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sean silcoff

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The clear and present possibility that Verizon Communications Inc. may indeed enter Canada's wireless market brings two things clearly into focus.

One is that it will hurt the three incumbents, as evidenced by the sharp drop in their share prices Wednesday on news Verizon has offered $700-million for Wind Mobile and is talking to Mobilicity. The other is that the federal government's anything-goes market interventions to support a fourth carrier have so gerrymandered the rules to favour Verizon sweeping in that any investor seriously interested in buying shares in Canadian telecom companies should be spooked. Over time, the costs of this uncertain investment climate could outweigh the benefits that may come to Canadian consumers.

Industry Minister Christian Paradis is no doubt pleased – he's been calling for foreign telcos to enter the Canadian wireless market and has cleared a regulatory path for them. The federal government last year lifted ownership restrictions on wireless providers, but only for those with less than 10 per cent market share (well above the level for either of Wind or Mobilicity, and well below those of BCE, Telus and Rogers). A second move this month saw the government effectively forbid any incumbent from buying an upstart.

But in the name of increasing competition, the government has effectively created unfair advantages for Verizon. For one, Verizon would get a sweet deal because, by forbidding offers from the big three, the government has limited the pool of potential buyers for the upstarts. That no doubt depressed valuations, to Verizon's advantage.

In addition, any company that buys one of the upstarts also gets spectrum for which the original buyer paid a cut-rate price, as it was set aside specifically for new entrants in a 2008 auction. If incumbents had been allowed to bid they likely would have driven up the price to real market levels (the three did buy separate spectrum that was open to all bidders).

Sure, Verizon would have to invest heavily to build on Wind and/or Mobilicity's weak networks in Canada, but over time it has greater advantages, thanks to its massive size (its market capitalization is about twice the combined value of the three incumbents). None of the incumbents enjoy the economies of scale and balance sheet power they would get from being part of a significantly larger company like Verizon, including buying power that would allow them to pay less for handsets. The incumbents' access to foreign capital is relatively limited and they are unable to offer cheaper roaming rates on a U.S. network like Verizon can, which could be an advantage if Verizon woos corporate accounts.

And what if Verizon gets so successful (under the revised telecom rules, it may grow past 10 per cent, but only organically) that it threatens the health of one of the three incumbents? Would any of them be able to sell out – or just the one that is hurting the most? Right now the federal government seems content to let any telco sell to a foreigner – as long as they're in financial trouble. Then again, if the government's primary objective is to hobble Telus, Bell and Rogers, then there are probably a lot of satisfied people in Ottawa right now.

Disclosure: I own a small number of Verizon shares.

Sean Silcoff is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights , and follow Sean on Twitter at @seansilcoff .

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