The Canadian Mobile Wireless Industry is Changing: More Operators, and Rethinking Foreign Investment Restrictions
The Canadian mobile industry is in the midst of significant change, with new entrants coming on stream, and the rules restricting foreign investment going under the microscope. The result will be a more competitive industry, with the prospect of increased opportunities for foreign investors.
Canada was an early adopter of mobile technology. In the mid-1980s, Canada licensed two cellular mobile operators in each territory. One licence was issued to the incumbent telephone company in each territory, and one national licence was issued to what is now Rogers Wireless. Canada licensed two new national operators in 1996, although both eventually merged with established operators. As a result of these acquisitions, and other industry consolidations, three national operators emerged by the early days of the 21st century: Bell Mobility, Rogers Wireless and Telus Mobility. Some small operators also provided service in particular regions. Some mobile virtual network operators, or MVNOs, were launched, but the largest was later taken over by an incumbent operator, and the rest continue as small participants in the market.
Although Canada is a developed country with up-to-date telecommunications infrastructure, the penetration rate for mobile service in Canada has lagged behind most other OECD countries. The Canadian telecommunications regulator, the Canadian Radio-television and Telecommunications Commission (CRTC), reported that Canada’s mobile penetration rate only reached 62 per cent in 2007, as compared to 85 per cent in the US and more than 100 per cent in Germany, the UK and Italy. In a recent report prepared at the request of the United States Federal Communications Commission, Canada was shown as ranking 26th of 30 OECD countries in 3G wireless penetration.
The Telecommunications Policy Review Panel, a government-appointed panel to examine telecommunications policy and make recommendations for improvement, issued a report in 2006 that was critical of Canadian mobile policy. The Panel lamented that, as compared to the US, Canada’s mobile sector evidenced higher prices, less innovation, lower uptake and lower rates of usage. The Panel also observed that Canada had the second-lowest mobile penetration level in the OECD.
An opportunity for government action occurred in mid-2008, when the government auctioned six blocks of Advanced Wireless Services (AWS) spectrum at 1.7/2.1 GHz, and one block of Personal Communications Service (PCS) spectrum at 1.9 GHz. In order to spur new competitive entry, the government set aside three AWS blocks in each territory for new mobile operators. At auction’s end, from one to four new entrants, and the three incumbents, acquired spectrum in almost every territory. The spectrum payments, totalling over $4 billion CA, were completed in September 2008 just before the worldwide financial meltdown.
As part of the spectrum licensing process, all purchasers had to satisfy Industry Canada — the government department that conducted the auction — that they met the Canadian ownership and control test. This test appears both in the Radiocommunication Act and its regulations, and in the Telecommunications Act and its regulations. The key elements of that test are that a sizeable majority of the voting equity in the operator (and any holding company) must be held by Canadians and that the operator must not be controlled in fact by non-Canadians. All operators successfully passed this hurdle by early 2009. The new operators moved forward to construct their networks. They also entered into roaming and tower-sharing deals with incumbent operators, in accordance with new regulatory principles that Industry Canada had put in place.
Notwithstanding the green light from Industry Canada, the CRTC decided that it too should examine the Canadian ownership and control of the new mobile operators. The first candidate was Globalive Wireless, which had received a sizeable investment (through a combination of equity purchase and provision of loans) from Egyptian-based Orascom Telecom, which owns stakes in mobile operators in various countries in North Africa, Europe and Asia. Following a public proceeding, the CRTC ruled that Globalive Wireless did not meet the Canadian ownership and control test, notably the control-in-fact component of the test, and hence was ineligible to operate.
With two regulatory authorities, the CRTC and Industry Canada, interpreting the same law but coming to quite different conclusions on Globalive Wireless’s Canadian ownership and control, the federal cabinet, on its own motion, decided to review the matter. Near the end of 2009, the federal cabinet exercised its authority under the Telecommunications Act and reversed the CRTC’s decision, having determined that Globalive Wireless was not controlled in fact by non-Canadians. In confirming Globalive Wireless’s eligibility to operate under the Telecommunications Act, the federal cabinet noted that while the Telecommunications Act does restrict ownership of voting shares, it does not otherwise limit foreign investment in telecommunications common carriers and that the Telecommunications Act should be interpreted in a way that ensures access to foreign capital, technology and experience is encouraged so as to support telecommunications policy objectives.
Not long after the foreign-investment-friendly statement in the Globalive Wireless ruling, the federal government announced that, as part of its upcoming legislative agenda, it intends to "open Canada’s doors further to venture capital and to foreign investment in key sectors, including the satellite and telecommunications industries, giving Canadian firms access to the funds and expertise they need." Many interpret this as a signal that the government wants to liberalize its Canadian ownership and control rules, as recommended by the 2006 Telecommunications Policy Review Panel, the OECD, and the 2008 Competition Policy Review Panel. However, it seems unlikely that any wide-ranging action on this score will be taken quickly. Although legislation has been introduced to liberalize the ownership and control of Canadian satellite operators, further study, as well as consultation with interested stakeholders, will likely take place before the government decides to undertake any more-generalized liberalization steps, including for mobile wireless operators. That said, the recent events suggest at least some momentum in favour of liberalization, although to what extent remains unclear.
What does all this mean to foreign investors? Over the years, Canadian telecommunications operators have relied heavily on foreign investment. Indeed, in the early days of the industry, several of the larger Canadian players were owned by foreign operators. But since the late 1980s, Canadian ownership and control rules have imposed restrictions on foreign investors seeking to operate in Canada. As a result, none of the large global players, such as Vodafone, Telefonica or AT&T, have any significant presence in the Canadian mobile market. Orascom Telecom’s investment in Globalive Wireless suggests that some international operators still see Canada, with its relatively less-developed mobile sector, as an opportunity. As such, they will want to pay close attention to the developments this year, which could see liberalization initiatives gain traction.
If significant liberalization does occur, foreign operators and other investors in telecommunications will soon have an important spectrum-buying opportunity to consider. Industry Canada has indicated that it intends to auction spectrum in 700 MHz band — the same spectrum that saw tremendous industry interest when auctioned in the US in 2008. At one point several years ago, Industry Canada suggested that it could make such spectrum available as early as 2011. Given the worldwide financial meltdown in 2008-9, and the slower-than-expected launch of new AWS operators, that date may very well slip. Still, the public consultations leading to the auction of the 700 MHz spectrum will start well in advance of the auction itself, and many foreign investors will want to monitor those developments carefully.