Rogers, Canada’s biggest cellphone carrier, made waves on Friday by taking its lobbying efforts for the next auction of wireless airwaves to the public. The company launched a website that urges Canadians to write to their MPs in support of a wide-open auction, rather than one that will set aside licenses for new cellphone companies.
The auction, expected to happen next year, will sell off the valuable 700-megahertz spectrum that was recently freed up when most Canadian markets converted to digital over-the-air television signals. Many are seeing this auction as the last, best chance for any new competitors to Canada’s big three – Rogers, Bell and Telus – to solidify a position. The previous auction, which had a set aside for new entrants, netted the likes of Wind Mobile, Mobilicity and Videotron, which boosted competition in major cities and supposedly brought prices down, all of which was the government’s intent in giving newcomers a break. In 2008, when the government announced the previous auction’s rules, it made no bones about the fact that wireless prices were too high and usage of mobile phones was too low.
With its new website, Rogers is purveying the message that an open auction without set-asides is the only way that Canadians in underserved rural and remote areas will get its super-fast Long-Term Evolution network. “I want to see Canadians from coast to coast and in cities, towns and rural areas have access to this technology,” says the posted form letter that visitors are asked to send.
I’ve touched on this before. As things stand right now, an open auction without a set-aside for new entrants would effectively amount to an auction with a 100% set-aside for the big carriers; they simply have every incentive to buy every last chunk of spectrum at hugely inflated prices if it means shutting new competitors out. And without that spectrum, new carriers are effectively dead in the water. Making sure the new carriers get some spectrum, most probably through a set-aside, is therefore a no-brainer.
The implied threat of rural customers not getting service is also a red herring. It’s perfectly natural for telecom companies to roll out service in more profitable urban centres first. It’s also perfectly natural that when growth in those places slows, carriers expand to so-called “green fields” where there are new customers. In a way, more competition in cities is good for rural areas because it creates a race to get there. The underserved nature of many of these communities can be considered another byproduct of the uncompetitive market Canada has had across the board. In that way, the government doing the reverse of what Rogers is asking might be the best way to actually achieve the company’s supposed goal.
Aside from that, the attempt by Rogers to rally the public to its cause – a process known as astroturfing, in that it’s effectively faking grassroots support – is a phenomenally bad idea that is likely to backfire spectacularly. Such efforts always do.
Most recently, AT&T got burned when it tried the same logic and tactics in drumming up support for its proposed takeover of T-Mobile. AT&T trumpeted the message that the merger was the only way to ensure a rollout of advanced wireless services to rural customers and convinced a number of special-interest groups, one way or another, to back it. The Gay and Lesbian Alliance Against Defamation, for one, recently sacked much of its leadership for doing so, then withdrew the support those individuals had promised.
In just one Canadian example, the Chamber of Commerce took heat in 2009 for supporting Bell and Telus in their effort to overturn a CRTC decision that would have given smaller internet providers access to higher speeds. Bell and Telus tried the usual tack, that axing smaller companies’ access was the only way to guarantee their own continued broadband investments, and enlisted their own special interest and lobby groups as support. Some groups that fell under the Chamber’s umbrella, such as the Canadian Federation of Independent Businesses, didn’t necessarily agree with its position and spoke out, doing much to invalidate the whole effort.
Such things can and will happen as lobbying over the next auction ratchets up, which really raises the question of how gullible the telecom companies think the public, the media and the government are. There’s no other explanation for why they keep trying with such doomed-to-fail tactics.
That said, there is still the essential substance of what Rogers is asking for. While a set-aside for new companies is a no-brainer if the status quo holds, there is no reason to believe it will. Before the auction happens, the government is also expected to finally take action on the festering foreign-ownership issue. The exact limits are overly complicated, but foreign companies are currently prevented from having a significant ownership stake in any Canadian telecommunications provider that actually has its own infrastructure and networks. It’s an archaic rule that most developed countries have long since liberalized.
With a majority government in power, it’s looking like the Conservatives are finally getting down to the business they started last year with a consultation on the matter. In that process, they put down four options: do nothing, raise ownership limits to 49%, lift all restrictions on companies with less than 10% market share with bigger companies coming later, or throw the doors open completely. The smart money is on option #3: the first is out and the second is unlikely because it’s effectively like the first, while the fourth could be problematic.
Lifting foreign ownership rules on all telecom companies would likely result in a flurry of mergers and takeovers, both within Canada and from without. My take on what might happen in such a situation is a bit dated, but some of it is still probable (especially Bell and Telus merging). Nevertheless, it’s very unlikely the government wants a string of high-profile, multibillion-dollar mergers to take place in the lead-up to an auction. With that auction a year or two at most away, that’s also probably not enough time for such deals to be enacted, reviewed and consummated.
So what would happen if restrictions were lifted on smaller or entirely new companies? It’s obviously hard to say definitely, but here too the fate of Canada’s wireless market likely lies with whether or not there’s going to be a set-aside for smaller carriers in the next auction.
If the government follows conventional wisdom and decides that – since foreign ownership restrictions are being lifted – the playing field should be equal, then the smart bet is on consolidation. With no set-aside, there will only be room in the auction for deep-pocketed players. Russia’s Vimpelcom, which currently financially backs Wind Mobile, is best situated for that possibility. It would likely take ownership of Wind and possibly try to buy the other two startups, Mobilicity and Public Mobile.
There is the possibility that a fifth large player, perhaps AT&T or Verizon, could get involved and bid on spectrum as a first step toward building its own network from scratch, or buy Mobilicity and/or Public Mobile to get its foot in the door. But, given that the United States – a country with 10 times the population of Canada – is having trouble supporting four national carriers, that’s a remote possibility at best.
Things would get very interesting if, however, the government lifted foreign ownership restrictions and promised a set aside for small and new carriers. While a wide-open auction might effectively declare that the Canadian market is all but settled between four players, an additional set-aside would still leave some wiggle room. There might still be consolidation among smaller players, but they wouldn’t necessarily have to merge. Wind could be bought by Vimpelcom while Mobilicity could sell to AT&T, for example, which would raise the odds of there being more than four carriers left standing after the auction.
Simply put, more players in any market means better prices and innovation will eventually result. It also means some of those players are going to lose money, or perhaps not make as much as they hoped. If a removal of foreign ownership restrictions is a given, the government must then decide on whether its plan to get more competition in wireless has been effective yet. If the answer is yes, an auction with no set-asides is the way to go. If the answer is no, then perhaps new competition must be further stimulated through another set-aside.
The CRTC’s recent Communications Monitoring Report actually quantified the impact of the new cellphone carriers. So far, they’ve amounted to the average cellphone bill decreasing by a whopping 95 cents. That, and the fact that most Canadians still complain about overpaying, means the government’s path forward seems pretty clear.