Cell block

Awakening a New Revolution

I despise the term "revolution." After being so overused in marketing and public relations materials in the technology industry, it somehow doesn't have the same impact it once did. But in the wireless telecommunication sector, we really are on the cusp of a revolution. The very definitions of wireless, mobility, and connectivity are changing, in large part due to new trends in mobile and the changing lifestyle of the connected individual. This makes the need for better, more reliable networks, faster speeds, and more choice even greater than ever before. But as in any situation, change comes at the expense of shaking of the status quo. And with wireless, change has also brought a host of controversy along for the ride.

Consequently, the Canadian Telecom Summit, held in Toronto, ON in early June, was home to some of the most heated and passionate debates I've ever seen in the industry. The key players, including incumbent wireless carriers Bell, Rogers, and Telus, new carriers like WIND Mobile and Mobilicity, emerging new wireless forces like MTS Allstream and Videotron, and regulators and influencers like Industry Canada, the Canadian Radio-television Telecommunications Commission (CRTC), and the Canadian Wireless Telecommunications Association (CWTA), have no qualms about being candid with where they stand on the issues.

The issues range from regulating the industry, including terms on foreign ownership and investment; to Canada's position in wireless in relation to the rest of the world. Are we really so far behind in penetration and pricing, or are we actually miles (oops, kilometres) ahead in those and/or other aspects? And if we are behind, what can we do to improve the situation?

Naturally, wireless connectivity and the companies that offer it are at the heart of each of these debates. And while those working in other sectors of the industry might view wireless as merely a periphery concern, the truth is that the outcome of Industry Canada's Digital Economy report, which will outline the country's strategy going forward, will play a significant role in all businesses.

"We are living in a mobile wireless revolution in Canada," declared Bernard Lord, President & CEO of the CWTA during his keynote address at the Summit. "When we think digital economy, we think wireless. The backbone of Canada's digital economy is network infrastructure. It will be the key to productivity gains and growth."

Regulation

Pepsi & Coca Cola. McDonalds and Burger King. Duracell and Energizer. FedEx and UPS. For centuries, we have faced companies and brands that, at times, have engaged in head-to-head, gloves off, out for blood competition. Today, the battle between the "old" Canadian wireless carriers and the "new" ones is one of the most heated we've seen of late.

With Bell, Rogers, and Telus on one side (known as the incumbents) and Globalive (WIND), Mobilicity, and, to some extent, Videotron and MTS Allstream, on the other (Public Mobile is drumming to its own tune, in many respects), the debate was a central theme of the Canadian Telecom Summit. In fact, it even hijacked a final panel discussion that was intended to cover advanced wireless services. (But let's face it: what did they expect by sandwiching Rogers' Executive Vice President of Marketing John Boynton between WIND CEO Ken Campbell and Mobilicity's President & CEO Dave Dobbin?)

There are three key points of contention in this space: foreign ownership and investment concerns; cellular tower sharing requirements; and conditions on spectrum.

Rob Bruce, President, Communications, Rogers Communications: "It doesn't make sense to strengthen the weak by weakening the strong."

Foreign Ownership & Investments

At the heart of the debate is allowing access to foreign investments in the telecom sector, and what terms will come with it. Of the 30 countries listed by the Organisation for Economic Co-operation and Development (OECD), Canada is one of only three that does not permit access to global investment.

In its Speech from the Throne in March, and much to the delight of many, Industry Canada confirmed that the Government will open the floodgates to permit foreign investment in both the telecom and satellite sectors. And the Honourable Minster of Industry Tony Clement reiterated this fact in his keynote address that kicked off the Summit.

"We are intending to move ahead with telecom reform for allowing foreign investments," he declared to the audience of telecom industry professionals.

Three key reasons for this decision are outlined in the Competition Policy Review Panel's report called Compete to Win: to ensure Canadian companies have access to capital and experts; to promote competition; and to improve services for consumers.

Arguably acting as catalyst for this change was Globalive Communications, which entered the Canadian market with its WIND Mobile carrier brand under an umbrella of scrutiny and controversy. The company bid big bucks, and was granted a license to build a network in Canada. But halfway through the process and after urging from the incumbent carriers, the CRTC conducted a public hearing to examine WIND's ownership structure. WIND secured hefty investments from Egyptian billionaire/entrepreneur Naguib Sawiris, the man behind Orascom Telecom, which operates wireless services in Europe, Africa, and the Middle East. In the end, the CRTC ruled that WIND did not comply with Canada's foreign ownership regulations. But at the 11th hour, the Honourable Tony Clement jumped in and overturned the ruling. The result was frustration from the incumbents: if you allow WIND to enter the market under its structure, that means foreign ownership rules should be adjusted for all carriers.

The Honourable Industry Minister Tony Clement: "We are intending to move ahead with telecom reform for allowing foreign investments."

Industry Canada is toying with three options for reform: to adjust the foreign ownership shares outlined in the Telecommunications Act from 20% to 49%, thus allowing a Canadian company to hold just 51% of a venture versus requiring a full 80%. The second potential option is to open the market to foreign investments only for companies with less than 10% market share. And the third idea is to remove foreign ownership restrictions outlined for the telecom sector altogether, and let all carriers duke it out on an even playing field. Naturally, players each have their opinions and preferences.

Rogers is in favour of opening the market to foreign investment, but logically feels that terms must be equal for all. Michael Hennessy, Senior Vice President, Regulatory & Government Affairs, Telus Mobility, agrees wholeheartedly. "If we are going to change the Telecom Act," he said during a panel discussion on the topic, "we do it for all carriers under the Telecom Act. If we decide foreign ownership would help us down the line, at least give us that right."

"It doesn't make sense to strengthen the weak by weakening the strong," added Rob Bruce, President, Communications, Rogers Communications, during his keynote speech. "We support regulation that supports where we're going, not where we've been. Regulation is not a substitute for innovation; it's often a barrier to innovation."

Edward Antecol, Vice President, Regulatory Affairs & Carrier Services, Globalive Communications: "[Adjusting foreign ownership percentages to 49%] won't attract one iota more of foreign capital. You have to do more than tinker and tweak the control numbers."

Edward Antecol, Vice President, Regulatory Affairs & Carrier Services, Globalive Communications: "[Adjusting foreign ownership percentages to 49%] won't attract one iota more of foreign capital. You have to do more than tinker and tweak the control numbers. 

To that, Globalive's Chairman Tony Lacavera rolls his eyes. "Talk about a Goliath trying to push around a David!" he muses. "We need a framework that supports foreign and domestic investment. It sounds like positive change is coming, and we look forward to that change."

While Bell and Telus undoubtedly prefer opening the market entirely versus just for new carriers, company spokespersons imply that, if given the choice, they'd rather just keep the status quo.

"To disregard real competition and build public policy on myths is dangerous," warns Robert McFarlane, CEO, Telus Mobility. "The AWS auction resulted in a $1.4 billion dollar overpayment. The new carriers just drove up prices for incumbents without any risk to themselves."

Robert McFarlane, CEO, Telus Mobility: "The AWS Auction resulted in a $1.4 billion dollar overpayment. The new carriers just drove up prices for incumbents without any risk to themselves."

"Canada does not need more regulatory burdens," agrees Kevin Krull, President, Residential Services, Bell Canada. "The business climate must reward risk capital. We went through 20 years of investment before turning a profit. Yet despite all this success, we are still debating Government regulation, and this needs to stop. Policy should protect, not harm those that invest."

Pierre Blouin is CEO at MTS Allstream, and he sides passionately with the new carriers, despite the fact that he admits pricing got too high in the last auction to fit MTS' business plans and budgets. "Regulations encourage investment and foster competition," he says. He cites the U.K. as an example. When networks were opened up to competition there, the results were "competition, innovation, lower prices, and solid shareholder returns," he claims. Conversely, without access to foreign capital back in 2002 when MTS wanted to innovate, the company was forced to rely on debt.

Pierre, Blouin, CEO, MTS Allstream: "Our market is among the most closed of all OECD countries. 27 of 30 countries allow access to global investment."

"Incumbents have benefited from a decade of investment, while companies like MTS have been forced to rely on debt because of Canada's limits on foreign investment," he says. "We incurred a $4 billion debt to build out a truly competitive network. In 2002, we went through the second-largest restructuring in Canadian history; we paid $400 million in annual interest charges on the debt required to build our network. The build out could have been funded with equity, and bankruptcy could have been avoided."

While Blouin's preference is that foreign investment is opened up to companies with fewer than 10% marketshare, he says that if the decision is to remove restrictions for any company, "we support that too. Either way, it's good for us."

No one denies that a new start up company requires financial backing in order to successfully compete. But why the need for foreign funds? After all, as incumbents argue, there's plenty of opportunity to gain capital from Canadian investors. "Canada is hardly second rate when it comes to investment," says McFarlane. But Lacavera begs to differ.

"We searched across Canada," he says, of Globalive's attempts at gaining support prior to the auction of 2008, "and were consistently dismissed and ignored by Canadian investors. We knew that to purchase enough spectrum to compete on a national level, we would need to find a suitable partner."

Anthony Lacavera, Chairman, Globalive Communications: "We searched across Canada and were consistently dismissed and ignored by Canadian investors. We knew that to purchase enough spectrum to compete on a national level, we would need to find a suitable partner."

He also points to the history of the incumbents. "Bell was started by an American," he claims. "Telus by an American. AT&T, an American company, became MTS Allstream; all prior to the foreign ownership rules coming into play in Canada. [The late] Ted Rogers has admitted that at one point during the high debt growth phase, Rogers was not in compliance with foreign ownership rules. Questioning our Canadian-ness is a bit ironic when you consider the incumbents started their businesses with the help of foreign investors."

But Rogers' Boynton isn't buying it. "It's not that there's no funding available," he replies. "It's the terms and conditions that they're trying to get with that funding. People should survive on their own two feet."

Indeed, Mobilicity is a perfect example. The company has been able to stand tall with a group of staunch Canadian supporters, including Canadian entrepreneur John Bitove, who is a controlling shareholder in Obelysk and Canadian Satellite Radio, parent company to XM Canada; and Founder of the Toronto Raptors, among other accomplishments. But, admits Dobbin, "raising capital in Canada is hard. We funded our business last year in the pit of the global recession. It's doable. But there's a wider pool of investors worldwide that have an appetite for wireless and risk capital for it."

The removal of foreign ownership blocks has been brought up time and time again: in 2001, 2003, 2006, and 2008, to be exact. Luckily, it seems that the Honourable Tony Clement is finally taking action.

However, Konrad von Finckenstein, Chairman of the CRTC, heeds a warning to Industry Canada about fully opening the market up to competition. The CRTC proposed option one: to adjust foreign ownership percentages to 49%. "Competition," urges Finckenstein, "as wonderful as it is, has its limits. If you don't restrain competition, it will devour itself."

During a "fireside chat" with Mark Goldberg, producer of the Canadian Telecom Summit, Konrad von Finckenstein, Chairman of the CRTC (left), discusses competition in the Canadian telecom sector. "Competition, as wonderful as it is, has its limits. If you don't restrain competition, it will devour itself."

But Globalive's Edward Antecol, Vice President, Regulatory Affairs & Carrier Services, claims that doing that won't attract "one iota more of foreign capital. You have to do more than tinker and tweak the control numbers."

One issue making this decision even more complicated is determining the difference between telecom and broadcasting, and whether telecom can be handled separately without meddling with the Broadcasting Act. Von Finckenstein doesn't think so. However, Industry Canada says the objectives of the Broadcasting Act are more cultural and social in nature, and have nothing to do with telecom. "While it is recognized that telecommunications and broadcasting are increasingly converging," Industry Canada allows, "the policy objectives and legislative authorities under the Telecommunications Act and the Broadcasting Act are distinct, and the Government is not considering changes to the Broadcasting Act."

Lacavera concurs. "We respect the distribution of Canadian content," he says, "But offering foreign capital does not pose a risk to that. We need to differentiate between companies creating and distributing content and those building services and pipelines. We have different roles, and can be separated."

How does the average Canadian feel about the issues? According to a Harris/Decima study cited by Blouin, 63% of Canadians support global investment in the telecom sector. Perhaps in an anecdotal way, we'll find out how true this is. In the democratic spirit of a connected, digital country, Industry Canada is asking Canadians for their input on the issue. Comments can be sent via e-mail to telecominvestment@ic.gc.ca; or mailed to Director General, Telecommunications Policy Branch, Industry Canada, 16th Floor, 300 Slater St., Ottawa, ON K1A 0C8 up until July 30, 2010. Soon after, submissions will be posted at www.ic.gc.ca/telecominvestment.

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