Spectrum auction horse race update

Only the strong survive. That’s the theme of the spectrum auction as the May 27 Canadian final bid date comes ever closer.

Notable players dropped out of the race Monday afternoon to buy airwaves from the government and ultimately offer cell phone service to Canadians or showed lesser interest.

Niagara Networks, the company that sent an $880-million letter of credit to Industry Canada mere weeks ago, withdrew without comment. Obviously, it’s backers didn’t come through or perhaps Doug Evashkow, the president of Niagara, simply wanted to have his 15 minutes of fame.

The Ghermezian brothers, the founders of the West Edmonton Mall, contributed a mere $11-million. That’s a sharp contrast to the first round of bidding earlier this month when they submitted a $144-million letter of credit.

There are now 27 players that can potentially buy spectrum from Industry Canada, which gives Canadians a better idea as to what companies will become the next generation of domestic cell phone service providers.

So why are potential cell phone service providers dropping out of the race almost as soon as they enter it? The wireless divisions of Bell, Telus and Rogers contribute most of each company’s top-line growth after all; seems like a lucrative opportunity.

The most likely reason, in the case of Niagara was that its presumed foreign backers came to their senses and realized what a poor business case chasing after a relatively small group of tech laggards is in a small country like Canada. These are the remaining 35%+ of Canadians that don’t own a cell phone. Traditionally, these are senior citizens, the poor, kids and others that generally don’t get ARPU-oriented telco executives excited.

It’s possible for new entrants alike to fight for the business the wireless incumbents – Bell, Rogers and Telus – own but that’s a fool’s game. That’s especially true if you’re a small company with no other levers to pull in the market unlike Videotron, Shaw or MTS Allstream.

Some independent parties, such as Data & Audio-Visual Enterprises Wireless, the Paul Allen-backed venture, could very well buy Canadian spectrum. But over the long term, it’s a lot tougher for a company that provides only cell phone service to survive in a market that almost requires providers to offer the quadruple play of services.

All these factors add up to a rather boring spectrum auction. Expect other interested parties to drop out of the race as the process continues through to the end of May and beyond.

Ultimately, Canadians will end up with a smattering of independents and the cablecos, such as Videotron, competing against the incumbents for the business of remaining cell phone less citizens.