FAIR IS FAIR, RIGHT? On Tuesday, Cartt.ca presented one side of the advanced wireless auction debate through an interview with Videotron CEO Robert Dépatie.
On Wednesday, Rogers Wireless president Rob Bruce (pictured below) sat down – along with RCI vice-president, regulatory, Ken Englehart – with Cartt.ca editor and publisher Greg O’Brien to swing back, so to speak, and talk about RCI’s reply comments to Industry Canada on the potential for new rules on this auction and what they hope will happen.
What follows is an edited transcript.
Greg O’Brien: Well, let’s start with today’s filing. What does it say differently, or what’s new in it compared to the initial comments.
Rob Bruce: I think we’ve just said exactly what we said from the beginning: We’re fully in favor of competition. We’ve always been in favor of competition and we fight that fight every day. So when it comes to competition, bring it on. In fact, we’ve added competitors to the market. You know we were the ones that unilaterally enabled Videotron to be able to participate in the wireless market in Quebec.
But at the end of the day, we just think the rules need to be fair, both for the auction and the outcomes post-auction. As a company, we’ve invested somewhere in the range of $8 billion to build a network, to produce a great customer experience, to deploy the latest technology and the latest service that we possibly could. And frankly why, at the 11th hour, after 19 years of missionary work with zero profitability when we’re finally starting to turn a profit should (companies that) actually are incredibly well-capitalized be subsidized by the government or by our shareholders to get into the wireless business?
GOB: And their arguments that you paid zero for the capacity originally are correct on an upfront basis, but over time you have paid license fees.
RB: That’s another great myth I didn’t touch on in my speech in Ottawa. Some like to say that we got spectrum free in a beauty contest. Well the reality is the government has changed how they charge for spectrum over time. You know today we pay a big up front price and smaller license fee.
In the old days you paid virtually nothing up front but you pay huge fees. So either way, whether you’re paying for it on an upfront basis or paying huge rental fees along the way, either way we’ve paid through the nose for our access to spectrum.
GOB: And there weren’t exactly a lot of contestants in that beauty contest either then.
Ken Englehart: It’s a completely different market. In ’85 you got 25 MHz but we had a license condition that required us to roll out to 23 cities in three years. So at the end of the first five year license period, we spent two-and-a-half billion in capital on the network, yet we were still EBITDA-negative. You know that wouldn’t have been much of an auction. If you had an auction in ’85, how much would people have paid for the right to lose $2.5 billion dollars?
Now the market has evolved to the point where it’s profitable and is a widespread consumer commodity and part of the reason why the government had a different pricing model 20 years ago was in the hope that people like us would create that market – which we now have.
GOB: And now that you’ve created it, is it fair to let all these other new guys in?
KE: I think it is. I think that’s why they have auctions is to let new guys in.
GOB: But as you said, it’s not fair to give them new rules.
RB: And the interesting thing about both of the declared large contestants (MTS Allstream and Quebecor Media) is that they both actually had interest in the wireless business that they sold off along the way.
So, they gave up hope, but now it now looks more lucrative and they’re saying "maybe we’ll get the taxpayers to subsidize us getting back in… It just doesn’t make sense… (but) they see two things. They see a slightly better profitability profile. And secondly I think some of them see the upside of: "hey maybe we’ll buy this spectrum, sit on it and roll it over when foreign ownership (rules are eliminated) and make a lot of money for our shareholders.
GOB: Do you feel your position has at all been weakened by what Telus had to say last week when they were trying to sell their bid for Bell that never happened – what they said about the wireless auction and what they’d be interested in?
RB: I think we need to be focused on what it is we’ve had to say which has been incredibly consistent. The rules of the auction and the rules that follow need to be fair. Telus has economic reasons, we’ve had economic reasons for the things that they’ve said publicly. I don’t think we should be confused by that. The reality is the rules of the auction need to be examined and the rules that follow need to be fair.
What kind of message does it send to people who want to invest in technology in Canada then when somebody makes a long run back, a 25 year bet on technology that takes 19 years before it actually delivers any pre-cash flow, that the government would fundamentally change the rules and want to subsidize, just as the potential of a payback actually occurs.
(H)onestly, I think set asides are bad enough because they’re subsidizing well-capitalized companies on the backs of taxpayers, but mandatory roaming is really subsidizing new competitors on the backs of our shareholders. It’s almost incomprehensible.
GOB: I’ve always thought that has parallels with the mandated line leasing where telcos have to lease their network to competitors with the goal that eventually new facilities would be built (by the competition). But those new facilities were never built, except by cable. There were never new telco facilities built as companies just kept on leasing these lines. I always thought there was kind of a potential parallel there with wireless (mandated roaming).
KE: You’re right. The argument there was that (line leasing) was mandated to facilitate the emergence of facilities based competition. (But) we have facilities based competition in wireless. We have it here. If somebody wants to build some more facilities, let them go ahead, but why should they use my network?
RB: And if you look across the OECD countries and many of the other European countries, it’s not uncommon to have three carriers. In fact, most of the countries only have two or three carriers, so the Canadian situation is not different from the situation that’s occurring around the world except for one thing. The Canadian geography is about a 100-fold larger than what most of the European countries are actually seeing today.
GOB: And we also don’t allow the Verizons and the AT&Ts of the world to come and sell here, but if you live in France, you can get a cell phone from companies in all different neighboring countries if you wish. With all this, how much thought have you put into the foreign ownership argument?
RB: The emergence of the foreign ownership is really a decision that is up to the government.
GOB: Because that’s been part of the Videotron argument too.
RB: We’ve said bring the competition on, we’ll take it in whatever form that it comes. The question with foreign ownership for me is what problem are we trying to solve? I’ve lost the thread of what it is we’re trying to solve. Are we trying to say that there are not enough competitors or we’re not big enough or our technology is not good enough, because it’s not obvious to me. What I see is in comparison to the U.S., where they’re probably six months ahead in the rollout of HSDPA. Do you know why? We’ve learned over time that we can’t actually buy devices as Canadians until a U.S. carrier signs up for it.
So there isn’t a device newly available until the U.S. actually makes a decision. So, we’re gated, effectively, by what happens in the U.S., then we’re typically five or six months behind. I don’t think that’s a crisis in terms of lagging technology.
And in terms of applications, frankly we’re ahead of many. We were the first in North America to launch video calling. We were way up there in terms of some of the things we did with television and satellite radio. So, again this foreign ownership thing, bring on more competition but I’m just not sure what problem we’re trying to solve.
GOB: One of Videotron’s key points is that if it’s going to be an open auction, well let’s make it an open auction. Let’s bring in everybody from around the world to bid on the spectrum, dropping the foreign ownership rules.
KE: I think they’re saying that because they know, that in a minority government situation, it’s impossible… I’m very leery of this argument that says we should have a set aside because we don’t have foreign ownership. It seems to me that you can’t fine tune markets that way.
RB: Honestly, I struggle with the problem. Are we suggesting that there is not the availability of capital to set up wireless networks in Canada? I would argue that there’s actually not suitable economics when we’re sitting at 60% penetration with three well established carriers providing services across the country.
GOB: Is an auction cap more palatable – if there were to be limits imposed on the auction, is a cap more palatable to both of you or is it not at all?
KE: We say in our brief, the thing that distorts the market most is mandatory roaming. The second-worst is set asides. And the least evil is an auction cap. We think all of them are unnecessary but we do rank them that way.
RB: And notice we’re saying an auction cap, not a spectrum cap.
GOB: What’s the difference?
RB: There’s a significant difference actually. We exist in a spectrum ecosystem and that’s not shaped necessarily by Rogers Wireless or what happens in Canada, it’s actually North American. For handsets and gear, we’ve actually got to be on the same frequencies as the U.S. or otherwise we lose all the economies of scale of being able to buy those same handsets.
So, a $50 swing on handsets for a wireless company, times four million handsets a year, is a completely non trivial addition to the bottom line. So, if we got shut out of getting spectrum that we felt we needed and we fell out of the ecosystem… they’d effectively be shutting us out of the ecosystem that we need to be a part of so that we can participate in the handsets, devices and gear.
KE: So, the spectrum cap is sort of forever… An auction cap… is that you can only by so much in this auction and then you can’t sell it for two years, which is different than a spectrum cap which is forever, you won’t have more than that…
GOB: Any thought to approach Videotron and say, "well here’s a better deal on your MVNO. You guys can offer Blackberrys, you guys can have this and that."
RB: They have a fantastic deal now.
GOB: Well, they told me it’s very expensive.
RB: Obviously these things are all bound by NDA (non-disclosure agreements) as Mr. Dépatie told you, but they have a terrific price. They’ve been very successful and we’re delighted with their success and I think part of that success is the great price that they see.
