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Greg MacDonaldGreg MacDonald

The wireless spectrum describes the band of radio frequencies used to carry voice and data for wireless communication devices, such as cellphones.

Most countries regulate and manage use of the spectrum, which is considered a public resource. In Canada, telecommunications companies receive licences to use certain frequencies through auctions run by Industry Canada.

But there is a limit to the radio frequencies available for use. It's a serious issue facing the telecommunications industry, and experts say if it's not addressed, the problem will lead to more dropped calls and spotty or slow Internet service. It may even hamper Canada's ability to remain competitive and innovative in business.

"The spectrum is coming under higher demand because wireless data usage is exploding," explains Greg MacDonald, analyst at Macquarie Securities. "We're not looking over the edge of the abyss just yet, but if we leave this much longer, we will be."

Mr. MacDonald joined Macquarie in 2011 to cover the Canadian telecom and media sectors. A highly-ranked analyst, he has more than 20 years' experience with both global and domestic firms. He has provided top-ranked research coverage through various cycles including upstart telecom companies through the tech bubble, as well as BCE through the largest proposed LBO in capital market history. He earned his MBA from Queen's University, Kingston.

So what can we expect once our wireless spectrum runs out? Or are companies worrying too much? Greg MacDonald joined us for a live chat to discuss the topic.

Niamh O'Doherty - Hello all, my name is Niamh O'Doherty and I'd like to welcome you all to our live chat with analyst Greg MacDonald. Please feel free to start submitting questions now.

12:54

Niamh O'Doherty - Just a quick proviso folks: Greg is a equity/investment analyst, and his area of expertise is how wireless companies make money and what the spectrum crunch implies for the next spectrum auction. So we'll steer clear of anything too highly technical for now.

12:57

Niamh O'Doherty - So Greg, perhaps you could give us a quick summary of the issue to start?

1:04

[Comment From Greg MacDonald]

Sure. Wireless companies are seeing unprecedented growth in data demand. All of this started with the iPhone and is being accelerated with Android phones being sold at lower and lower price points. Wireless spectrum is necessary to facilitate growth in wireless data - hence the carriers crying for more.

1:05

Niamh O'Doherty - And now onto the questions....

1:05

[Comment From DRJ ]

Is it critical for the incumbents to have access to all the 700MHz auction, or could they get by with a portion set aside for the new entrants?

1:07

[Comment From Greg MacDonald ]

Well, its kind of critical any serious carrier has 700 because the propogation characteristics are very good for data in particular with this are of the spectrum range.

1:08

[Comment From Mark ]

What do you think of Shaw's decision not to enter the cell phone market and instead build wireless hubs throughout BC?

1:08

[Comment From Greg MacDonald]

Propogation meaning, in building penetration capability and coverage capability - for those liek me who are not technically savy.

1:10

[Comment From Greg MacDonald]

My opinion, Shaw will enter mobile wireless at some point. They have announced a Wi-fi network build. Its important to understand that wi-fi can act as a "data offload" strategy in urban markets. Effectively another way of addressing the expected growth in data by taking traffic off the macro network and putting it on a micro network. Therefore, Shaw is building a future network component - likely because it believes there has been too much capacity built by the likes of Mobilicity, Wind, Public mobile

1:11

[Comment From ]

What are the alternatives to wireless and what companies are worth watching in this area ?

1:13

[Comment From Greg MacDonald]

alternatives to wireless - well, there are free wireless networks at starbucks (again wifi). Wireline is an alternative. Depends on how you want to consume info/entertainment. Do I understand your question correctly?

1:14

Niamh O'Doherty - Hmmm. While we wait for clarification on that one, here's another question...

1:14

[Comment From WYSIWYG2 ]

Greg, do you think it's in the best interest of a companies long term survival to be as anti-unlimited data plans as Telus currently is? I for one will leave when my contract expires and am already using Mobilicity because of the unlimited data. Do you think the incumbents will see a major exidus of customers because of it?

1:14

[Comment From Greg MacDonald]

Companies worth watching. Carriers are large companies by definition because it is a very capital intensive business. Technology companies can be interesting given this theme - I'm not as familiar with tech but think the arms dealers (Ericsson etc)

1:17

[Comment From Greg MacDonald]

Data caps are necessary for return on capital. I know everyone hates their wireless company but they have to make money or they won't be able to build these large networks. This is a very competitive time in the market so you as consumers have an excellent ability to get good products (both price and bandwidth). In my opinion, that opportunity won't last forever - there will be greater pricing rationality at some point and caps will likely be part of pricing plans long term.

1:18

[Comment From Mike ]

At one point in time, we had a dilemma where we were running out of IP addresses for network devices. This was resolved with the introduction of IPv6. Do you think this is a parallel example of a similar problem that engineers will ultimately find a way to resolve?

1:18

[Comment From Greg MacDonald]

Do I expect a major exodus from incumbents - no.

1:20

[Comment From Greg MacDonald]

Currently, there are no obvious ways to expand the network capacity of a MHz of spectrum beyond what the 4G (LTE) outlook implies. Possible? yes, but not in the current outlook.

1:20

[Comment From MF ]

Hi Greg. It is not clear to me how how the wireless spectrum being finite will impact certain wireless providers more than others. I guess that those providers with higher traffic/frequency will suffer first, but eventually everyone would be in the same boat?

1:21

[Comment From Greg MacDonald]

True, they will all ultimately face restrictions. But that is what consolidation is for. AT&T is trying to acquire T-Mobile partly for the spectrum value.

1:22

[Comment From free agent ]

Was there wisdom in the last spectrum auction, with the setting aside of portions of the spectrum for new entrants only? What are the early signs of that experiment? Is it fostering more competition?

1:22

[Comment From Greg MacDonald]

BTW, anyone who thinks wireless is a LT threat to wireline is on the wrong track for this reason.

1:24

[Comment From Greg MacDonald]

Set asides - to the extent that Wind, Mobilicity, and PM are in business because of set asides, they have served the purpose. Canada now has some of the lowest voice prices in the world as a result (contrary to OECD claims).

1:24

Niamh O'Doherty - and a reader's response to Mike's question (above)....

1:24

[Comment From WYSIWYG2 ]

@Mike IPv6 is a major change when it comes to cell phones. Right now the only phones capable of handling IPv6 are Windows 7 and the latest Android OS. iPhones still can't handle it

1:26

[Comment From VE5CMA ]

So what if we got strict about wireless spectrum hoarding, and forced spectrum auction winners to 'use it or lose it', within a set (tight) period of time?

1:26

[Comment From WYSIWYG2 ]

@Greg Please prove that statement. Because I can prove that the US has higher Data caps and faster speeds as well as charge less for their services. So how can you say we have the lowest prices in the world?

1:28

[Comment From Greg MacDonald]

There currently are build requirements. Enforcability could be greater but one must also consider other factors - such as access to capital - that can affect build-outs. There should be some give and take on this issue. But generally, I believe Industry Canada is in favour of use it or lose it.

1:29

[Comment From Greg MacDonald]

In response to WYSIWYG2 - I said lowest wireless "voice" prices. Don't worry, data will follow over time. What you need for low prices relative to usage is multiple carriers and we now have that.

1:29

[Comment From kram]

The issue in Canada with any wireless service provider is covering the vast expanses of rural and highway cost efficiently. If government forced incumbent providers to sell access to their networks at reasonable rates, would that make it easier for new entrants and lower prices?

1:31

[Comment From Greg MacDonald]

Kram, what you are talking about is socialism. I believe in free markets. it may take time but you are getting lower prices. If the government forced lower wholesale access prices, I would likely downgrade these stocks - their cost of capital would go up - and they would ultimately build less network capacity.

1:31

[Comment From Bob Loblaw ]

In your estimation, what kind of a timeframe are we looking at before this becomes an urgent issue?

1:34

[Comment From Greg MacDonald]

Studies from Ericsson suggest a hockey stick inflection on data demand around 2013. They also suggest that by 2020 carriers will have to build 6-10 micro sites for every macro site. Difficult to say and I don't want so suggest we will all have to curtail our usage ( or pay a dramatically higher price) at some point. Just that data-offload is a good investment thesis. Shaw is a smart company and their data offload strategy is a smart term strategy in my view.

1:35

[Comment From David Tait ]

Greg, do you the the current scarcity of spectrum will lead to M&A activity in the sector in the short to medium term?

1:36

[Comment From Greg MacDonald]

I want to comment on kram's response again. you can get unlimited voice and dat plus a $300 subsidy for $29/month right now. who can tell me that is not a very cheap price - who can say we don't have gut wrenching competition in this country?

1:37

[Comment From Greg MacDonald]

M&A - yes its a reasonable assumption that spectrum scarcity will lead to consolidation in the medium term. There are short term limitations, incumbent telcos are not allowed to acquire new entrant spectrum until after 2013.

1:38

[Comment From free agent ]

Good lord, "socialism"? We are trying to have a thoughtful conversation around telecommunications services that serve the customers. To think of this industry as a "free market" -- what with the extent of regulation, and the fact that the entire industry is based on a "public good" -- kinda misses the point of the need for balancing multiple interests. Greg, you seem to be hinting that there is a capital problem here (re: increasing capacity). Why not then advocate for a significant relaxing of foreign investment rules?

1:41

[Comment From Greg MacDonald]

in the interest of free markets, I would agree with opening the investment restrictions - and it is my view that these restrictions will be at least eased in the near term.

1:42

[Comment From WYSIWYG2 ]

Greg How do you see the fact that the incumbents are taking so many bites at the apple. I mean with Telus having Koodo, Rogers having chatr, and bell having it's own "cheap" phone system. Do you not think that that with that much money coming in they aren't making a profit? As to you're comment right now for for "unlimited Voice and data" who is that through? Because it's not any of the incumbents?

1:45

[Comment From Frau ]

Greg, how much of the 700 spectrum do you think service providers are going to go for? All of it? There supposed to be a substantial block set aside for public safety use.

1:45

[Comment From Greg MacDonald]

How much profit is too much? Incumbents are doing what they can to earn a return. Same as banks (which the public also seems to hate). Wind is currently offering unlimited voice and data for $29 and you can get a $300 subsidy with that price if you have a good credit rating. I'm not trying to be condescending - the competitive environment in Canad matches any in the world.

1:47

[Comment From Greg MacDonald]

Incumbents will bid for all that they can, subject to the auction price getting out of control. My sources say about 58MHz of 700 is up for auction. Recent European auctions suggest about $2/MHz/pop which works out to about $4 billion (or about $800m-$1b per 12MHz block).

1:48

Niamh O'Doherty - Okay folks, time for any last questions you might have....

1:50

[Comment From Frau ]

Do you see a lot of potential commercial activity for that part of 700 reserved for public safety. (i.e. the Motorola and the Harris's building public safety networks for Governments?

1:51

[Comment From Greg MacDonald]

One last comment from me. I see a lot of miss-information on the topic of telecom pricing and services. I've studied data (wireless and wireline) pricing globally and would say we have an excellent price/service ratio her in this market. Public safety - there could be some opportunities but I have to admit to not spending much time on the topic.

1:53

Niamh O'Doherty - So, Greg, what does the future look like? Should we be worried about the spectrum crunch or not?

1:56

[Comment From Greg MacDonald]

There does seem to be a spectrum crunch based on the data demand outlook - but remember we are at the steepest part of the S curve right now. My guess is that demand will be addressed in other ways (ie, data offload) and other parts of the spectrum range.

1:57

Niamh O'Doherty - Great. Thanks Greg - and thanks to all our readers, I'm sorry we couldn't get to all your comments.

1:57

[Comment From Greg MacDonald]

In the near term though, I think spectrum will increase in value.

1:57

Niamh O'Doherty - Feel free to continue the discussion in the comments section - seems to be a pretty hot topic!



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