With yet another bidder pulling out of January's wireless spectrum auction, the Big Three carriers can fairly claim to have won the battle against a federal government intent on bringing new competition to the sector. Aside from the dangerous possibility that Ottawa could allow airtime resellers in, the government has run out of options.
Next month's spectrum auction was supposed to help aspiring fourth national carriers build their own infrastructure and, eventually, bring greater competition to a market that the government asserted is suffering from high prices and shoddy service.
That is looking increasingly doubtful. The auction will not include a giant foreign player bid, despite the government's heavy courting of a briefly intrigued Verizon Communications. Meanwhile, four of the 15 bidders who put down refundable deposits by the deadline in September have pulled out. The latest is Toronto private equity firm Catalyst Capital Group, whose Newton Glassman declared in May that in order to bring more competition to the market, "We are willing to put our money where our mouth is." He has now pulled his money out of his mouth and put it back in his wallet.
That leaves the Big Three, a host of regional players, and little else, other than a startup backed by serial entrepreneur John Bitove and Globalive Communications, the company behind Wind Mobile, which has struggled and whose foreign owner, VimpelCom Ltd., desperately wants to sell. Meanwhile, the government has stood in the way of takeovers of players such as Mobilicity and MTS Allstream that could have brought more financial firepower to the auction. Catalyst's exit "suggests to us that investors should not expect any viable incremental players to enter Canadian wireless," Canaccord Genuity analyst Dvai Ghose said in a note Thursday. "In our view, the government's dream of a viable fourth player in every market is in tatters."
So the incumbents are big winners, right?
But the telcos are hardly celebrating. The Conservative government, which has been openly hostile to the incumbents, can still do a lot of damage in the remaining two years of its mandate. The telecom regulator has already imposed a telco-unfriendly wireless code capping various fees; the industry's biggest worry now is that the government reverses its policy of encouraging wireless upstarts to build their own network infrastructure. Instead, Mr. Ghose points out, it could declare open season for airtime resellers to set up shop using the telcos' existing infrastructure, pay the incumbents government-mandated fire-sale rates, and drive down prices for consumers.
That might increase competition, but it would come back to bite Canadians in the long term. If incumbents are forced to compete for subscribers with firms who don't have to deal with the cost of maintaining and upgrading infrastructure, the incumbents may simply spend as little as possible, and let the country's high-quality networks fall into disrepair.
The government isn't threatening that yet, but it seems an increasingly likely outcome after the auction falls short of delivering a credible fourth carrier. Punishing the telcos and driving down phone bills by whatever means it deems necessary could feed into the Conservatives' narrative that it is the party that stands up the most for consumers. But if it turns Canada into a country of cheap-yet-lousy wireless service, then what price competition?
Disclosure: I own a small number of Verizon shares.
Sean Silcoff