Telco caterwauling sounds hollow

Canada’s Newspaper Publishers are getting a pleasant summer surprise, with the appearance of full page advocacy ads attempting to arose suspicion in the minds of voters about the Federal government’s approach to the wireless industry. The timing of the ads, and the caterwauling message, comes across as either hollow or transparent, depending on one’s penchant for generosity.

How quickly they forget; the Federal government’s entire strategy has been geared to create an environment where there is more competition in the Canadian wireless sector. The goal was to have a sustainable 4th carrier to challenge Bell, Rogers and Telus. Whether or not Koodo, Fido and the like needed a cheap, unaligned competitor was beside the point. Canadians looked longingly at the U.S. TV ads selling all-you-can-eat packages to their Southern cousins and were certain we were getting a raw deal.

Phase One of the Fed plan was to set aside wireless spectrum for several start-ups to purchase. The taxpayer made a nice $4 billion pass on that, unlike many of the valuable television and radio licences that currently sit in the inventory of the Canadian wireless sector; oh, and let’s not forge the free spectrum that was awarded to the industry by the government of the day in the 1980s and 90s. The private equity and pension fund investors who backed the new entrant start-ups have spent more than $1 billion to date and have little to show for it, depending on how you define success. Wind Mobile tried to be the national player, Mobilicity’s footprint was urban by design and left itself to be an eventual tuckunder, and Public Mobile’s curious choice of spectrum and handset left most on Bay Street scratching their heads about the ultimate exit strategy on that name.

Despite spending a huge ticket on the initial spectrum, Videotron and Shaw appear to have been at best hedging their bets all along or, at worst, speculating that the value of their spectrum would rise.

Phase Two of the Fed plan was to remove the ban on foreign carriers playing in the domestic market as long as they weren’t acquiring anyone with serious marketshare. At the time, Rogers bravely, even wisely, supported “foreign competition”; I encouraged the same on BNN last summer with Andy Bell. The Feds made this move because Phase One hadn’t delivered success to any of the start-ups: no huge change in marketshare nor even reduced prices for the traditional customers of the Big 3.

Phase Three was the game of chicken that the Federal government just played with the lenders to the start-ups. Mobilicity appears to be insolvent, and Wind has suffered several changes in ownership — likely out of frustration of the company’s inability to get to cash flow positive. Mobilicity’s footprint made it a natural tuck-under candidate for Wind, as I’ve argued on BNN Business News Network for the past two years; for whatever reason, a deal never got done. They both probably regret that now. As for Public Mobile, even the $60 billion OMERS pension plan decided that its pockets weren’t deep enough to continue to fund the losses that appear to go hand-in-hand with being a small fish in Canada’s wireless sector. And this is despite the fact that there was never a moratorium preventing one of the Big 3 from acquiring Public’s specialty spectrum over the past five years.

Once the lenders were in charge at Mobilicity, Telus bid for the company (ie. bid for the spectrum that was tenuously securing Mobilicity’s most senior-ranking debt). The problem with that proposal was simply that the government’s moratorium on an incumbent acquiring the spectrum of a new entrant hadn’t yet expired. As such, the Telus/Mobilicity proposal never had a chance unless the Feds had had a change of heart on Phase One.

Once the government refused to amend the rules to allow Telus to bail out Mobilicity’s lenders and acquire the spectrum, Verizon (VZ:NYSE) started to publicly show renewed signs of interest in the Canadian market. With a market cap just shy of US$150 billion, Verizon definitely has the horsepower to make a move. And they were wise to interpret the Fed decision on Telus/Mobilicity for what it was: a sign of just how focussed the government is on creating a 4th national player.

The newspaper ads make lots of claims, and they all may well be true. But the Federal government wasn’t kidding about the public policy foundation to Phase One, and they should not be dissuaded from that goal just because investors may have lost $1 billion trying to grow the sector. I don’t recall seeing these newspaper ads when the Feds kicked-off Phase One of their wireless strategy, nor when they opened the doors to foreign competition. Provided Verizon steps into the fray before the spectrum moratorium ends, the Feds can hold their heads up high — the rules will have not been gerrymandered for the benefit of Verizon.

I’m sure Galen Weston and other Loblaws shareholders would have appreciated it if the Feds had banned Walmart from entering the Canadian grocery market way back when (hat tip: RMQ). The Big 3 wireless players will survive the Verizon onslaught, just as the Canadian banks tolerate business banking competition from Comerica and Silicon Valley Bank, who just so happen to pay to use (at least virtually) the bank branches of the Big 5 Canadian banks to take their client deposits and clear cheques.

Let’s stop the caterwauling and focus on delivering the kinds of cable, wireless and satellite products that folks in Buffalo, Seattle and Minneapolis have enjoyed for years.

MRM