Even with all the technological and regulatory changes roiling the telecommunications industry, Canada’s Big Three–BCE Inc. (TSX: BCE, NYSE: BCE), Telus Corp. (TSX: T, NYSE: TU) and Rogers Communications Inc. (TSX: RCI/B, NYSE: RCI)–boast seemingly insurmountable moats.

And as the country’s recent wireless auctions have shown, they’re willing to spend to ensure their continued dominance. Although Canada’s ruling Conservative Party has attempted to foster greater competition by repeatedly changing the rules in favor of new market entrants, the Big Three still hold a commanding share of more than 90% of the country’s wireless market.

And the biggest threat to their market share seems to have passed. The U.S. Big Two–Verizon Communications Inc. (NYSE: VZ) and AT&T Inc. (NYSE: T)–enticed by Ottawa’s relaxation of rules regarding foreign ownership of domestic telcos, strongly considered entering the Canadian market, but have opted to pass on it for now.

Their initial forays into Canada would have been made via acquisitions of tiny, upstart Canadian mobile operators, particularly Wind Mobile Corp. and Mobilicity.

Verizon went so far as to make preliminary bids for both firms in 2013, but chose to table its offers as the company geared up for its $130 billion deal to buy the 45% stake in Verizon Wireless it didn’t already own. For its part, AT&T reportedly looked at both companies in detail, but decided that the Canadian market simply isn’t big enough for a fourth major carrier.

Meanwhile, Canada’s wireless build-out has lagged other advanced countries, resulting in market penetration that’s at least a few years behind many of its developed-world peers.

Canada’s wireless market penetration rate hit 83% in 2013, up from 78% three years earlier, according to Statistics Canada. By contrast, wireless market penetration in other first-world countries is in the triple digits, including the U.S., which climbed to 104% last year.

Pointing out this disparity is not intended as a slight against Canada. Instead, it means that investors who were late to the wireless revolution in the U.S. still have an opportunity to get in on some of that incredible growth in a stable, first-world country whose wireless market is still maturing.

This year, by its own account, the Canadian government is auctioning off an unprecedented amount of wireless spectrum. As of this month, in fact, Industry Canada, the government agency overseeing this process, says that the amount of spectrum available to provide mobile services to Canadians has jumped 60% since early last year.

This invisible infrastructure is absolutely critical to sustaining the rampant growth in use of smartphones and other data-intensive portable devices that use the airwaves to communicate.

And the biggest spectrum hog is mobile video. Indeed, according to The Globe and Mail, Canada’s mobile data traffic is projected to be seven times higher in 2019 than it was in 2014, with 207 million gigabytes of data transferred over the airwaves, the equivalent of streaming 52 million DVDs.  

But the amount of spectrum is ultimately finite. Consequently, government regulators apportion it via auction by granting exclusive licenses for segments of band to individual carriers. These exclusive licenses help mitigate interference between competing companies’ networks.

Up for Bid

When it comes to the wireless wars, the incumbent telcos that win the most spectrum at auction will preserve their entrenched positions for the long term. Indeed, as one Telus executive once memorably put it in an interview with the CBC, “Spectrum is the lifeblood of our industry.”

In the U.S., for instance, there are concerns that we’re running out of spectrum. As a result, the U.S. Federal Communications Commission’s recent auction for so-called AWS-3 spectrum, which was the country’s first major spectrum auction since 2008, saw companies such as Verizon and AT&T pay massive premiums to expand their reach or fill holes in their coverage. While analysts projected the auction would raise between $15 billion and $20 billion, the final bids totaled nearly $45 billion.   

In Canada, the Big Three held 98% of the available mobile spectrum in 2006, but government policy has been steadily chipping away at the number ever since.

In fact, after this year’s final auction concludes, Ottawa expects the Big Three’s share of nationwide wireless spectrum will fall to 75%, with the balance divvied up among nine or more smaller competitors.

So far this year, the Canadian government has conducted two major spectrum auctions. In March, the auction for AWS-3 spectrum, which affords the ability to transmit large amounts of data, showed the extent to which the government is willing give smaller players an edge with significant set-asides and steep discounts.

Three small wireless carriers were permitted to gobble up a majority of the spectrum at auction–about 60%–for just under CAD100 million, boosting their spectrum coverage by an average of 107%. By contrast, Telus and BCE spent a little more than CAD2 billion altogether, increasing their spectrum coverage by 16% and 4%, respectively.

The auction for the 2500 megahertz band, ideal for coverage in rural areas, concluded last week, with results announced on Tuesday. This time around, there were no set-asides, though the government capped the amount of spectrum any one player can own in a particular service area.

Among the Big Three, Telus was once again the big winner, shelling out nearly CAD479 million, upping its wireless coverage by another 37%.

Meanwhile, BCE and Rogers paid CAD30 million and CAD24 million for increases of 5% and 4%, respectively. However, it’s important to note that both were precluded from spending more since they were already at or above the aforementioned cap in most service areas.

Will the Canadian government prevail in its bid to dramatically reduce the Big Three’s dominance? We wouldn’t bet against the Big Three. After all, they have the power of incumbency, along with the scale and the financial strength to help maintain the status quo.

And while spectrum is the lifeblood of the wireless industry, acquiring swaths of spectrum hasn’t always translated into success for the smaller players, which must then invest in capital-intensive network infrastructure while also stealing customers away from the Big Three.

As analysts with Canaccord Genuity noted, even with a projected 25% of the wireless spectrum after the last round of auctions wraps later this year, these would-be usurpers of the Big Three currently have just 6% of the customers.

The next major hurdle for the Big Three is the mass expiration of three-year contracts later this summer. They’re already stepping up their customer-retention game by actively courting their most high-value customers well in advance of the deadline.

As The Globe and Mail observes, BCE and Telus, our two favorite Canadian telcos, have lower churn rates compared to Rogers and are, therefore, better positioned to get through this process relatively unscathed.