IT WOULD SEEM THAT THE all-hands on deck round of public pleading from our big wireless companies will not shake our meddlesome federal government from its wireless policy path. After all, there are no votes in it for Ottawa to alter course – and potentially big, big money in simply plowing ahead.
As everyone knows, the most recent Canadian spectrum auction in 2008 brought five new wireless companies to life in Wind Mobile, Public Mobile, Mobilicity, Videotron Wireless and EastLink Wireless. Regulatory intervention set aside some spectrum then which was purchased more cheaply than that which was bought by the incumbent players back in ’08 and the new companies have built businesses of varying success rates using it, as well as rules which let them roam on the already-built networks of Rogers, Telus and Bell. The 2008 auction brought in more than $4 billion to the federal coffers.
The proviso that came with the set aside was the spectrum could not be transferred to an incumbent carrier for five years – and since their launch the newcomers’ presence have caused the big three incumbents to respond and helped force wireless rates to come down for Canadians. Our federal government does not hesitate to take credit, and if they want to claim that as a victory, well, that’s politics. If they think Canadians will vote Conservative because of their wireless bills, history shows our politicians will chase those votes and do anything, no matter the cost.
With the five year moratorium coming to an end and some of the investors in struggling Wind, Public and Mobilicity are looking to get out and recoup some of the money they have spent by selling. Our interventionist government has instead stepped in to change the rules to say, in effect, “Sorry, no. We really don’t want the likes of Rogers, Telus or Bell buying that spectrum.” So, the pool of bidders for those distressed companies is now much smaller that it could or should be.
Enter Verizon, where the Globe and Mail first reported last month has placed a $700 million offer on the table for Wind (although Verizon executives have told analysts that their interest in Canada is just exploratory for now).
Verizon buying Wind and entering Canada would be fine if not for our half-measure regulations on foreign investment and the rules of the much-delayed 700 MHz spectrum auction. Any foreign company can buy a telecom firm with less than 10% market share, while the auction rules prevent the big Canadian incumbents from buying more than one of the four prime blocks of 700 MHz spectrum on auction – while allowing the smaller companies to buy two. Add all that together and we have a real problem. With just four blocks of spectrum that everyone wants, if Verizon Wireless really does buy Wind, a company with $115 billion in annual revenue and over 100 million subscribers will be treated as a small newcomer with access to twice the spectrum.
This could kill Videotron’s wireless business (unless it can come to network sharing agreement with a carrier akin to the network sharing deal Bell and Telus have). So, let’s say Verizon takes two blocks in Montreal and Rogers, Telus and/or Bell take the other two in a bidding war. Videotron is a big Quebec company but it is far smaller than any of our big three and absolutely puny compared to Verizon. It would have no 700 spectrum, the spectrum it absolutely needs to offer more video more cheaply in more places, to adequately compete with LTE and to offer the iPhone, finally.
“There is a problem with the regulatory framework applicable to the next auction because the current rules combined with the rules applicable to foreign ownership in the telecom industry are to the effect that nothing prevents Verizon Wireless from acquiring half of the prime spectrum blocks in each region of Canada and nothing would prevent Verizon from limiting its deployment to urban areas, leaving a large percentage of the Canadian population behind,” Serge Sasseville, senior vice-president of corporate and institutional affairs at Videotron’s parent, Québecor Media, told Cartt.ca. “There could be potential consequences so that four prime spectrum blocks per region would be shared by only three players.”
So much for the federal government’s idea for a quartet of carriers in every region.
“If the rules do not change, the first victims of that will be the original new entrants who do not have the same financial means as Verizon or the incumbent companies,” added Sasseville. Videotron has asked the federal government to make it so that one of the 700 MHz blocks can be purchased only by a Canadian-owned new entrant.
KIBOSHED
New Industry Minister James Moore released a statement Wednesday, however, effectively saying that nothing is going to change. That means the September 17th date to submit deposits and declare an intention to participate in the January auction is set. “Since 2008, our Government has introduced new policies to increase competition in our telecommunications industry. The result has been greater choices at lower prices for Canadians. In fact, our actions have driven down the average cost of wireless services by nearly 20%,” reads the statement.
“Our Government’s view is that Canadian families work hard for their money, and they want their government to make decisions that will help them keep more of it. Protecting consumers and increasing competition in the wireless market are priorities for Canadians and our Conservative Government.
“Our policy has been clear and remains unchanged: greater competition and liberalized investment has meant more choices at lower prices for Canadian families,” it continues. “Our Government’s telecommunications policy was not created overnight. It is the result of a vigorous consultation that started in 2008 and continues today. All players – industry, consumer groups and everyday Canadians – contributed to this policy.” (Ed note: The consultation started in 2007.)
“We are committed to ensuring the best possible outcomes for Canadian consumers. We want all regions of Canada to benefit from competitive market forces, which is why more progress must be made. We will continue to stay the course by ensuring Canadians benefit from a competitive telecommunications industry.”
And that gets to my cynical, Machiavellian crux of the matter. Phil Lind, Rogers Communications executive vice-chairman and no stranger to backroom political warfare in Ottawa, told media outlets last week that federal government officials have been directly courting Verizon to try and entice them into Canada. One wonders what the feds offered Verizon but let’s suppose the big U.S. firm does move north and does enter the auction. Let’s also agree that everyone in wireless believes that 700 MHz spectrum is an absolute “must-have”, because everyone does believe that. With such competition for just four blocks, auction prices would likely skyrocket to heights few believed were possible just a few months ago. If you must have something, then you’ll pay almost anything for it.
According to analysts, that could swell the government’s take on the auction to a figure north of $6 billion – which would surely put a huge dent in our country’s $18 billion-plus federal budget deficit. The trouble is it also removes a ton of cash from wireless companies’ customer service, research and development, job creation and career development budgets, for example.
The unknown for now, however, is how much of an opportunity Verizon feels Canada presents. If I was a Verizon executive though, one thing would surely weigh on me: If the federal government is willing to change rules it created because it feels like it, as it has with the 2008 spectrum transfer moratorium, how can Verizon trust Ottawa won’t change its mind on something else down the road?
