Canada Takes A Long-Awaited First Step To Eliminate Archaic Foreign Ownership Restrictions On Telecommunications

The Canadian federal government has (finally) made a move to lift Canada’s rules on telecommunications operator ownership from a previous maximum of 46.7% (20% direct plus 30% indirect) foreign ownership — albeit only for smaller market players. Earlier this week, the Minister of Industry announced amendments to the 1993 Telecommunications Act that will remove all restrictions on foreign ownership of wired and wireless network operators that have less than 10% market share. Details haven’t been provided on precisely how this will be calculated, but it’s assumed it will be based on national market share in terms of revenues and addressable customers. The rationale stems from Conservative government’s desire to stimulate competition in the Canadian national market where two operators — Bell Canada and TELUS — dominate fixed-line business and consumer voice and data services, and where three wireless operators — Rogers (which is also a major cable operator), Bell Mobility, and TELUS — have a 95% chokehold on cellular services.

Periodically over the years the federal government has commissioned studies to review the potential impact of foreign ownership on the economy and for specific industries. Each time, the resulting report has recognized and recommended changes to the rules. For example, in a 2006 study, a parliamentary committee concluded that "foreign ownership restrictions compromise, among other important economic contributions, the diffusion of new communications technologies and Canadians' access to modern communications services. [Therefore] the Committee recommends the complete removal of Canada's foreign ownership restrictions applicable to telecommunications carriers." But until now, no concrete action had been taken. (See http://www.part.gc.ca/InfoComDoc/17/2/INST/Studies/Reports/instrp03-e.html and http://www.telecomreview.ca.epic/site/tprp-geert.nsf/en/rx00073e.html.)

WHAT IT MEANS

* Canada narrows the gap to attract foreign investment. Canada has lagged other industrialized and many emerging economies as well on removing foreign ownership restrictions. Since the late 1990s, most countries of all sizes have removed all or most foreign ownership restrictions. This move helps Canada “catch up” with others, signaling the government’s desire to attract foreign capital investment in a critical technology sector, at last. I have always been opposed to any restrictions on foreign ownership in telecoms and welcome this first step.

* 25% of 700 MHz spectrum will be reserved for any-comers. The same announcement included the government’s plan during the first half of 2013 to auction new radio spectrum for 4G wireless services in the 700 MHz band which Verizon and AT&T in the US are using for their LTE services. These lower frequencies signals travel farther and also provide better in-building penetration than higher frequencies such as those used for today’s 3G (EVDO and UMTS) and 3.5G (HSPA+) wireless data. Also, fewer radio base stations to cover an area, resulting in build costs of about half those for constructing a network using 1700 MHz, 1900 MHz, etc. Twenty-five percent of the spectrum to be auctioned will be reserved for bidders with less than 10% market share. This will allow firms like the cablecos Videotron and Shaw to play an active role, and also may push newcomers like Mobilicity, Wind, and Public Mobile to merge and solicit funding from foreign investors to make a grab for regional licenses at the lowest cost, since they only have to bid with other small players for a substantial chunk of spectrum.

* We don't expect significant interest by US operators to expand in Canada. Canada’s rule change won’t raise interest by US telecoms giants to expand their presence in Canada beyond existing data centers. But it does mean that smaller and new players will be able to get lower-cost funding from international lending institutions and investors than under the previous rules. Potential interest in the 700 MHz spectrum auction or in a later one planned in 2014 might come from a small Asian operator like “3” which currently operates networks in the UK and Hong Kong, who are interested in building a North American network bridge between Europe and Asia, or by others in the Middle East, etc. who would focus on Canada’s extensive immigrant population.