The Motley Fool

A Primer on Verizon, the Spectrum Auction, and the Future of the Canadian Telecoms

By Christine Conway

Verizon’s (NYSE: VZ) potential move into Canada has caused waves. The Big 3 telecoms have a lot of turf to protect. In case you’ve missed the situation, here is an overview of what’s been happening.

It isn’t every day that telecommunication competitors Bell (TSX: BCE), Telus (TSX:T), and Rogers (TSX: RCI) band together, launch a national campaign, and write the prime minister — but there’s a lot at stake. The Canadian wireless industry contributed $20.7 billion in direct GDP in 2011, of which $13.4 billion remained in Canada. It serves 27 million Canadian cell phone users; 99% of the population has access to wireless.

Verizon would be quite the competitor, with revenues and cash flows that far exceed Telus, Bell, and Rogers combined. While it’s hard to know what percentage of its resources it would direct to picking up Canadian business, should it choose to enter the fray, it has ample resources from which to draw. Here’s a comparison of the four players:

Company Market Cap Revenue at Dec. 31, 2012 3-Year Growth Cash at Dec. 2012
Verizon $142B $115.8B 2.43% $3,093M
Telus $20.2B $10.9B 4.26% $107M
Bell $32.3B $20.2B 4.43% $10M
Rogers $20.2B $12.5B 1.94% $213M

Source: GlobeInvestorGold as of Aug 12, 2013.

In January 2014, the government will be auctioning off a 700 MHz spectrum. The spectrum allows high-quality data and video transmission over large areas and is good for both rural and urban usage — and as such, is an attractive asset for any of the Big 3 telecoms to expand market share.

The spectrum is packaged into four parcels. Existing Canadian firms can bid on one parcel, while new, outside firms can bid on two. This rule was originally meant to foster additional competition — which would reduce prices and benefit consumers — but the prospect of foreign entrants, notably U.S. telecom powerhouse Verizon, threatens the dominance of the Big 3.

The application deadline to begin the bidding process was originally June 11, 2013, but was postponed to Sept. 17, 2013, so that the issues could be given more thought. The telecommunication industry is federally regulated, and in July 2013 the new Canadian Minister of Industry, James Moore, was appointed.

With the presence of a new Minister, it is possible that the date could be postponed again. Beyond the consumer aspect, the Ministry will also need to look at the impact on the economy.

According to a report prepared by Nordicity for the lobbying group Canadian Wireless Telecommunications Association (CWTA), “the financial benefit of 300 MHz of new spectrum in the U.S. is likely to exceed US$100 billion. When adjusted for differences in population, a rough estimate of the potential economic benefit of the release of additional spectrum in Canada would be CDN$33.33 million per MHz on a national basis.”

There’s huge economic impact related to keeping the business Canadian. According to the CWTA, the industry contributes total economic value of $50.2 billion and roughly 280,000 jobs to the Canadian economy. These jobs pay higher than the typical Canadian job, with an average wage of $65,000. The Nordicity report claimed that in 2011, 135,800 of those jobs were with the wireless operators. If an American firm were to enter the market, would at least some of those positions be lost to our neighbors to the south?

As they say, there’s more than one way to skin a cat. While the spectrum auction has been a large focus of discussion, both Wind Mobile and Mobilicity are for sale, which would provide another point of entry into the Canadian market.

Verizon’s preliminary $700 million bid for Wind Mobile has been the only bid thus far, and federal rules prevent Bell, Telus, or Rogers from placing a bid for either company until at least 2014. It was recently reported that Verizon has decided to hold off on its preliminary bid until after the spectrum auction.

Some have viewed this as Verizon wanting to test the waters at the auction to see how much spectrum it would have access to. The opposing view, though, is that with no other bidders, waiting may lower the price if the owners of Wind Mobile or Mobilicity need to sell. Either way, it makes the outcome of the upcoming auction that much more important.

The decisions reached regarding the spectrum auction, and the purchase of Wind Mobile and Mobilicity, will have large implications for the future of the industry. If Verizon can come in and use existing infrastructure, will it open the door to other competitors? If the Big 3 have to fight just to retain their existing market share, shareholders will need to have their eyes on the ball here.

The Motley Fool Canada has put together a special FREE report detailing “A Top Canadian Small Cap for 2013 — and Beyond.” To see the name of this stock, download your free copy of the report by clicking here.

Christine Conway does not own shares of any companies mentioned.

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