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John Bitove, chairman of DAVE wireless, and then-president Dave Dobbin, present their new brand name and logo, Mobilicity, on Feb. 2, 2010 in Toronto. Editor's note: Mr. Bitove's name was misspelled and Mr. Dobbin's title was out of date in an earlier version of this caption. (Peter Power/The Globe and Mail)

John Bitove, chairman of DAVE wireless, and then-president Dave Dobbin, present their new brand name and logo, Mobilicity, on Feb. 2, 2010 in Toronto.

 

Editor's note: Mr. Bitove's name was misspelled and Mr. Dobbin's title was out of date in an earlier version of this caption.

(Peter Power/The Globe and Mail)

Canada's newly competitive cellphone market at risk Add to ...

Fed up with expensive cellphone bills, Brian Wilson cut off his wireless service with Rogers Communications Inc. more than a year ago. Today, he’s thinking of going back.

Every time he walks into a building, he worries about losing the signal on his Samsung smartphone. As he travels between his home in Vancouver and the University of British Columbia, where he works, his phone sometimes kicks into “roaming” mode – meaning he’d have to pay extra fees to make a call or use data services – even though he’s still within the coverage area of his new cell provider, Mobilicity.

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He’s not thrilled with the customer service, either: Mr. Wilson says the company gave him the runaround when he tried to have some roaming charges reversed. So while he doesn’t want to give the industry giants any more of his money, he’s having second thoughts about his decision to go with one of the Canadian wireless industry’s newest players.

“If I could get better pricing and support a competitive startup, it seemed like a chance worth taking,” says Mr. Wilson, 46, who designs online courses at UBC. “I’m willing to put up with a bit [of hassle] ... But at some point, you’re thinking, ‘Well, it is really not worth it.’ “

Mr. Wilson is one of hundreds of thousands of Canadians who signed up with the upstart competitors in a Canadian wireless industry overwhelmingly dominated by the troika of BCE Inc. , Telus Corp. and Rogers. But more than four years after the federal government unveiled an ambitious plan to boost competition in the $17-billion sector, new companies such as Mobilicity, Wind Mobile and Public Mobile are still struggling to gain a foothold against the goliaths.

The Harper government’s attempt to engineer more competition for the benefit of Canada’s 27 million wireless users has been successful in a couple of ways: Prices have fallen for the average customer, and service plans are now more flexible. The question is, for how much longer? The upstarts’ networks are still poor – both in quality and scope – and there is constant talk of consolidation among players that may be too financially weak to go it alone. Many believe the endgame will see the Big Three eventually consolidate their grip on the market by buying up their smaller rivals, returning the wireless industry to its former state as a cozy oligopoly.

“There is a fundamental difference between competition and sustainable competition,” says Alek Krstajic, chief executive officer of Public Mobile. “I think what this country needs is sustainable competition.” The upstarts say that for all their success in driving prices lower, they will die off without further help – or without foreign funding, which is currently restricted by Ottawa’s foreign ownership rules in the telecom sector. Some of them are already pointing fingers at the government that encouraged them to launch in the first place, arguing that Industry Canada has failed to enforce the sector’s rules of fair play, such as forcing BCE, Telus and Rogers to share their wireless towers.

The incumbents, meanwhile, argue that Canadians simply prefer the major players’ higher-quality service as well as the higher-end devices they offer such as the iPhone, which the upstarts lack. If the government wants to score political points by lowering prices for consumers, and the big wireless companies say, they will further fragment the relatively small Canadian market and make it more difficult for carriers to afford the latest, greatest wireless technology.

All of this has put the Harper government in a difficult spot. Ottawa is set to auction off valuable wireless licences, probably later this year or next. It must soon decide what the rules for that auction will be – whether to tilt them in favour of new wireless companies by setting aside licences that only they can purchase, as the government did in 2008 to stimulate more competition. Its decision on that question and on foreign ownership will shape the industry’s future, and will help determine whether the new entrants can survive for the long haul, or are doomed to disappear.

A key public policy issue

The last burst of wireless competition, which began in the late 1990s, ended with the new entrants succumbing to financial problems or selling out to the giants they had been fighting for years.

Clearnet Communications Inc. was scooped up by Telus for $6.6-billion in 2000 after it had amassed around two million subscribers. Microcell Communications shook up the market with its Fido brand but later buckled under financial pressure. After emerging from bankruptcy protection in 2003, it faced a hostile takeover bid from Telus before it was purchased by Rogers for $1.6-billion in 2004.

Today’s new wireless players might not be as strong as Clearnet and Microcell were. Back then, fewer Canadians had cellphones, so there were many more new customers to pick off. “They were better financed, and it was a growth environment – as in, all telecom was growing, there was a lot of growth, and the incumbents were on their heels a bit,” says a senior industry executive who has worked at both new and incumbent telecoms.

The price of entry is still steep – it takes hundreds of millions, even billions, to buy wireless spectrum, build towers and lease retail space – but the conditions are no longer as favourable. When the new companies launched in late 2009 and early 2010, about 70 per cent of Canadians were estimated to have cellphones. But in urban areas, where new wireless competitors focused their efforts to gain scale, that number was likely around 85 per cent or higher, especially in major cities such as Toronto, where it is likely closer to 95 per cent.

Michael Hennessy, senior vice-president for government and regulatory affairs at Telus, says new wireless companies were forced to attack on price because they overestimated the number of Canadians without mobile phones.

“It was the belief that things were worse than they were, leading to an assumption that there was low hanging fruit that really wasn’t there,” Mr. Hennessy says. “The only thing left they had to differentiate on was price. And that just puts you into a spiral of a startup company, where you’re always trying to rely on price to grow market share in order to ultimately flip or consolidate.”

For Anthony Lacavera, chairman of Globalive Wireless Management Corp., which operates Wind Mobile, the story of facing new entrants is not so simple.

“The government doesn’t have policies in place, or teeth to enforce policies that are in place, to make sure we are able to compete, and it is on every front,” Mr. Lacavera says. “We’ve faced unprecedented legal challenges, we’ve faced unprecedented regulatory challenges.”

In 2009, the Canadian Radio-television and Telecommunications Commission ruled that Globalive had too much foreign control, and violated ownership laws. The Harper cabinet overruled that, allowing the company to begin service, but the issue is now before the Supreme Court, which has yet to decide whether it will hear the case.

But that has hardly been the only hurdle. While the federal government has forced incumbents to share their towers with  new entrants and allow the upstarts’ customers to roam on their larger networks, those policies have failed, Mr. Lacavera says.

Overcoming obstacles

The Big Three drag out cellular site-sharing feasibility studies, he and others claim, while filling up towers with non-functional equipment. Executives at the new competitors also accuse incumbents of enforcing a roaming policy called a “hard handoff.” It means that when a customer of a new entrant roams onto the network of one of the big players, the call is dropped.

Some of the incumbents have also reacted aggressively in their marketing to the new competitors. Rogers launched a new wireless brand, Chatr, with a pricing structure practically identical to Wind’s. (Such smaller brands owned by bigger companies are known as “flanker brands.”)

“There are, I would say, dubious competitive actions taken by the incumbents, whether it is the launching of flanker brands that directly mirror the offerings of the new entrants – and they offer those plans probably at a loss,” says Stewart Lyons, president and chief operating officer of Mobilicity. “Or their actions with retailers, where they buy shelf space away from retailers to keep us out. Or they don’t share towers or they mess around with roaming.”

Ken Engelhart, senior vice-president of regulatory affairs at Rogers, says any suggestions that Rogers does not share its towers is categorically false.

“To say that we’re not offering them towers is very, very irritating. We’re offering them lots of towers,” he says. “In many cases, they request a tower, we offer them the tower, and then they cancel their request, which is also very irritating. And under Industry Canada rules, we’re not allowed to charge them for all that work.”

As to mandated seamless roaming, Mr. Engelhart says it does not exist in any country. “It is just simply not done.”

While there is agreement among new entrants that Canada needs a fourth national carrier to ensure sustainable competition, the path is unclear.

There is frequent speculation that Globalive and Mobilicity will be the first to merge, but perhaps not until there is more certainty about Ottawa’s auction policy and changes to foreign investment rules. Current law restricts direct and indirect foreign investment in telecom companies to a combined total of 46.7 per cent.

Among its options, the Conservative government is considering whether to allow full foreign ownership of telecom firms with a market share of 10 per cent or less. That would give providers like Wind and Mobilicity more options for raising the money they need to build their networks and weather the early years of operating losses. Without some sort of regulatory change, the past two years will amount to a “blip” where wireless prices came down temporarily before competition fizzled, says Mr. Krstajic of Public Mobile.

The cable threat

But there are others who take a less dire view. Canada, with a population of about 34 million spread over a large geography, might not be able to sustain so many wireless companies. Experts say there is no magic number. “It is not clear to me that consumers aren’t well served today,” said telecom consultant Mark Goldberg. And there are some new competitors with deeper pockets. Quebecor Inc.’s Vidéotron unit has brought new competition to the Quebec market, and Halifax-based EastLink all bought wireless spectrum in 2008 – though in the West, Shaw Communications Inc. bowed out after deciding it couldn’t make a decent return in the wireless business.

With cable TV and broadband Internet, these companies have the ability to bundle services for customers and pose the most serious threat to the big players. “We’re probably the reason that competition is so aggressive now,” says Vidéotron CEO Robert Dépatie.

But Mr. Dépatie thinks the present era of competition is unsustainable and has joined the other new entrants in calling for preferential treatment in the coming auction. He argues that spectrum bought in 2008 isn’t enough to continue on. “[The incumbents]have proven, in the last spectrum auction, that price is no object.”

The issue is one of furious lobbying right now in Ottawa. And the issue is more complicated than just one of prices, says Wade Oosterman, president of BCE Inc.’s Bell Mobility unit. He says Canada’s small population already makes it difficult to bring the best technology to Canada – and to use scale to bring it here as fast and affordable as possible.

“Remember the uproar when we didn’t get the iPhone in time?” he asks. “Even Vidéotron, which is a big company, can’t even get the iPhone because they don’t have scale. If we had 10 Vidéotrons, would we really be better off as a country?”

Mr. Oosterman thinks the big players are good for the digital economy because they can pull in the world’s best devices. He adds that consumers who make the switch – like Brian Wilson in Vancouver – experience a drop in network quality, and that “the new guys lose a tremendously large number of subscribers every month.”

“What Canada has to come to grips with is [that]scale is enormously important and should be encouraged. Seven carriers is crazy for this country, and it leads to negative consequences for industry. ... What the government has to decide is whether we want to have the Apple of telecom or the Dollar Store.”

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WIRELESS VS. WIRELESS

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There is always bickering in Canada about the state of wireless competition.

One side (mainly consumer groups, academics and international organizations) argues that Canada’s large telecom companies are sheltered from foreign competition, operate in a regulated sector, and get away with high prices, poor services and little innovation.

The other side (mainly industry consultants and the large companies) argue that rival studies use flawed methodology that draws from a small sample of rate plans, and that measures small, densely populated European countries against Canada, which has a vast geography and a dispersed population.

Last June, after Organization for Economic Co-Operation and Development reports ranked Canada’s telecom sector as uncompetitive, Telus Corp. commissioned a report from consulting firm Nordicity. The report noted that Canadian wireless voice costs are 10 per cent lower than the OECD average, based on average income; and that the cost of wireless voice is declining more quickly here than in other OECD countries.

This week, SeaBoard Group issued a report arguing that there is no evidence Canada’s geography or population distribution have anything to do with the high costs facing Canadians. It noted that before new wireless firms launched in 2008, Canada had only 8,000 cellular sites, compared with 35,000 in the U.K. and 220,000 in the U.S.

The Seaboard report argues that Ottawa must set aside more wireless licences for new competitors, as it did in 2008, and remove foreign ownership restrictions. The report noted that when the Telus-owned Koodo cell brand raised prices, Bay Street analysts figured its rivals would do the same. “It speaks volumes when one carrier can make a pricing adjustment and the investment community automatically expects the other incumbent brands to follow suit,” SeaBoard said. “That is why Industry Canada must continue its work to enhance competition in the wireless market.”

Iain Marlow

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