Ottawa might lift all limits on telecom ownership

Ottawa might lift all restictions on foreign ownership of telecommunications carriers, the government said.
That is one of three options the cabinet is considering according to a list of three choices released today by Industry Minister Tony Clement.
The choices are:

—–Increase the limit for direct foreign investment in broadcasting and telecommunications common carriers to 49 percent;

——Lift restrictions on telecommunications common carriers with a 10-percent market share or less, by revenue; or

——Remove telecommunications restrictions completely.

The release of the list will start a furious six weeks of lobbying by incumbent phone and cable companies as well as wireless startups who are just launching service now, some of whom eagerly want investment to ensure they can compete against the entrenched giants of the industry.

David Dobbin, CEO of Toronto-based wireless startup Mobilicity, predicts the lobbying will be “absolutely intense.”
“Our goal is to encourage investment, innovation and competition in the telecommunications sector for the benefit of both businesses and consumers,” said Industry minister Tony Clement. “We look forward to receiving Canadians’ views on this important issue.”
Industry players and ordinary Canadians have until July 30 to get their opinions to the government. Clement hopes to introduce legislation with one of the options into parliament in the fall.
Incumbents like Telus Corp., BCE Inc.’s Bell Canada and Rogers Communications Inc. have already gone on record as opposing any reform that would give some competitors access to foreign investment based on the amount of market share or revenue they have. They insist the rules should be the same for all.
On the other hand wirless startups and other small and mid-sized carriers might favor a limit because it would divert investment to them and not incumbents. Startups testified in April to a parliamentary committee on opening up foreign investment. 
The government’s background paper on the issue is here.
Iain Grant, managing director of the telecommunications consultancy the SeaBoard Group, said the first two options would likely sound good to the industry, while completely demolishing the foreign ownership restrictions is “a non-starter.” However, he applauded Clement for including it as a choice.
Lifting restrictions for small players is the easiest for most to accept, he said, for it basically means “let’s walk before we run” and relax the restrictions even more. On the other hand, he said, it will lead to a knashing of teeth by incumbents.
The consultation paper notes the Organization for Economic Co-operation and Development (OECD) has said only three of its 30 member countries have investment and ownership restrictions that apply to all public telecommunication operators: Canada, Mexico, and Korea. “Of the three countries, Canada has the most severe restrictions.”


The paper details how the changes would work:

Option 1: Currently the Telecommunications Act effectively limits direct and indirect foreign ownership of a telecom carrier to 47 per cent. The act’s requirement that not less than 80 percent of voting shares of a telecommunications common carrier be held by Canadians would be reduced to 51 percent. A similar change would be made to the rules the Canadian Radio-television and Telecommunications Commission have to consider when it weighs who controls a telecom carrier.

Option 2 would also see an ammendment to the Telecommunications Act to define the criterion to be less than 10 per cent of total telecommunication market revenues. According to the CRTC‘s Communications Monitoring Report of 2009, total telecommunication revenues in 2008, based on CRTC data collection, amounted to $40.3 billion. The threshold, therefore, would be just over $4 billion.

To encourage long-term investments, foreign investors who are successful in growing their market shares over 10 per cent of total telecommunications market revenues would still not have to comply with the restrictions incumbents face under the law.

Option 3, removing all restrictions completely, would recognize the benefits of regulatory symmetry between small and large telecommunications common carriers, the consulation paper says.
Mobilicity’s Dobbin said his choice Option Two, lifting restrictions on companys with less than10 per cent of the market.

However, he also said the issue isn’t foreign investment but the ability of startups to raise money. “Incumbents have no problems raising capital,” he said.

But “it’s more difficult to raise money in Canadian than it is in international markets.”

On the other hand, he touted the fact that Mobilicity’s parent company, Data & Audio-visual Entertainment Wireless (DAVE Wireless), raised more money than any of the three new entrants that have launched service in the last six months. Wind Mobile so far has been totally reliant for funds from its Egyptian-based partner, Orascom Telecom Holdings SAE.
One puzzle is the difference between Option One and Option Two: The first would increase the limit of foreign ownership in broadcasting carriers as well as telecommunication carriers, while the second would only apply to telecom carriers.

Incumbent telephone and cable companies including Telus Corp., Bell Canada, Rogers,  are not only telecommunications carriers for offering voice and Internet service, they are also broadcast undertakings regulated by the Broadcasting Act for distributing TV signals, so only Option One would apply to them.

Telecommunications industry consultant Mark Goldberg calls Option Two the “everyone but Telus, Bell and Rogers” choice. He believes only they have telecom revenues over the $4 billion threshold.

The lack of clarity over the positions of broadcast distribution undertakings, as they are called, may cause them heartburn because they very much want all restrictions off foreign ownership. If Option Three only applies to telecom companies, they’re left out.

Clement has said publicly he doesn’t want to touch the Broadcasting Act because it includes the sensitive Canadian content obligations of TV, specialty cable channels and radio stations.

However, Goldberg notes that the discussion paper says the government “is not considering” changing that act, rather than “will not.” If Ottawa merely amends the Broadcasting Act to allow BDU’s to take advantage of new foreign ownership laws that would clear things up.

In fact, a Telus spokesman said soon after the discussion paper was released that not covering BDU’s is a “significant gap” in the options.

“We’re in a converged world now for delivery of all kinds of content,” said Jim Johannsson, director of media relations. Telcos can’t separate their broadcast distribution services from their voice and data services, he said.

“We’re not opposed to foreign direct investment as long as it’s done in a way that’s equitable and fair to all players. We do not believe it’s appropriate or fair to have asymmetric rules.”

Option One “is not a lot different than what exists today, and Option Two is problematic, because you have to look at the firms you’re giving a competitive advantage to.” These would be startups backed by international telecom companies like Vodafone or Deutche Telecom. “These are massive compared to any of the incumbent players in Canada. They really don’t need special advantages given to them.”

BCE Inc. issued a statement saying it is studying the consultation paper. “Bell has previously stated that we have no issue with increased foreign investment provided the same rules apply to all – big companies and small, telecom and broadcasting – and [foreign] ownership limits are increased to a maximum of 49 per cent,” the statement said. That’s Option One.

Jean Brazeau, senior vice-president of regulatory affairs at Shaw Communications Inc., said that’s the also the preference of three options for the Calgary-based cable company.

“Whatever the solution, we want it to be equitable, to apply to both telecom carriers and cable carriers.” he said in an interview. “We compete in the same markets and we want to be sure no one gains a unfair advantage over the other players.”

However, Shaw’s real preference is that the distribution side of BDUs be added to Option Three so there would be no foreign ownership restrictions for any carrier. It wouldn’t be hard for a company to corporately separate content creators like TV stations or specialty channels from its distribution network, he said. Otherwise Option Three would give an advantage to telecom companies, which would give Shaw “significant problems.”

Like Telus’ Johannsson, Brazeau says giving preference to companies with less than 10 per cent market share (Option Two) opens the market to competitors such as Verizon and AT&T. “They would gain the advantage and we would not,” he complained.

The three options haven’t clarified the government’s strategy, he added. “I’m not sure they’re really made up their minds yet on what they’d like to see,” other than it wants some sort of liberalization.

However, analyst Greg McDonald of National Bank Financial is certain the Industry department wants to get rid of all telecom foreign ownership restrictions. That’s why he thinks the debate will come down to the 10 per cent rule or total elimination. Option Two, the 10 per cent rule, “there to make sure the debate is balanced,” he added. “It’s politically easy, but it doesn’t really address the concerns of the incumbent telcos.”

But he cautioned that the “monkey wrench” in the debate may be the fact that many incumbents are regulated by both the Broadcasting and Telecommunications Act.

“In effect, even if you were to pull the trigger on Option Three, the incumbents would still be treated differently than new entrants. And that is going to be a problem with the incumbents.”

Tony Lacavera, the chairman of Toronto-based Globalive Wireless Management Corp., which arguably caused the government to initiate the telecom foreign ownership overhaul, said the options are a good framework for debate.

But, he added, “the most important thing is that we not let the incumbents muddy the waters by trying to bring Canadian broadcasting or content into the discussion. This is a discussion about foreign ownership in telecommunications, not in broadcasting … They are separate and distinct.”

The issue, he said, is creating competition in telecommunications carriage.

Of the three options, he dismissed raising the foreign ownership limit to 49 per cent as not doing a lot.

“Whether we do a phased-in approach or do this all at once, both of those [options] provide a basis for debate.”

After fruitlessly hunting for Canadian investors, Globalive had to rely on Egypt’s Orascom Telecom Holdings SAE to get into the wireless market. But looking at the depth of Orascom’s involvement, including funding all of its debt, providing the Wind Mobile brand and a management contract, the CRTC ruled Globalive wasn’t controlled by Canadians. That was the opposite conclusion Industry Canada came to.

Last December the federal cabinet sided with Industry, and while the government insisted it wasn’t a precedent many couldn’t figure out what Ottawa’s telecom foreign ownership policy was.

To meet that uncertainty in March the Harper government said in the throne speech it wants to “open the doors” to foreign telecom investment.

The foreign investment restrictions on facilities-based telecom carriers date back to 1987 as part of the free trade negotiations with the U.S. But for the past seven years there have been calls to liberalize the rules, starting in 2003 with a report by the House of Commons Industry committee. The 2006 Telecommunications Policy Review Panel recommended a phased-in liberalization, plus a review of the Broadcasting Act. That was echoed by a 2008 federal competition policy review panel.

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Howard Solomon
Howard Solomon
Currently a freelance writer, I'm the former editor of and Computing Canada. An IT journalist since 1997, I've written for several of ITWC's sister publications including and Computer Dealer News. Before that I was a staff reporter at the Calgary Herald and the Brampton (Ont.) Daily Times. I can be reached at hsolomon [@]

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