How Ottawa's plan to foster wireless competition sank

The Globe and Mail

A Wind Mobile store. (JENNIFER ROBERTS FOR THE GLOBE AND MAIL)

‘Today marks a new chapter for wireless in Canada.”

That was Anthony Lacavera’s bold declaration as he launched Wind Mobile on a chilly day in December, 2009. There was a buzz in the air as hundreds of people packed Toronto’s waterfront to watch the 35-year-old chairman unveil a six-metre statue of “Joe,” a tribute to the average Canadian consumer. Joe was a symbol for the millions of Canadians who would, presumably, soon be reaping the benefits – a lower cellphone bill – of increased wireless competition.

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It was billed as a “historic day” for the cellular industry – and, in a sense, it was. Wind’s launch was the end result of a deliberate strategy by the government of Stephen Harper to deal with a burning issue for consumers: the high cost of wireless service in a country where three players dominate the telecommunications market.

In 2008, the government came up with a plan to set aside a portion of publicly owned radio waves – the means by which cellphone and other signals fly through the air – for new entrants to the wireless market. Three new companies – Wind Mobile, Mobilicity and Public Mobile were among those newcomers who took part in the auction.

There appeared to be pent-up demand for the new challengers. Tens of thousands of Canadians had flooded Wind’s “Wireless Soapbox” website with tales of high prices and poor service. Although the company, which was backed by Egyptian billionaire Naguib Sawiris, briefly stumbled on a hurdle when the CRTC questioned its ownership structure, the government eventually cleared Wind for launch.

Mr. Lacavera had every reason to be optimistic.

Three years later, the future is looking less friendly for Joe Canuck. Wireless prices have come down, but the government’s goal of creating viable alternatives to the Big Three in a $19-billion industry is teetering toward collapse. Wind is up for sale, and has struggled to gain a foothold. Its two upstart peers also face uncertain futures. Public Mobile has hired investment bankers to explore strategic options, after one of its main investors decided to cut its losses. And Mobilicity, after months of beating the bushes for a buyer, found a white knight in Telus Corp., which announced a $380-million deal to buy the company this week. If that deal does not get government approval, Telus says, Mobilicity is bound for “bankruptcy.”

The Telus-Mobilicity announcement was a powerful signal that the current government’s wireless strategy is on life support. If the deal goes ahead, it is just a matter of time before Wind and Public Mobile are also swallowed up by major carriers, while a big block of unused wireless licences currently held by Shaw Communications Inc. would likely fall into the hands of Rogers Communications Inc.

The political costs of a failed policy could be significant. The Conservative government has invested political capital in making life better for wireless consumers, tapping into public sentiment over long-term contracts and hidden fees. The deep financial problems of the new players are putting pressure on Industry Minister Christian Paradis to either help the new entrants with more regulation or admit defeat and allow the upstarts to fail or get swallowed up by Telus, Rogers or BCE Inc. – leaving the market in much of Canada exactly where it was in 2008.

How did it go so wrong?

“Look, obviously expectations were one thing and the reality has been something else – I think no one is going to deny that,” Mobilicity’s president and chief operating officer Stewart Lyons said in an interview.

“All of the new entrants are in a relatively tough spot. You know, [it is] different for each one of us, but our spot, I would argue, is particularly tough. We obviously had high expectations, high aspirations when we launched the business three years ago, and some of those have not come to fruition.”

Roadblocks to success

“We will make pain, and they will suffer,” Egyptian telecom magnate and Wind backer Naguib Sawiris told The Globe and Mail in 2010.

A little more than a year later, he returned to say he regretted his decision to invest in Canada. “They take our money and they leave us to the dogs,” Mr. Sawiris said, suggesting the government’s wireless policy had really set up the new entrants to fail.

The three small upstarts have many gripes. While Ottawa reserved wireless licenses for new players in 2008, it stopped short of making other changes to ensure the upstarts’ long-term success.

Anxious to protect their market share, incumbents were allowed to launch more discount brands, such as Rogers’ Chatr and Telus’s Koodo, to compete with the still-wobbly trio of upstarts.

The government, meanwhile, created rules around roaming and tower sharing but failed to enforce them. In fact, Industry Canada waited until this year to beef up those provisions. “We anticipated about a third of our sites to be shared, and today about 3 per cent of our sites are shared. So, that had a huge impact on our startup costs,” Mr. Lacavera said. More tower sharing would also have allowed Wind to roll out much faster, because it would not have needed to secure so many locations and obtain building permits.

Roaming rates are a third pain point. Just last month, Wind once again criticized the government for its “apparent unwillingness to deal directly with artificially high domestic roaming rates.” It also decried the lack of action on other thorny issues including termination fees, three-year contracts and the use of bundles to keep consumers from switching carriers. In a submission to Industry Canada, the company argued the “conditions simply do not yet exist” to sustain a fourth carrier in each region.

There are other, technical complaints: “hard hand-offs” of calls between carriers, which cause calls to drop when customers travel outside of an upstart’s service area.

The big telecom companies say seamless transitions present technical challenges and argue they provide domestic roaming at commercial rates.

But the new entrants are partly to blame for their own misfortune. They underestimated the impact of the smartphone revolution and the sea change it would bring to the industry. After they launched, the business model quickly shifted from talk-and-text on flip phones to data consumption, including mobile video, on devices like the iPhone. None of the smaller companies offer the Apple phone.

In a further testament to how much the market has changed, Wind’s former CEO Ken Campbell’s marketing hook on launch day was: “You can replace your BlackBerry every year if you want, based on our proposition.”

But after three years, the new entrants have captured less than 6 per cent of the market after spending much of their early days focused on the low-budget prepaid customer that pays up front for service. Wind shifted its focus to postpaid in mid 2012, while Public Mobile has begun offering data services including unlimited mobile music service.

“I thought the talk-and-text model, which is what that was, would last us for three or four years,” Alek Krstajic, Public’s chief executive officer, said in an interview last year. “Very quickly we realized the market is moving quickly.”

For their part, the big wireless companies say competition has never been more fierce.

“No one is going to back off, they can’t afford to,” George Cope, BCE Inc.’s chief executive officer, told journalists following the company’s annual meeting in Toronto. “I’ve been in the business since 1985, I don’t think I’ve ever seen it as competitive from an intensity perspective.” (BCE owns a 15 per cent stake in The Globe and Mail)

But critics say competition wasn’t the first priority for the government when it came time to auction off publicly owned wireless spectrum, first in 2008 and again later this year, arguing that maximizing revenue has become more important. Increasingly, analysts are suggesting that the 700-megahertz auction, scheduled for November, but with a June 11 deadline for applications, will have to be delayed.

“I fear that the train does seem to have left the station on its way to, if not a train wreck, a dead end in terms of the competitive intensity of the Canadian wireless market and maximum benefits for customers,” said Martyn Roetter, a Boston-based telecom consultant, who recently spoke at the Canadian Spectrum Summit in Toronto.

A plan for competition

To understand how the Harper government’s wireless plan unravelled so badly, it’s worth looking back seven years to revIew the assumptions they had.

By the time the government prepared to auction off publicly owned wireless spectrum in 2008, successive administrations had spent 15 years trying, and largely failing, to foster greater competition in the wireless arena. Some inside Industry Canada were dismayed to see first Clearnet, and then Microcell, get swallowed by larger players.

“Since 1993, Canada’s policy has been to rely on market forces to serve consumer interests in telecommunications,” said Leonard St-Aubin, who retired in 2009 as director-general of telecommunications policy with Industry Canada. “That policy can only work if you have a dynamically competitive market.”

Shortly after the Conservatives came to power in 2006, the government released a report commissioned by the previous Liberal regime that found Canada’s market for wireless services was trailing the rest of the OECD, due to lower penetration and usage rates, and higher prices. A key solution, the report stated – outside of its mandate – was to drop foreign ownership restrictions.

That was music to the ears within Industry, where some senior bureaucrats had internally pushed for years for the end of foreign ownership restrictions, only to be thwarted by concerns elsewhere in government that opening the door to foreign buyers in telecommunications would lead to takeovers in broadcasting – and threaten Canadian culture.

But while newly minted industry minister Maxime Bernier, a strong libertarian with a young like-minded staff, seized on the report, it was evident that revisiting foreign ownership liberalization would be a non-starter in a minority government. Still, wireless “was one of those areas where [Mr. Bernier] thought there was room for regulatory reform,” said Paul Beaudry, Mr. Bernier’s telecommunications policy adviser from 2006 to 2007. So the minister launched a process that would lead to an auction of wireless spectrum in 2008.

The goal of the auction, said Paul Boothe, associate deputy minister of Industry from 2007 to 2010, was broad: to create more competition. “We didn’t have a view about what the ultimate market structure should be,” he said. “No one knows ahead of time what these changes in market structure will produce, and technology is changing rapidly. It was an experiment. We had to see what would happen if we introduced more competition but not full competition.”

From the outset the government’s options were limited, given that foreign ownership changes were off the table. “If you have a view there is not enough competition and ask what can government do short of regulating, you end up in a space of spectrum set-asides,” said a former senior government official who asked not to be identified. “You don’t have a ton of alternatives and options, especially in a minority government.”

The incumbents were strongly opposed to making any special allowances for new players – while many in Mr. Bernier’s office felt the same way, opposing the set-aside of spectrum. “I was skeptical of the virtues of a set-aside,” Mr. Beaudry said. He felt that by limiting who could bid on part of the spectrum, it would lead to reduced prices by buyers who either didn’t need the help – or would inevitably sell out to an incumbent at a higher price. “The consequence of the set-aside was a delay of allocating the spectrum to the companies that value it the most,” he said.

But others at the departmental and political level didn’t see it that way, swayed to some degree by a successful multifaceted campaign by Quebecor Inc. to push for a set-aside as well as mandatory use of roaming capabilities and towers of the incumbents. That would give the new entrants a hand against dominant entrenched competitors. (In the end, the Bernier crew wouldn’t be around when the final decision was made – Mr. Bernier was shuffled to Foreign Affairs in the summer of 2007, giving way to the more accommodating Jim Prentice, who now sits on BCE’s board of directors.). “Wireless is not a mom and pop business,” said another former senior Industry Canada bureaucrat. “You need a lot of money and staying power, and it’s very tough for new entrants to make a go of this.”

In the end, the auction put the boot to another one of the objections of the incumbents: That a rigged auction would raise far less money than an important public resource deserved. “I remember being in a meeting with lobbyists [for the incumbents] where they said ‘If you have an unrestricted auction, you’ll make $1.2-billion, and with set-aside, you’ll only get $800-million, so that will cost the taxpayers $400-million’” Mr. Boothe said.

Things didn’t turn out that way: The auction raised over $4-billion. To government, it was proof that the process was sound. “There were more people out there who thought they could make a buck by bidding on spectrum,” said the senior official speaking on background. “They didn’t bid to please the government or meet its policy objectives. They came in because they thought there was an opportunity” to make money.

Five years later, Mr. Boothe said, there’s little doubt the new entrants created more competition and choice. “Whether prices are lower, you can probably get people to say yes and no to that,” he said. “If you’re asking ‘Did this create a stable market structure?’ I think the answer to that is, ‘Not yet.’ If that is one of the requirements of the policy, then we need to keep working on this, because the small guys have not proven to be durable.”

But while bureaucrats may stop short of calling the past five years a failure, Martin Masse, another former policy adviser from Mr. Bernier’s office, holds a different view: The competitive regime is “a mess” because the government hasn’t fully addressed the foreign ownership question. Successive industry ministers, he said, “still haven’t done what should have been done then and would solve the problem now” – by opening the whole sector to foreigners.

“It’s still the same old story, the same old problem,” he said. “You still have all the mess of five years of not having a level playing field and the foreign players are not that interested in coming here. We would have known if there was a place for a fourth national player if we’d opened to foreign ownership five years ago. Today it would all be solved.”

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