Videotron won its 700 MHz spectrum. Now what?

6 possible courses of action

Videotron store

After months of will-they, won’t-they, Videotron has indeed pulled the trigger on acquiring wireless spectrum licenses for much of the rest of Canada. The Montreal-based cable company has emerged as perhaps the biggest winner of the 700 MHz auction, with licenses in its home province of Quebec but also Ontario, Alberta and British Columbia. And so begins a new game of will-they, won’t-they.

As several observers note in my analysis of what the auction results mean for consumers, there’s no guarantee that Videotron’s parent Quebecor will in fact roll out service. As the company itself said in a release on Wednesday night, getting the licenses means it has “several options.” What are those possibilities? There are at least five, plus one I’m really hoping for:

1. Do nothing

At $233 million, Quebecor got the licenses at a relative steal thanks to having few competitors in the auction. With new carriers Mobilicity in creditor protection and Wind pulling out at the last minute because of a lack of funding from its Russia-based backer Vimpelcom, the path was clear for the Montreal company to swoop in and grab licenses on the cheap. Its only potential competitors were regional wireless providers such as Eastlink, MTS and Sasktel, plus Vancouver-based internet provider Novus and Feenix, a Toronto-based operation started by entrepreneur Mobilicity founder John Bitove. However, none of the regional players had shown much interest in expanding out of their home territories while both Novus and Feenix were relative minnows compared to deep-pocketed Quebecor.

At such a bargain basement price, there’s no real hurry for the company to roll out service and thereby seek a return on investment. The auction’s use-it-or-lose-it rules are relatively lax in this respect too – they require licensees to cover between 20 and 50 per cent of the population, depending on the region, within 10 years.

Quebecor may want to sit back and wait for someone to consolidate Wind and Mobilicity – whether it’s the two firms themselves joining up, U.S. giant Verizon, private equity or some other entity other than Bell, Rogers or Telus, someone is going to snap up the two firms. The only questions are when and for how much?

Once that happens, Quebecor could pop in and resell its spectrum to the lucky consolidator, at a tidy profit of course.

If I were a betting man, I’d say this course of action is unlikely. In a press conference last night and in a subsequent interview, Industry Minister James Moore told me the government is certainly expecting Videotron to bring service to Ontario, Alberta and B.C. “The money is non-refundable and that spectrum cannot be transferred to the Big Three. They’ve got to make a go of it,” he said.

It would be foolish for Quebecor to do nothing in the face of such expectations, especially when the government is hell-bent on generating more wireless competition.

2. Build out its own network

At the other end of the spectrum—no pun intended—Videotron could simply go for broke (again no pun intended) and start building its western expansion. Back when Verizon was thinking about getting into Canada, Bay Street analysts estimated a nationwide network would cost at least $1 billion to build. Videotron spent nearly that on its network in Quebec alone, so the guess might not be too far off, if not more.

At the very least, the company will certainly wait until new domestic roaming legislation and/or regulations have been put in place. The government has promised such rules, reiterated in the federal budget last week, which will make it easier and cheaper for competing wireless providers to get decent roaming rates on the Big Three networks. What that means in the real world is that Videotron customers won’t see big charges when they leave the company’s own service areas.

Even then, this option on its own looks unlikely. Starting from scratch against three incredibly well-entrenched incumbents is hard if not foolish—just ask Wind and Mobilicity.

Videotron would also face a bit of a technical problem in that it might be tricky to offer actual voice service. The company would presumably build an LTE network (it’s hard to imagine why it wouldn’t), but voice doesn’t actually work over LTE just yet. It’s coming, but estimates don’t see it happening till 2015. If Videotron really wanted to rush into offering service, it could conceivably provide customers with voice-like apps that instead use the data network—think Skype—but that seems unlikely when a proper answer isn’t too far away.

3. Buy Mobilicity

If it were possible to wager on Canadian wireless transactions in Vegas, this would be the surest bet going. The two companies have apparently been talking and if the reality hasn’t set in on Mobilicity yet—that it has no other options—then it probably never will. Telus has tried to acquire the small provider on two occasions but was denied both times by the government, meaning there’s zero chance the company can sell out for relative big bucks to an incumbent.

Quebecor now has all kinds of leverage to get the company much like its spectrum: for cheap. While Telus had offered around $380 million for Mobilicity, its 190,000-ish customers and its spectrum, Quebecor’s $233-million expenditure on considerably better quality spectrum puts the smaller company’s overall value into a new perspective.

Buying Mobilicity would give Videotron a running start in Toronto, Vancouver, Edmonton, Calgary and Ottawa, complete with customers, existing network and cell tower arrangements. It would also get around that pesky voice service problem, since that could be offered over Mobilicity’s AWS spectrum.

4. Buy Wind

There have been no indications that Videotron and Wind have been talking about an acquisition, but that doesn’t mean it couldn’t still happen. However, with 630,000-ish customers and better brand recognition, Wind is intrinsically more valuable than Mobilicity and will therefore be wanting more money. Strategically, it makes more sense for Videotron to take the smaller company out first, mainly because it would cost less, but also because it would really put Wind in a bind.

If Quebecor buys Mobilicity, it’ll be a clear signal that the company is indeed going to expand westward rather than sit on its asset purchases. In that case, Videotron will soon be competing with Wind, as well as the Big Three, which will eventually turn into a not-very-fair competition since the cable company has relatively deep pockets and—more importantly—700 MHz spectrum.

Time is not on Wind’s side, since that lack of spectrum and LTE means its phone offerings are going to look increasingly dated with each passing month. In a war of attrition with Videotron, it will surely lose. It’s a reality the company is facing regardless, but Videotron’s expansion—if it happens—will only ratchet up the pressure.

If Videotron buys Mobilicity, I’d expect Vimpelcom to also sell Wind to the cable company shortly thereafter. At least it should, since Wind would get less valuable with every passing day.

5. Partner up

The other possibility is that Videotron decides there’s strength in numbers, so it partners up with other companies. This could take many forms, including some sort of network-sharing agreement with another carrier(s), such as Wind, the other regional companies or, most likely, Rogers. With Telus and Bell sharing a network and thus defraying their own network costs, Rogers has been looking for a dance partner to do the same, and indeed the two cable companies have already agreed to do just that in Quebec.

Working with Rogers could also be the least antagonistic way of Videotron joining the wireless club – while its Ontario-based rival may begrudgingly give up some of its market, there is the old saying about keeping your enemies closer. A quid pro quo could emerge where Rogers gives up some of the market in exchange for Videotron not rocking the boat too much with lower prices.

Videotron also doesn’t want to risk Rogers retaliating by doing something foolish, like say, launching TV and internet service in Quebec. It therefore has a lot of incentive to play nice, which is another way of saying that regulators, competition watchdogs and government have plenty of reasons to be wary of any such partnerships.

6. Change its name

If the company does come west, I for one hope it does so under a different brand. Videotron sounds like some sort of 1980s science-fiction robot monster.