To hear Canada's cellphone giants tell it, they are facing an illegitimate threat and a transformation of their industry - all thanks to a dinner at a Chinese restaurant in Cairo.
The 2008 tête-à-tête involved a Canadian telecom entrepreneur, Anthony Lacavera, and an Egyptian telecom mogul, Naguib Sawiris. Mr. Lacavera pitched his billionaire companion on the idea of breaking Canada's wireless oligopoly. Not long after, he emerged with a $700-million war chest to do just that.
Now the incumbent triumvirate - Rogers Communications Inc. , BCE Inc.'s Bell Canada and Telus Corp. - are fighting a pitched battle to keep Mr. Lacavera's challenger, Globalive Wireless Management Corp., out of the game. The mud fight comes to a head next week at an unusual set of hearings convened by the Canadian Radio-television and Telecommunications Commission in Ottawa.
The preliminary exchanges between the two sides have not been diplomatic. The incumbents have belittled Mr. Lacavera as a "peripheral" and "expendable" player, "a minnow swimming with a whale."
Mr. Lacavera is not intimidated. "We are going to be the first real competition these guys have ever seen," he says flatly.
Insults and boasts aside, two big questions hang over the proceedings. First, is Mr. Lacavera truly just Mr. Sawiris's pawn, the first play in a foreign invasion of the telecom industry? Second, and more important, is this the beginning of the end for the cozy wireless establishment in Canada? If Mr. Lacavera isn't headed off at the regulatory pass, the domestic companies - which have never ventured beyond their protected space - will suddenly have to contend with a breed of competitor they've never faced before.
Mr. Lacavera is a 35-year-old entrepreneur whose first foray into the Canadian telecom market 11 years ago has grown into a $125-million-a-year business that sells long distance, Internet access and other services, most notably under the popular Yak brand.
For a man in the centre of a storm, he's surprisingly calm - the only thing that gives away his drive is a knee that bounces continually during conversation.
From the start, Mr. Lacavera figured his ambitions to build a national wireless carrier were too big for a Canadian financier alone. Although he wasn't sure precisely how foreign expertise would help his operation, he saw a parallel to the domestic airline industry, where foreign carriers forced Air Canada to improve its game.
"I wanted to bring best international practices to Canada. With the incumbents, their only visibility is Canada," Mr. Lacavera says. "If the general consensus is we're lagging in pricing and services, why wouldn't I look externally?"
Just 62 per cent of the Canadian population had a wireless phone in 2007, ranking it dead last among the 30 members of the Organization for Economic Co-operation and Development. At the same time, carriers here reaped the fourth-highest average revenue per wireless customer, an OECD study said last month.
Mr. Lacavera's pitch to Mr. Sawiris, one of Egypt's most prominent businessmen, conveyed three important messages. First, Canada's wireless market lacked competition - and moreover, the federal government was about to attempt to fix the problem by auctioning off wireless spectrum. Second, as founder and chairman of Globalive Communications Corp., he had already proven that, even as an upstart facing a field of giants, he could make money. And third, federal rules restricting foreign ownership and control did not preclude tapping overseas funds and expertise.
Mr. Sawiris's Orascom Telecom Holding SAE enjoyed profits of more than $2-billion last year and has a substantial track record in starting up wireless carriers. Together with his holding company, Weather Investments, which owns most of Orascom, the Sawiris empire has more than 100 million customers in Europe, the Middle East, Africa and Asia.
Mr. Sawiris was quick to respond to Mr. Lacavera's proposition, committing $200-million to a partnership and later promising to sink up to $700-million into Globalive over four years. He signed on in March, 2008, and has stayed the course through rough waters that have included skyrocketing prices in the spectrum auction last summer, the global credit crunch, rising debt at his own company and delays in Ottawa's approval process.
Mr. Sawiris won't be making an appearance at the CRTC hearings. Through Mr. Lacavera, he declined requests for an interview. But he remains confident Globalive will launch, says Mr. Lacavera, who met with his partner in Paris last week.
Part of Orascom's success stems from its ability to get management teams to work together internationally, says Khaled Bichara, the company's Cairo-based chief operating officer. "It is not the same as picking up a case study of what others did in the market."
Globalive will have access to information that Orascom gathered through previous startups and will be able to build on that data and know-how, he says.
"Sure, the incumbents know Canadians well. But clearly they haven't been able to convince them all to buy their services," says Mr. Bichara, referring to Canada's relatively low number of subscribers.
Orascom is already applying its expertise to the construction of some of the 500 to 600 towers that Globalive will need to provide service in Toronto and Calgary that is scheduled to launch this fall. By the spring, it aims to add Vancouver, Edmonton and Ottawa to its network.
Orascom has also given Globalive a licence for it its European wireless brand Wind, which will give the Canadian startup immediate cost advantages on equipment such as handsets. Wind is already promising customers better value, simple billing, transparent pricing and no-contract flexibility.
Apart from tapping Orascom's market intelligence and operational expertise, Globalive will have access to Orascom's international fibre-optics network and preferred rates from equipment suppliers. Orascom told analysts last year that it is able to buy from Alcatel-Lucent for 30 per cent less than France's biggest phone company. Those kind of discounts strike fear into competitors' hearts because they can translate into lower costs - and lower prices for consumers.
Showdown in Ottawa
The two worlds of telecom - domestic and international - will collide at the CRTC hearings on Wednesday.
The current shape of Canada's market is rooted in a massive overhaul of telecommunications policy that Ottawa undertook 16 years ago as wireless technology emerged and global competition accelerated. Policy makers believed that domestic control of telecom was key to maintaining the country's identity and sovereignty. Accordingly, the new Telecommunications Act attempted to strike a balance between promoting Canadian control and fostering competition.
Since then, the wireless industry has counted on Ottawa's rules to keep major international players out of the market. In return, it has been content to pursue only domestic customers. It's a classic Canadian regulatory quid pro quo.
But since Canada put this regime in place, many major carriers abroad have reached beyond their borders, consolidating their way to goliath stature. Orascom, although it ranks as only the 15th-largest wireless carrier in the world by subscriber head count, is still about 10 times the size of Rogers, Canada's biggest mobile operator. Just last week, Deutsche Telekom and France Télécom said they planned to merge their operations in the United Kingdom. The union will create the No. 1 wireless player in the country.
Policy makers in Ottawa have remained aware of the need for more competition in wireless, and last year, as the government auctioned off new spectrum, it allocated a portion exclusively for new entrants. But the lengths Ottawa is willing to go to support new competition are still unclear.
Globalive coughed up more than $442-million in the auction to win 30 wireless spectrum licences, giving the company a presence everywhere but Quebec.
The amounts Globalive and others paid stunned everyone in the industry, including the government, which reaped at least double its anticipated take from the auction.
With the stakes raised, the ownership debate has been ignited in earnest. Ottawa's rules require that at least 80 per cent of voting shares in any telecom carrier be owned by Canadians and at least 80 per cent of the board be Canadian. Additionally, a telecom company must be deemed to be "controlled in fact" by Canadians at all times.
In the wake of the spectrum auction, Industry Canada ruled that Globalive passed muster on ownership and control. Now the question must be revisited by the federal communications regulator, which has already had an earful from Rogers, Bell and Telus about how Globalive is offside.
Globalive insists that it has satisfied the requirements with a structure where Orascom holds a 65-per-cent equity stake and 30-per-cent controlling stake in Globalive Wireless. The arrangement uses a complicated formula that involves two holding companies in which Mr. Lacavera owns the majority of voting shares.
To Globalive's consternation, the incumbents have won special third-party status at the new company's hearing, which allows them to not only make their case, but also to review materials Globalive says are confidential.
Rogers, Bell and Telus argue that it is inconceivable that an international company would provide all the startup cash and most of the expertise and yet not retain control of their investment and operation.
"When someone is having almost all the capital provided by foreigners, and the management provided by foreigners, it defies imagination that there isn't some control in fact," says Robert McFarlane, executive vice-president and chief financial officer of Telus.
Rogers is equally categorical. "It is impossible to conclude that Globalive Wireless is controlled by anyone other than Orascom," the company said.
The incumbents insist that Globalive should be held to the same standards that they have. Furthermore, if Globalive's structure is allowed to stand, they say, the ruling would fundamentally change the landscape of Canadian telecom, possibly forcing them to take foreign equity to stay competitive.
"A ruling from the CRTC that the structure does comply effectively guts the foreign ownership rule. That's a fairly significant issue and should be made by parliament and not indirectly by a regulator," says Mirko Bibic, senior vice-president of regulatory and government affairs for Bell Canada.
"If the rules are going to be effectively gutted, and this type of foreign investment is possible, then I think what you will see is every telecom and broadcasting carrier in the country looking anew at what is within the art of the possible with respect to ownership and structure."
One scenario could see the incumbents racing to partner with the strongest foreign players, among them Britain's Vodafone Group, Spain's Telefonica, and U.S. giants Verizon Communications and AT&T.
For now, the incumbents are portraying Mr. Lacavera and his holding firm, AAL Telecom Holdings Inc., as a bit player in a power play by Mr. Sawiris.
"AAL is a minnow swimming with a whale. Its principal shareholder, Mr. Lacavera, is a comparatively youthful 35 years old and has no track record in the wireless industry," Telus said in a filing to the CRTC last month.
Globalive lawyers fired off a response to Telus's filing, comparing Mr. Lacavera to Bill Gates and Ted Rogers. "[Telus's]comment misses an important point of the technology revolution of the past two decades. Many whales have been beached over those years and agile young minnows have grown up to replace them."
This is not the usual stuff of CRTC proceedings, which tend toward the dry and legalistic. Last week, Globalive accused Rogers of playing "regulatory gamesmanship" that is "harmful," "distasteful" and "disappointing."
For its part, Rogers has expanded its attack, asking the CRTC to begin similar intensive reviews of the structure of the two other wireless startups. Rogers says the structures of Data & Audio-Visual Enterprises Wireless Inc. (DAVE Wireless) and Public Mobile Holdings Inc. have grown sufficiently complicated since last summer that only a public proceeding will illuminate their ownership and control.
As with Globalive, Industry Canada has already determined that those two entrants satisfy ownership and control rules, although the CRTC must conduct its own investigation.
If the CRTC rejects Globalive's structure, the company could be forced to add Canadian equity. "Imagine how that negotiation goes, now that it is a public process," Mr. Lacavera says. "The Canadian investment community would know that we have to take in funds, and we're playing in a small universe. The terms could be unfavourable. We can't be put in a situation where we have to take capital on anything other than commercial terms."
Orascom doesn't expect to be tripped up at this stage of the process. The company came to Canada with its eyes wide open. The rules are well documented in Canada and the requirements much clearer than in some other countries where Orascom has invested, Mr. Lacavera says.
"It would be counterproductive for the Canadian government to say, 'We don't want our market to take advantage of foreign best practices.' That would be to everyone's detriment."
The market battle
Despite all the invective Canada's wireless oligarchs have hurled toward Globalive and its big sibling, they dismiss the notion that they will be threatened by Orascom's size and experience once things move from the regulatory arena into the marketplace.
"I find the conclusion ludicrous," Telus's Mr. McFarlane says. Experience in markets like North Korea, where Orascom recently set up a wireless network, won't create competitive advantage in Canada, he says.
As well, Orascom operates mostly in cities with big populations, which is completely different from building for a country like Canada, he says. "I would much rather have people who are bred in Canada, with significant management expertise [and who understand]the dynamics of this marketplace."
Still, it is bound to mean a new game. Traditionally, the incumbents' major challenges come from each other. Rogers, Bell and Telus spend billions of dollars on network upgrades, advertising, promotions and handset subsidies in a battle that plays out weekly in small gains and losses in market share.
With the advent of new wireless players - not just the likes of Globalive but also some of Canada's cable companies - the incumbents will see their market share drop from nearly 100 per cent today to 76 per cent five years from now, according to a study by the Toronto-based Convergence Consulting Group Ltd.
While Orascom, for one, has international clout behind it and, it argues, a superior set of services to sell customers, the incumbents have some strengths too: established brands, the ability to bundle wireless services with other offerings, and world-class networks.
It will be an expensive game. Investment demands will be high and it will take about 10 years for Globalive Wireless, DAVE Wireless and Public Mobile to see real profits, says Brahm Eiley, a principal at Convergence.
That scenario makes it more likely that the battle will eventually turn into a very different sort of endgame, with some or all of the upstarts pursuing strategies to get bought out by one of the incumbents after 2014, when most of the wireless spectrum licences become transferable.Report Typo/Error