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Streetwise A big step in Ottawa’s plan to get a fourth wireless carrier

Ottawa is singlemindedly focused on a fourth carrier that it says will benefit consumers.

Fred Lum/The Globe and Mail

The federal government's latest strategy to foment competition in wireless at first brings to mind Albert Einstein's famous definition of insanity – doing the same thing over and over again and expecting different results.

The government on Monday announced it would set aside valuable spectrum for mobile phones that could only be purchased by a company that wants to compete with the big three in the wireless business: BCE Inc., Rogers Communications Inc. and Telus Corp. That had echoes of the government's 2008 spectrum auction, which set aside spectrum for new entrants. That spectrum was eventually purchased by Mobilicity and Wind Mobile, which are now struggling to make a go of it.

Dvai Ghose, a well-respected telecom stock analyst at Canaccord Genuity, channelled Einstein when he opined in a report that "we have seen this story before and it has not resulted in success for the new entrants" and that "we wonder why the government believes that following the same strategy that has failed to date would have a different outcome this time around."

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That risks giving the government too little credit on two fronts. One, that the government has not learned anything from its mistakes on this file – and there have been more than a few. And two, that Ottawa has not been talking to potential consolidators about what they need on their shopping list before they go ahead with what the government so desperately wants: create a fourth national wireless carrier.

A roadmap to creating that carrier has to include how to get more spectrum, because the business is increasingly about bigger and bigger data plans as people transition to smartphones. Given that the Big Three can outbid most anybody in an open spectrum auction, the government has to find ways around that.

A lobbyist for Verizon Communications Inc. met with Industry Canada officials late last year. And the federal lobbyist registry shows meetings between senior Quebecor Inc. officials and Industry Canada regarding telecommunications in February of this year. What are the chances that those meetings did not touch on what those companies would need to try a fourth carrier?

"I can't believe anyone is saying this doesn't move the needle," said Macquarie telecom analyst Greg MacDonald. "You must assume Quebecor has had a conversation and said 'wink wink, nudge nudge, and this is what it takes to make the economics work.'"

And when Verizon's lobbyist met with the government, "my guess is Verizon pressed the point then as well," Mr. MacDonald adds.

So would have any of the private equity firms that have been circling the file.

True, on its own this move is not enough. Still on the shopping list would have to be a way to ensure cheaper roaming charges when customers on an upstart's network in urban areas head into other areas where only the Big Three have towers. The industry regulator is looking at that later this year.

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And finally, there has to be an exit strategy. The government would like to limit the ability of anybody who buys this new spectrum to sell it, but that ignores the reality that anybody who takes a gamble on creating a fourth network will want to know there is an escape hatch if it doesn't work. The government's record on this so far – limiting the ability of Wind and Mobilicity to sell – will not inspire great confidence in anybody eyeing getting in.

So yes, this has to only be viewed as step one, but a big one.

Mr. MacDonald thinks one strategy that's open to an upstart is based on cheap data. A new entrant with a lot of spectrum relative to its small number of customers can price big buckets of data cheaply. An incumbent with millions of customers and spectrum that's straining at capacity cannot match it for fear that its network would bog down.

If there is a loser in this, it is quite possibly the backers of Wind and Mobilicity because it reduces the scarcity value of their spectrum. That's somewhat ironic, given that the government wants them to be part of the solution and so has stipulated, essentially, that anyone wanting to get into the auction for this new spectrum will have to buy one of those two first.

Still, the government has been remarkably cavalier about the financial outcomes for Wind and Mobilicity and their investors, repeatedly blocking attempts to sell. Ottawa is singlemindedly focused on a fourth carrier that it says will benefit consumers. Investors in the Big Three and the new entrants are a distant second in the government's mind.

And if the government is to get to a fourth carrier in time to trumpet that as a success before an election next year, the fortunes of those investors may yet take more bruisings as more steps in the plan are laid out.

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