Analyst Angle: Another setback for Canada's wireless industry

A quote often attributed to Bernard Shaw actually comes from the German philosopher Georg Hegel: “We learn from history that man can never learn anything from history.” Perhaps the Canadian Radio-Television Telecommunications Commission (CRTC) should pay attention to that bit of wisdom.
By determining that Globalive Wireless was not entitled to launch its wireless services under the Wind Mobile brand in its October 2009 decision, the CRTC contravened government policy geared towards increasing wireless competition in Canada. Later in December 2009, Industry Minister Tony Clement decided to overrule the federal telecom regulator and approved Globalive as a telecommunications carrier, maintaining that Wind Mobile did not contravene Canada’s ownership laws. However, in February, Canada’s Federal Court struck down that decision, ruling in favor of the claim made by Public Mobile and Telus that Wind does not comply with Canada’s foreign ownership limits.
The court decision will very likely be appealed (perhaps all the way to the Supreme Court), as the key divergence between the CRTC and the Canadian government on whether Globalive is “not controlled by non-Canadians,” is above all a semantic issue. But concurrently with the legal appeals, it is very likely that the Conservative minority government will accelerate its plans to relax foreign ownership restrictions for new entrants and smaller carriers (but not the three largest operators). In fact, consultations on foreign ownership are set for May, with three options being considered: removal of all restrictions, an increase in the foreign investment limit from the current 20% to 49%, and a lifting of restrictions for operators having less than 10% market share.
How did we get here?
Perhaps a more fundamental question to ask is what the current status quo and CRTC regulatory activity have gotten Canada in the past. A mobile service penetration hovering around the 70% mark (surpassed not only by GSM countries whose “penetration” is high due to SIM card swapping but also other Latin American countries such as Brazil and Mexico, which historically had CDMA and still have installed bases in that technology), the third-highest cell phone bills in the world (according to the OECD service bucket definition), and increasing customer complaints as stated by the Commissioner for Complaints for Telecommunications Services and the Better Business Bureau, whose stats show that the wireless industry is the most complained about in Canada.
Before the last AWS spectrum auction, our government expressed its goal that Canadians needed to have more choice, and that increased competition was going to be a key driver for better and more affordable wireless services. But the imposition of stringent remedies as those prescribed by the CRTC, certainly goes against these policy directives.
Much more is at risk here than one company. Wind Mobile is the only new wireless entrant with a national footprint (except Quebec), and with the clear capability to bring serious competition to the Canadian wireless industry. It is the most high-profile of the new mobile operators in Canada, amassing 250,000 subscribers within its first year, providing lower prices, and delivering innovation, as attested by its recent launch of HD Voice technology throughout its network.
The CRTC decision came after months of determined effort and regulatory gamesmanship by the incumbents to maintain their market position and frustrate government policy designed to increase competition. Some Canadian incumbents argued that under the law, the CRTC had no choice but to find Globalive non-compliant and that competition is inevitable in any case. But are these assertions in fact valid?
Actually, the CRTC was not required “by law” to reach its decision. In fact, the commission exercised its subjective discretion to reverse the finding that was previously made by both Industry Canada and the Department of Justice, namely, that Globalive complied with the Canadian Ownership and Control Rules (“O&C Rules”). The reality is that the CRTC could have reached a different verdict, and in a way that would not frustrate the government’s policy.
In doing so, they raised questions about Globalive’s structure, many of which go beyond the legal requirements of Canadian ownership and control. These conditions impose arbitrary and unnecessary restrictions that are not required by law or precedent. For instance, in terms of debt financing structure, the CRTC created a brand new standard about the combination of debt and equity, never applied before (and clearly not contemplated in current law), without even articulating what thresholds would be appropriate. Consequently, Canada now has the dubious distinction of being a country in which two regulatory bodies have reached different conclusions about what the law requires. These conflicting decisions make it appear that Canada has an incoherent regulatory process.
The commission is required to consider every case solely based on its actual facts and circumstances. The unusual facts and circumstances of this case include high spectrum prices, followed by a severe global credit crisis, and, as a result, a highly vulnerable equity investor being forced to extend a unique form of borrower-friendly bridge financing that has no covenants or other control levers whatsoever. After the Globalive experience, no new spectrum investors would allow themselves to be put in that situation.
The final word
As Bernard Shaw once wrote, “We are made wise not by the recollection of our past, but by the responsibility for our future.” The status quo means that Canada has not reaped the rewards it would have if we had greater competition in our wireless telecom market. These benefits include a positive impact on GDP growth, faster introduction of the latest generation infrastructure, and much needed service innovation. Therefore by appealing the Court’s decision and enacting foreign ownership relaxation, the government will be able to provide the opportunity for Canadians to enjoy these rewards arising from a culture of competition and innovation.
Ronald Gruia is Program Leader and Principal Analyst at Frost&Sullivan covering Emerging Communications Solutions. He is available at rgruia@frost.com.