Feds need to keep their eye on the Telco prize

According to my morning newspaper, which itself is partially owned by Bell Canada (a Canadian Telco), “corporate Canada is now widely concerned about the government’s strategy for shaking up Canada’s wireless market.” The voice of “corporate Canada” is former Liberal Industry Minister John Manley, now the rep of the Canadian Council of Chief Executives; Mr. Manley is also director of Telus (T:TSX), another large Canadian Telco, which means he has a fiduciary obligation to the shareholders of one of the three firms that are now very concerned about the gory details of the Conservative government’s wireless strategy.

The Globe & Mail, whose partial owner Bell has found common cause with Mr. Manley’s Telus, reports that Mr. Manley (with his CCCE hat on) “rarely speak out on matters specific to one industry but feel in this case there are broader principles at stake.” What are those principles, you ask?

First, it seems that the Federal government “should not discriminate against Canadian companies in favour of large foreign operators.” Hard to argue with that, except that the presence of large foreign operators in the “new entrant” game is nothing new: Wind Mobile was originally backed by Egypt’s Orascom, and later wound up in the hands of VimpelCom, of Holland.

VimpelCom acquired full control of Wind Mobile earlier this year under the Federal government’s amended foreign Telecom investment rules. I didn’t hear a peep from CCCE when the Feds changed the rules a few months ago to allow the Dutch to be a bigger player in the Canadian wireless market. Indeed, firms such as Rogers said they favoured foreign wireless competition.

Mr. Manley is concerned that “there is no level playing field.” That’s true on many levels. Unlike Canada’s mining, technology, or oil and gas industries, for example, the Federal government essentially protects Canadian Telecom players from foreign takeovers. But that’s not the level playing field that Mr. Manley and the CCCE are complaining about. Their concern is that the Feds are about to auction off four blocks of wireless spectrum and the three incumbent wireless carriers are only allowed to acquire “one block apiece”, while a new entrant is allowed to acquire two of the four. Setting up a risk that one of Bell, Rogers or Telus will be skunked in the process.

On the one hand, the taxpayer is best served with the broadest auction dynamic. As Mr. Manley says: “An open, competitive auction that does not favour foreign operators would likely have the added benefit of increasing government revenues.” However, the Federal rules reserving spectrum for new entrants have been consistent for the past five years. New entrants have always had preferential treatment, which invariably meant that a reduced price was achieved for the public purse at each juncture. I don’t recall the CCCE complaining about these preferential rules at the time, particularly when Shaw and Videotron used their “new entrant” standing to buy and warehouse some of the new spectrum that the government put up for auction. In the end, these so-called “new entrants” (Shaw and Videotron) utilized the set-aside rules and eventually flipped the same spectrum to the incumbents for a profit; where was the CCCE to complain about the clear transfer of wealth from the taxpayer to the shareholders of Shaw and Videotron?

There has never been a “level playing field” as far as spectrum auctions are concerned, and yet the CCCE is only now coming to the defence of the taxpayer when the Bell or Telus goose is at risk.

The only point in this entire process that new Industry Minister James Moore needs to tweak surrounds the rights of new entrants (foreign or domestic) to piggyback on the existing wireless infrastructure during their roll-out period. The Feds had no problem with a foreign player acquiring a new entrant with less than 10% marketshare. I get that. The goal is to create more competition, and the government is right to keep their eye on that prize.

But those network piggyback rights need to fall away, no more than three years after any “newbie” grows beyond the 10% marketshare threshold. Letting Verizon enter the market via Wind and/or Mobilicity is consistent with the current rules. The moratorium on incumbents acquiring the new entrant spectrum hasn’t lapsed, and there’s no pressing public policy reason to waive that five year moratorium (which is due to end in early 2014). Allowing Verizon a lifetime’s free ride on our existing 4G network wouldn’t be fair, either. There are plenty of Canadian telecom gear manufacturers who’d love to sell them some equipment. The only question is one of timing. In Verizon refuses to ever build out its own Canadian network, then they can be fairly accused of being carpetbaggers. But to treat them the same as VimpelCom or Orascom while they are still building their Canadian subscriber base makes sense, and is consistent with the spirit of the current new entrant rules. And the process of the past five years.

The editorial board of the Globe and Mail called today for a delay to all of this, which could mean that the five year ban on incumbents buying the new entrant spectrum would end before Ottawa had settled on its Verizon strategy. It was this very five year moratorium that prevented the Telus acquisition of Mobilicity’s spectrum a few weeks ago, setting up Verizon as the only game in town for the next six months.

The government should stick to its guns, with the one tweak. If the CCCE is going to step out from the shadows so rarely, the least they could do is choose a topic where their arguments hang together.

MRM