Canada's new spectrum transfer rules could open door for Verizon

New Canadian rules on spectrum license transfers that would make it tougher for large wireless carriers there to buy airwaves could open the door for Verizon Communications (NYSE:VZ) to enter the market.

On Friday Canada's government, under the auspices of the Minister of Industry Christian Paradis, released new rules that will require all spectrum transfer requests to be reviewed. Further, "those that would result in undue spectrum concentration--and therefore diminish competition--will not be permitted," the government said. "Decisions on transfer requests will be made on a case-by-case basis and will be issued publicly to increase transparency."

The government has made it clear it will use whatever policies it can to give Canada's three largest carriers some more competition. "The Harper Government is committed to promoting at least four wireless providers in every region of the country to support greater competition in the market," Paradis said in a statement. "We are working to provide Canadian families with access to the latest technology at better prices."

The new rules come amid reports that Verizon made an initial offer of somewhere between $600 million and $800 million to buy fledgling Canadian wireless carrier Wind Mobile. Reports have also indicated that Verizon is in talks with rival wireless startup Mobilicity over a possible deal, and that Verizon is considering whether to participate in a Canadian auction of 700 MHz spectrum licenses. Verizon has declined to comment on the reports. 

Telus, BCE's Bell Mobility and Rogers Communications dominate 90 percent of the market in Canada, and the 2008 AWS spectrum auction did little so break their hold on the market. Telus tried to buy Mobilicity earlier this year for around $363 million but the deal was blocked by the government.

Rogers and Telus urged the government to let them put unused spectrum to work, according to Reuters. However, Bell Mobility said the new rules would leave the door open to Verizon if it acquired a smaller Canadian carrier with tiny market share, since the rules only apply to Canadian spectrum.

"Industry Canada needs to focus on a massive loophole in the spectrum auction framework," BCE spokesman Mark Langton said, according to the Canadian Press. "As it stands, major international wireless companies like Verizon can take advantage of rules intended for small start-ups and unfairly buy twice as much spectrum as Canadian companies at a fraction of the price."

Verizon's entry into the market, and potential participation in the 700 MHz auction could put pressure on the incumbents, according to Dawood Khan, principal at Red Mobile Consulting. Verizon has used 700 MHz Upper C Block spectrum for its LTE network in the United States. "Verizon's entry into the market could mean real competition in the bidding for the 700 MHz spectrum, especially in the Upper C block, potentially giving Bell and Telus a run for their money," he wrote in a research note.

Khan also wrote that when one adds in "Verizon's buying power for devices and infrastructure, its access to a much larger ecosystem of partners for innovative consumer and enterprise services, and one starts to understand the degree of unprecedented pressure the Canadian incumbents may face. This should encourage Canadian incumbents to invest in newer technologies sooner and bring innovative services to market--something they tend to traditionally lag the U.S. carriers in."

However, the incumbents dwarf both Wind and Mobilicity in terms of subscribers, which would mean a hard slog for Verizon if it entered the market. "Therefore, to be successful, Verizon will have to do more than investing in the latest technology and leverage their economies of scale," Khan wrote. "Verizon will have to modify the strategy adopted by the new entrants. It will have to significantly expand the geographic footprint to a near-national network, and aggressively target the postpaid, higher value client base of the incumbents."

"This will result in downward price pressure on monthly rates charged to consumers, but in a manner much more meaningful than earlier," Khan added. "This time, consumers have the potential to get better rates, and also quicker access to innovative services and a larger selection of devices."

For more:
- see this release
- see this Reuters article
- see this Globe and Mail article
- see this Canadian Press article

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