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Canadian Telco Ownership Rules From By-Gone Era

Corporate structures and loan agreements are rarely the stuff of public interest, yet, as my weekly technology column notes (Toronto Star version, homepage version) last month they attracted considerable attention in a case involving Globalive, a new wireless company vying to shake up Canada’s telecommunications industry.  Operating as Wind Mobile, the company paid hundreds of millions of dollars in 2008 to scoop up spectrum to enable it to operate as a new national wireless carrier.

Bell Canada, Telus Corp., and Rogers Communications, the big three incumbent carriers, unsurprisingly opposed the new rival.  First they lobbied against a set-aside of spectrum for new entrants. When that failed, they argued Globalive failed to comply with the Telecommunications Act's foreign control restrictions. Last month, the Canadian Radio-television and Telecommunications Commission agreed. While Industry Canada previously concluded the company met the Canadian control requirements for the purposes of the Radiocommunications Act when it bid for spectrum, the CRTC concluded that its ownership and control structure do not meet the legal requirements to operate as a wireless carrier.  

The commission identified a number of changes that will be needed to comply with the law and Globalive says it is evaluating its options. The first option is presumably for the federal cabinet to overrule the CRTC. Last week, Industry Minister Tony Clement gave Canada's telecom players until Wednesday to provide their views on the issue as he conducts a pre-cabinet review.  A decision may be weeks away, but the process puts a much bigger question into play: Will the Globalive case become the catalyst for the elimination of telecom foreign control restrictions?

This is hardly the first time the foreign control issue has been raised in Canada.  There have been earlier recommendations to scrap the requirements, most recently in the 2006 Telecom Policy Review Committee report, which concluded that Canada has "one of the most restrictive and inflexible set of rules limiting foreign investment in the telecommunications sector" among all OECD countries.

With hindsight, it should have been obvious that the foreign control issue would be the elephant in the room around the government's efforts to inject greater competition into the Canadian telecom sector.  There is little doubt that officials – not to mention Canadian consumers – were anxious to encourage new entrants.  While the set-aside in the spectrum auction guaranteed the new entrants, leaving the foreign control rules untouched meant the job was only half-done.

With the Globalive entry into the Canadian market at risk and hundreds of millions in spectrum in limbo, Canadians must ask hard questions about the merits of foreign control restrictions.  

The days of retaining Canadian control over physical telecommunications infrastructure connected to millions of homes are over. Wireless networks involve significant investments in cellphone towers, but not direct connectedness into individual homes.

Further, the notion that Canadian control guarantees Canadian jobs is also part of a by-gone era.  Canadian carriers regularly outsource some of their customer service jobs out of the country.  Meanwhile, other parts of the organization – retail and business sales as well as network building – involve jobs that will remain in Canada regardless of a company's country-of-origin.  While some head office jobs may be at risk, new companies operating in Canada could potentially create more jobs, not fewer.

It is tempting to blame the CRTC or the incumbent telecom providers for the current mess, but the real culprit lies with outdated legislation that prioritizes Canadian ownership over a competitive Canadian marketplace. The solution lies in changing the law to facilitate foreign ownership of common carriers – both to facilitate immediate competition and to pave the way for more foreign bidders in the next round of spectrum auctions.

23 Comments

  1. Foreign ownership is critical to future competitiveness
    Changing the restrictions on foreign ownership is critical not just to bringing another competitor to the Canadian wireless table, but to the future of our competiveness within the wireless North American landscape.

    Even if we decide to allow Globalive into the private club, I’d guess odds are greater than 50/50 that they would just join in our happy little oligopoly of $6.95 per month for nothing.

    And while consumers weary of the constant nickle-and-diming and contracts that carry through to your grandchildren, real damage is being done in the business marketplace. While our country depends on exports to maintain our way of life, the reality remains that we export 80% of our goods to the U.S. Meanwhile, businesspeople who regularly call and travel to the States are being charged at outrageous rates. For many reasons, it has become a competitive disadvantage to base your start-up firm in Canada, and communication costs is one where we have a huge discrepancy with our southern brothers.

    Open up to foreign ownership and those barriers will quickly fall to the axe of real competition.

  2. Opposite of what you say – Localized (User) Ownership Needed
    The “rules from a by-gone era” are based on the idea that is that there are technical and financial challenges to delivering telecommunications services. It’s evident fibre/wireless is a natural monopoly that is the foundation of our economy and should be structured as a public utility. Understandably, you cannot take that stand, as it would nullify your role as commentator of the bogus arguments put forth – like foreign ownership and net neutrality. (Researcher self-preservation trumping reality is sooo Canadian, but try to overcome it.)

  3. Think of the econom(y)ics!
    “While some head office jobs may be at risk, new companies operating in Canada could potentially create more jobs, not fewer.”
    Not only that but also think of the thousands of jobs which will be created indirectly by companies and consumers starting to spend their money on something other than overpriced cellphone services once the prices come down through competition. In addition, lower prices for wireless data packages will make mobile Internet access available to more people and thus enable companies to create new services and more jobs in the process.

    It is thus essential to change these rules as soon as possible. Going on like before is strangling Canadian consumers and Canada’s economy.

    (Appropriate Captcha: progres jewel :p )

  4. Foreign ownership is critical to future competitiveness
    Changing the restrictions on foreign ownership is critical not just to bringing another competitor to the Canadian wireless table, but to the future of our competiveness within the wireless North American landscape.

    Even if we decide to allow Globalive into the private club, I’d guess odds are greater than 50/50 that they would just join in our happy little oligopoly of $6.95 per month for nothing.

    And while consumers weary of the constant nickle-and-diming and contracts that carry through to your grandchildren, real damage is being done in the business marketplace. While our country depends on exports to maintain our way of life, the reality remains that we export 80% of our goods to the U.S. Meanwhile, businesspeople who regularly call and travel to the States are being charged at outrageous rates. For many reasons, it has become a competitive disadvantage to base your start-up firm in Canada, and communication costs is one where we have a huge discrepancy with our southern brothers.

    Open up to foreign ownership and those barriers will quickly fall to the axe of real competition.

  5. @Mike Thats right, because the incumbents need more of our money….
    Mike (above poster) rightly argues that telecommunications infrastructure should be treated as a public utility because it benefits everyone as a whole. Unfortunately, where he falls flat on his face is by asking the public to believe that any natural monopoly formed in Canada in this sector has ever had the interests of Canadian citizens in mind.

    See what the natural monopoly has brought us so far? $6 voice mail, incoming sms’s being charged at 15c a message. I’ve lived and seen better in developing countries. Shame on the Canadian natural monopolies!

    If this Globalive fiasco says anything, it’s that its about time telecoms companies in Canada offered real value to their customers or they should shut up and step aside for someone who will.

  6. Ownership of essential infrastructure should remain under canadian control
    I agree with Mike’s comment that last mile wire/wireless should be ran as a public utility, and that competition and more lax rules on foreign ownership should be at the next level up.

    Giving control of spectrum, which is a public resource, to a foreign controlled entity is as naive and irresponsible as selling the rights to our own drinking water.

  7. @SM
    I understood Mike’s comment to mean that the telecom infrastructure, both landline and wireless should be operated as a public utility, that is owned by the government in the same way as water and sewer is where provided by the municipality. The utility, in this case, would not offer direct to the public sales; the telcos, ISPs, etc, would purchase and resell access to the utility. At least, that is what I understood him to say and I would agree with this statement.

    A corporate monopoly is in no-one’s interest, save the shareholders of the company.

    @Simon. Agreed. Selling essential infrastructure to a foreign company opens up a few issues:

    1) Whose privacy laws are to be respected when there is a conflict (for instance, the Privacy Act vs the US PATRIOT Act if the provider is US based)?

    2) Will Canadian privacy, anti-spam and telemarketing laws be enforced against a foreign telco? For instance, could we do anything about it if the foreign company sells a list of the phone numbers of its subscribers to a telemarketer (ignoring the issue of if anything could be done under current laws)?

    3) What happens if the foreign company decides to pull out of Canada? Does the infrastructure go away? Imagine if our phone system was completely taken over by a telco Walmart. At a later date they decide there is insufficient profit to be made here in Canada (for instance, do to a change in mandated services) and bails. Services such as 911, etc, may go away as there is no underlying infrastructure to carry the communications.

  8. Jean Naimard says:

    The rules are there for a reason
    Given how lucrative wireless carrying is, it makes sense to restrict foreign ownership in order to keep profits in Canada.

    After all, those profits are (litterally!) created out of thin air; it’s not like some finite natural ressources are harvested/mined.

    CAPTCHA: seraphic Husak

  9. Laurel L. Russwurm says:

    Home Grown Telcos aren’t cutting it
    What took the cake for me was being billed by my cel phone provider for accidentally going to their own website (which their menu layout made really easy by default). I ended up removing online access capability from the cel. I don’t go online with a 3 inch screen. But I feel for those who find it essential.

    The “foreign ownership” concern might fly if the bulk of Canadian Big business wasn’t made up of branch plants.

    @Anon-K re: points 1, 2 & 3: When Foreign owned companies set up in Canada part of the deal is that they don’t break Canadian Law. This is the same anywhere.

    A far greater danger is the fact of Canadian Government (all levels) reliance on computers running the Windows operating system. Foreign governments don’t need spies when our government wraps its information up in proprietary software that regularly “phones home”. How secure is that?

    @michaelgeist I’m always willing to blame the CRTC (http://dissolvethecrtc.ca/) and the incumbent telecom providers (http://stopusagebasedbilling.wordpress.com/) precisely because they are always willing to throw their power and money into maintaining the status quo of “outdated legislation that prioritizes Canadian ownership over a competitive Canadian marketplace” since it benefits them so excessively.

    Canada needs competition.

  10. Jack Robinson says:

    Gatekeeper Guardianship or Freemarket Feeding Frenzy?
    While I greatly appreciate and support the informed and relevant issues expressed on this site… I’m frankly appalled at Mr. Geist’s analysis of the GlubAlive(sic) initiative to further penetrate our already U.S. Crap Culture-innundated Media Markets and besieged broadcast distribution utilities.

    It’s already lamentable enough that Canadians willingly endure the most foreign-owned press, cinema, radio and television concentrated and corprate controlled media anywhere in the Industrialized World… but that we’re now, thanks to Jim Prentice and his New Rome North cabal’s likely endorsement of yet another foreign fox into our endangered Canuck Heritage Hermitage… frankly makes me sick.

    But hey, it’s a Freemarket Zombie zeitgest after all… right Mr. Geist?

  11. Protectionism needed
    Have to agree with Jack Robinson.

    Call it what you will, maybe protectionism, but the rules do protect us from the american intrusion into Canadian telecom.

  12. RE: ditto Bob
    “Call it what you will, maybe protectionism, but the rules do protect us from the american intrusion into Canadian telecom.”

    Our telecom is so bad right now, I don’t think an “American intrusion” would really matter.

  13. @Laurel L. Russwurm
    Laurel. Regarding my points 1, 2 and 3. That they agree to not break the law is, frankly, beside the point. Sure, they agree. Big deal.

    In the case of 1), now, what happens when the law in their home country changes to contradict Canadian law? Does that automatically nullify their agreement here, leaving their customers out in the quiet?

    As far as your comment about Windows… big deal. That kind of software could be written into anything; it doesn’t have to be a Windows server. It could be written into a Linux box or even a proprietary RTOS by the manufacturer.

    In the case of 2), I ask again, if they break Canadian laws, what can we do about it? Currently it is wag our finger at them and call them naughty.

    In the case of 3). What incentive do they have for being here? Profit. If the profits aren’t high enough, are you suggesting that, just because they sad that they wouldn’t leave, they won’t? Personally, I wouldn’t count on it, in particular if the company enters bankruptcy protection in their home country.

    It comes down to this. Will the government have the cojones to nullify the agreement, leaving the customers out in the quiet, should the company fail to meet the agreement conditions at a later date?

  14. Natural Monopoly
    @SM …guess I should have been clear that a “natural monopoly” also needs to be owned and regulated by citizens (not Bell or their dirty proxies/partners – Telus, CRTC, CTV, etc). There is nothing “natural” about the current scam.

    The Google “cloud” (through peering agreements and direct deals with wireless carriers) is quickly increasing its role and influence in Canadian telecom (without having to worry about any “rules” associated with being a carrier) …assuming Google will be a better ally to the masses than our “Canadian” carriers is probably true (but still dangerous).

  15. @ Jean Naimard
    The rules don’t work.

    1) There isn’t enough money in Canada for a new entrant to be competitive because….

    2) There is a lack of entrepreurship in this country meaning…..

    3) The profits NEVER have or will stay here.

  16. The CRTC correctly applied current law. If that produces a bad outcome, then the law needs to be changed. But letting Globalive in is not the way to go because many other foreign companies declined to bid as they knew they didn’t qualify. If they had put in bids, who knows who would have won. The only fair outcome is to start from scratch.

  17. Public/Private Partnership
    It would be nice if canadian cellphone users group were created to joint venture with Globalive? I’d buy a share in that. The Canadian “public option”.

  18. Thomas Malenfant says:

    Canada will ride the swirl down the drain…
    As all our bright minds that want to try new things, realize that telecommunications costs for business are not worth their patriotism, the gene pool here will drop, and Canada will become even more of a third world country when it comes to telecom, as we will lack the ingenuity of our bright youth.

    If all you chest beating Canadians are happy with foreign protection rules, and can’t swallow a hard fact in your sea of anecdotal evidence, get ready as our best and brightest look elsewhere for a bright future. I’ll be a graduating engineer in a few years, and let me tell you, I have no interest in staying here if the outlook doesn’t improve.

    I do like this country more than the U.S., in fact, the U.S. frightens me, but if I can make more money there, I’ll leave. Patriotism to a nationalistic monopoly, of infrastructure necessary to business, isn’t going to feed my family. You would think in an era, where manufacturing increasingly happens overseas, and technology business is what’s going to make or break this country, that government would want to do EVERYTHING in their power to keep homegrown talent.

  19. Maynard G. Krebs says:

    Canadian telco has a history of foreign ownershop
    Bell Canada was originally a subsidiary of AT&T, and that lasted for at least 50 years, IIRC.

    Rogers – let’s see now….. Cantel/AT&T wireless was bankrolled by AT&T for years. Rogers raised billions of dollars of debt in the US for years, bought primarily by foreign owners who would have exerted control had Rogers got themselves into hot water.

    Telus – GTE (a US company) controlled telecom in BC and Alberta for years, prior to divesting and Telus coming into being.

    So there is ample precedent for a foreign entity to bankroll and/or own a large chunk of a carrier operating in Canada.

    And as to the ownership level restrictions, nobody ever checks that stuff anymore.

    Say PIMCO (a gargantuan US fund manager) owned large chunks of common share and debt of Bell. It would be most likely be held in nominee form, registered in the name of Cede & Co. (the blanket registration name for the segregated deposit accounts at CDS), and tracked back through a Canadian trustee (like Computershare – formerly Montreal Trust) acting on behalf on say BoNY Mellon, who might be the custodian for PIMCO. So unless you are willing to ‘follow the money’ and dig a lot, you’d never really know that Bell Canada might be 90% owned by a wide group of unrelated foreign pension funds.

  20. Why do we – Canadian users as a whole – need to partner with anyone?
    Why should we have to do so in order to crack the whip on the telcos, if whip-cracking’s what’s called for?

  21. Cameron Jantzen says:

    Canadian Wireless Technology is Cutting Edge
    “Our telecom is so bad right now, I don’t think an “American intrusion” would really matter.”

    Wrong. We’ve got the big 3 all running 21mbps networks. Our service is expensive, but at least it’s top notch.

  22. generic_idea_machine says:

    Another example of the Tri-oligopoly @ work [ Big Telcos, CRTC and the Govt]
    Another anti-competitive move to keep the oligopoly in place.

    The CRTC doesn’t even comprehend the ramifications of the decision they are making now, that will come into effect 10 years later down the road. When Canada would have no option but to compete with external competition. But continued innovation (external to Canada) would squash any local competition.

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