Has anybody seen Santa Claus? Because it sure feels like Christmas. The federal government came out of nowhere on Wednesday to announce that it is finally going to open up Canada’s telecommunications market to foreign investors. As an added bonus, Industry Minister Christian Paradis also announced the framework for the next wireless spectrum auction, to be held in the first half of 2013. Anybody who cares about telecom has been waiting on both decisions… well, seemingly forever.
On the foreign ownership front, the government is going to remove restrictions on companies that have less than 10% of the overall telecom market (some news outlets reported this as just wireless, but according to Industry Canada, it’s the entire market). The current law restricts foreign entities to 46.7% ownership, which has thus far been a small enough stake to discourage most outsiders from investing their money in Canada.
Removing the restrictions will mean two things: small and smallish players such as Wind Mobile, Mobilicity, Public Mobile and MTS Allstream can now attract bigger investors or buyers, and also that the runway is clear for new startups. An international giant such as Vodafone could, for example, come in and buy Mobilicity et al or launch an entirely new operation.
The foreign ownership barrier has been the biggest impediment to new competition on every telecommunications front, so tearing it down – while not quite akin to the Berlin Wall – is great news for Canadians.
Going with the 10% option was also a prudent move in that it largely avoids the giant elephant in the room, which is broadcasting. The threshold excludes the largest players – Bell, Rogers, Telus and Shaw – from foreign ownership. Most of those companies own broadcasters, which are governed by the separate Broadcasting Act, so an attempted takeover by a foreign entity could become messy. The 10% rule opens the door for competition where it is needed most, but also buys the government time to sort out that problem before it removes all restrictions, which will probably happen at some point in the future.
Just over a year ago, I mused about what an open telecom market – based on a total relaxation of foreign ownership restrictions – might look like, and some of those ideas still hold up. While new wireless companies such as Wind and Mobilicity are now potentially attractive takeover targets (or likely to merge), it’s important to remember that foreign companies can also conceivably come in and either buy wired internet providers such as Teksavvy and MTS, or build their own networks. AT&T, for one, has many enterprise customers in Canada and has previously expressed interest in being able to build its own network.
Some might wonder why it’s a good thing that the likes of Wind can now be bought by foreign entities. Simply put, it’s better than the alternative – the smaller companies are having a hell of a time competing against the big guys and, under the status quo, would run out of money sooner or later. Having them merge and/or bought up by a better-resourced entity would at least ensure their longer-term survival.
Over on the spectrum auction side of the announcement, the government has opted to go with caps rather than the set-aside that Wind and other newcomers were asking for. The caps will work as a quasi-set-aside, the government said, in that new companies will still have the opportunity to bid on prime licenses without having to go up against the big boys.
The auction framework is a lovely piece of engineering-ese that I won’t even begin to try to translate – if you want to check it out, go for it – which is why the new entrants are split on it. Wind chairman Anthony Lacavera says the caps are “a total disaster” while Mobilicity president Stewart Lyons seems to be okay with them. In the end, though, if caps are a bad idea I haven’t heard anyone put forward a good explanation as to why.
The question now is how quickly can the government change the foreign ownership rules. It’ll need to be done relatively soon so that any potential foreign investors can shore up their plans for next year’s auction.
For those of us who follow this market, Wednesday’s double announcement was about as exciting as they get. Assuming the government follows through on its plans, the telecom market is in for a major shake-up and is going to look very different by the end of 2013.
It’s also worth noting that in the span of a single week, the government has stuck up for consumers on two big fronts. First, as I wrote on Tuesday, the feds resisted caving in to new demands from entertainment industry lobbyists on copyright reform legislation. And then, all this telecom stuff, which runs counter to just about everything the big incumbents wanted and lobbied for.
It’s trendy to bash the government as being pro-big business, but in the past week that simply hasn’t been the case.