northern Ontario Tier 2-09

 Technology Roll Out

The auction also has rules concerning roll out of advanced technology in rural areas. Incumbents and new entrants who either purchase or have access to two paired blocks (not necessarily prime blocks) are required to provide 700 MHz coverage within 5 or 7 years to cover 90% and 97% respectively of the area their HSPA coverage provide in 2012. 

In effect, this means the new entrants have minuscule urban areas to cover while the incumbents have to cover about 75% of the country. The regional carriers are somewhere in between.

The only pressure on the new incumbents is that they must provide coverage within 10 years to a range of 20% to 50% depending on the geographical area. For Northern Ontario it is 50%.  Unfortunately, this can be achieved without providing any new technology or 700 MHz coverage in rural areas and by simply upgrading urban networks.

That is not to say they will not; just that they do not have to.  However, using the 700 MHz band blocks on existing or co-shared towers in rural area would allow for greater coverage while repurposing the most expensive part of the necessary infrastructure, the towers and ancillary structures. On the flip side of the coin, lower frequencies like 700 MHz can handle les bandwidth than the higher frequencies so congestion may quickly become a problem.  In summary, higher frequencies equal more bandwidth but less coverage while lower frequencies equal more coverage but less bandwidth.

The auctions rules also state that all network operate must allow network roaming and share tower by all service providers. This means a new entrant like Verizon can advertise and offer full national coverage on one of the incumbent networks without spending any capital for network infrastructure. They will have to pay the infrastructure owners reasonable rates in accordance with CRTC and Industry Canada directives. There are some hardware challenges and technology issues that need to be resolved but these are not insurmountable.