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New wireless providers are not created equal

09 Mar

If you’re Canadian and into things like spectrum auctions – and if you are, I feel sorry for you (I’m fairly ashamed of myself for caring) – you’ve probably been pulling your hair out over the past year or so. It’s been one long, drawn-out process of trying to guess what the government is going to do, and when. Many observers, myself included, have thrown their hands up in surrender, resigned to the fact that it’ll happen when it happens, if it ever does.

The frustration is understandable. Former industry minister Tony Clement announced that he would launch a consultation on the auction way back in Nov. 2010, with an eye to actually holding the auction by 2012. Since then, it’s been a series of false starts, near misses and delays.

But on sober second thought, it is understandable why the government is hemming and hawing over how it wants to handle the next auction, since there are two thorny issues at the core of this upcoming sale that must be dealt with – foreign ownership rules and a set-aside for new entrants.

The foreign ownership issue, which goes back even further than the spectrum auction problem, seems to be the easier one to handle.

As it stands, Canadian law prevents majority foreign ownership of any domestic telecom company that owns infrastructure. The government has held repeated consultations and expert panels that all suggested several courses of action, the smartest of which would be the immediate lifting of such restrictions on entities with less than 10% market share, followed by a similar loosening a few years down the road on all such companies, regardless of size.

The issue has been complicated over the past few years with large telecom providers buying broadcasters. With no governmental or public appetite for foreign ownership of those broadcasters, and with a different set of laws governing them, the acquisitions have created something of an entanglement problem: How does a foreign company buy a domestic telecom company if the acquiree is also a broadcaster?

I’ve always thought it should be easier than that – foreign ownership of broadcasters should be allowed too. Broadcasters currently follow some fairly simple rules, where they must air a certain percentage of Canadian content during specific times of the day, and they must contribute revenue to funds that help create that programming. Failure to comply jeopardizes the renewal of its broadcast license. There isn’t any reason why foreign companies couldn’t be made to follow the same rules.

Nevertheless, even if the broadcast rules are off limits, the entanglement issue would only affect the big four: Bell, Rogers, Shaw and Quebecor. There are still many telecom companies that could benefit from foreign investment, from bigger players such as MTS Allstream and Telus to smaller ones such as Wind Mobile and even Teksavvy. (Correction: The Broadcast Act also applies to cable companies and IPTV providers such as MTS and Telus, which does further complicate the entanglement for them, albeit to a lesser extent.)

It’s the set-aside issue, however, that is likely causing the government more of a headache. After intense lobbying from a host of parties, the 2008 spectrum auction featured special rules that reserved 40% of the spectrum for so-called new entrants, or bidders who did not yet have any airwaves. For a government wanting more competition and lower prices, there were two sets of results, one good, one bad.

On the plus side, new carriers Wind, Mobilicity and Public Mobile sprung up to offer lower-priced services in major cities. These new players have helped push prices down overall in these places.

On the down side, existing companies that bought spectrum under the set-aside regime – particularly Calgary-based Shaw and Halifax-based Eastlink – simply parked and sat on their new assets. Shaw, after much consideration, said it was too expensive to build out a network while Eastlink promised to have service up and running this year, although it hasn’t happened yet.

Somewhere in the middle is Videotron, whose parent Quebecor heavily lobbied the government in 2007 for the set-aside rules. The well-financed cable provider handily outbid other newcomers in Quebec and shut them out of the province (with the exception of Public, which bought a block of spectrum nobody else wanted) and did indeed launch service. The problem is, Quebecers are still grumbling that Videotron’s prices aren’t much better than the those of the incumbents. Worse still, the spectrum the newcomers bought in 2008 is limited in its scope, so the phones they’re offering aren’t as good as the bigger players.

So, the government is faced with the reality that not all new wireless companies are created equal. While all the potential newcomers lobbied on the basis that they were the only hope for bringing down Canada’s high wireless prices, not all of them did. On the one hand, the truly new companies did what they said they would do, but the bigger established companies either didn’t launch services or they did, but without much of a deal.

This second group is now messing things up for the first group this time around. The second group effectively got what the incumbents said they would – a huge, unnecessary discount on their spectrum.

It’s understandable, then, if the government is feeling a little snookered and hesitant to make the same mistake again. Strangely, this doesn’t appear to have occurred to some – Shaw, amazingly, is once again lobbying for a set-aside in the upcoming auction, according to the Wire Report.

The next auction needs to not only ensure all licenses are meaningfully used, the government also has to prevent the “old” new entrants (a.k.a. cable companies) from stomping on the truly new entrants in the event of a set-aside. There are a host of ways to do this, such as somehow excluding large cable companies from that set-aside or perhaps going with spectrum caps, as Telus is suggesting, but then all sorts of fairness issues come up. The biggest problem there is potentially organizing the auction based on how deep the bidders’ pockets are – could there be three categories of bidders: lower class, middle class and upper class?

The government is thus stuck between the veritable rock and a hard place. How does it create an auction framework that ensures more competition and lower prices, yet avoid abuses and egregious unfairness? It may be an impossible task.

Once again, however, the answer seems to lie in the first issue above: foreign ownership. Had the government cleared that up years ago when it should have (especially during the Wind Mobile debacle), this wouldn’t be an issue since all players would now have access to the funds they needed and the auction could proceed like all such sales ought to: may the best man win.

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3 Comments

Posted by on March 9, 2012 in government, telecommunications

 

3 responses to “New wireless providers are not created equal

  1. Hub

    March 9, 2012 at 11:54 am

    Excellent mention about Videotron and their grab on Quebec. Also Shaw demonstrate that their should be something against spectrum hoarding, ie they are forced to relinquish it if they don’t use.

     
  2. Marc Venot

    March 9, 2012 at 4:15 pm

    The (large) telecom companies, with their fat margins, are a cartel that have a huge lobbying power, even if sometimes they are not able to swallow all that provide exposure (for example BC place when a political decision trump it).
    Until this question become a real deterrent to invest in Canada why a government would let this super cash cow be own by foreign interests?

     
  3. Ben

    March 10, 2012 at 2:21 pm

    Hey Peter, do you know if anyone’s speculating on the likelihood that there will be some reservation of spectrum for unlicensed use? I know in the States this happened. But all I’ve heard so far viz. the Canadian 700MHz auction has been related to the “Public Safety” set aside (emergency services fire departments police etc.)

     
 
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