Following Videotron’s acquisition of 700 MHz spectrum outside its current coverage area in Canada’s recent frequency auction, telecoms experts are wondering what the operator’s game plan is.
So far, the French Canadian operator has kept the cards…
Following Videotron’s acquisition of 700 MHz spectrum outside its current coverage area in Canada’s recent frequency auction, telecoms experts are wondering what the operator’s game plan is.
So far, the French Canadian operator has kept the cards close to its chest.
In February, directly after it had won the licences, its CEO Robert Depatie described the acquisition as opportunistic and added in a statement: “We now have a number of options available to us to maximize the value of our investment.”
Local experts consulted by TelecomFinance believe Videotron is unlikely to put the spectrum to use anytime soon.
Videotron, owned by conglomerate Quebecor Media, spent C$233m on a paired 5+5 MHz block in the upper 700 MHz band, taking advantage of the lack of competition for the fourth block on offer.
The first three blocks were bought up by the market leaders – Rogers, Bell Canada and Telus – who were restricted from bidding for more than that.
The licences give Videotron coverage beyond the Francophone region it operates in, and means it now has a footprint which spreads over 80% of the Canadian population.
Wind Mobile, backed by Russian telco VimpelCom, was considered the favourite to acquire the fourth block but its parent pulled out of the auction just before it started in January.
In its fourth quarter results published this week, VimpelCom announced a US$619m write-down of the company’s assets in Canada.
Bargain price
One equity analyst, who preferred to speak on background, commented that Wind’s exit from the process presented Videotron with an affordable path to acquire prime spectrum at a good price.
“It wasn’t a lot of capital for them and they certainly have the balance sheet to be opportunistic,” the analyst said.
George Addy, partner at Davies and a member of the law firm’s Technology, and Communications & Media group, said while the quadruple play-operator could now build out a national network, it would prove expensive; especially since the regional player had just made the outlay on the spectrum.
“There is time for Videotron to assess its options and see how the market shakes out,” Addy said.
He added that while there was a “use it or lose it rule” attached to the frequencies, it was manageable as Videotron would not have to meet its coverage commitments for 10 years.
Dvai Ghose, head of research at Canaccord Genuity, did not expect the Quebecois operator to become a national player any time soon.
“I don’t think Videotron has any interest in national expansion,” Ghose said, pointing to the fact that the telco had looked to sell some of its spectrum to Rogers last May for C$180m as part of a network sharing agreement.
He added that there was a lack of compatible voice devices for the “upper C” frequencies Videotron had bought and it may only be able to offer data services.
Verizon Communications controls the upper C band in the US and uses it for data, and its users’ handsets revert to its CDMA network for voice services. Manufacturers build handsets based on the requirements of big telcos such as Verizon, meaning Videotron could struggle to provide voice services with the spectrum.
Ghose said if Videotron was to build a network, it should wait a few years for voice over LTE technology to come in, and then it could build a data-only network and offer a full plethora of services.
The consensus amongst the experts was that the spectrum acquisition was an opportunistic move to increase its options, and an investment as well.
Ghose does not expect Videotron to do anything with the spectrum for the next two or three years. The telco could wait and see if the government relaxed its moratorium on allowing the three incumbent operators to acquire spectrum from smaller players, or if cheap roaming rules were introduced to encourage Videotron to build out the airwaves.
But any relaxation of the government’s stance appears far off. Addy said that the law governing spectrum transfers – specifically the Spectrum Transfer Licence Framework introduced last year – was unlikely to change unless there was a new administration.
“I don’t see any indication that the government will relax those rules at all. In fact, the minister has been quite emphatic that those rules will stay in place,” he said.
Spectrum win not game-changing
So far it appears that Videotron’s acquisition of the spectrum is not a game changer like Verizon entering the Canadian market would be.
The US giant was exploring the possibility last summer, but decided against acquiring an operator or taking part in the 700 MHz auction.
The analyst said that the cost of entry to the market for Verizon would be crucial, and that the cost would be relatively low now due to operators Wind and Mobilicity – distressed to differing extents – being up for sale, and the 700 MHz now owned by Videotron being relatively affordable, should Verizon look to buy it.
“It boils down to who in Verizon’s boardroom is going to present this as a viable strategy,” the analyst suggested. “They can certainly afford to do it, and they can take years and years to get their return from it.”
Ghose did not expect Verizon to change its mind on Canada any time soon. He argued that the time for Verizon to enter the market was last year, when it could have bought two nationwide blocks of prime spectrum in the auction. Since Videotron only acquired one block, he doubted that Verizon would partner with the operator or look to buy the spectrum and build it out alone.
The equity analyst concluded that it was difficult to see where the telco goes from here, but noted it was not in any rush.
Ghose said that nothing would happen for two or three years, and eventually Videotron might decide to sell the spectrum, likely to one of the incumbents.
