WordsByNowak

A couple of weeks ago, I wrote a post comparing Sweden’s penchant for internet success with Canada’s, er, not success, and I mentioned how all of the Nordic countries had got it right in laying the groundwork for innovation-based economies. The region has put together the correct combination of government investment, open-access rules that let smaller competitors access the networks of incumbents and an open attitude toward foreign investment. The result is they lead the world in many broadband measures and they’re hitting above their weight in producing online success stories.

Someone recently suggested this broadband issue is my favourite “whipping boy,” which is only partially true. My favourite whipping boy has, in fact, always been Canada’s foreign ownership rules, which prevent non-Canadian companies from any real ownership of telecommunications providers in this country. I’ve believed for a while that our rules are archaic - that they’re out of whack with almost all other developed countries, which generally have an open-door policy for such ownership.

If you look at almost every other such country, you’ll see a veritable United Nations of telecom providers. Even tiny New Zealand, where I spent an amazing year and a half, has three major telecom companies, two of which are foreign-owned: Telecom NZ (local), Vodafone (British) and TelstraClear (Australian).

I’ve argued the benefits of liberalizing our rules many times and it all basically comes down to one fact: if you want to enjoy the benefits of a truly open market, you need to remove any barriers for new players to enter it.

I don’t want to rehash the topic again, but a reader did add a good comment to that Sweden post. “Bwalzer” said he’s pretty ambivalent about the ownership rules and he’s looking for more info. His question, as it relates to the Nordic countries, is that he’s not sure if liberalizing foreign ownership alone can accomplish the goal of having a more competitive market. “Is it possible that open access is a prerequisite to the good effects of a more open market?” he asked.

I was going to write a quick response, but that then morphed into this post. To succinctly answer the question: no, I don’t think open access is a prerequisite, but it definitely helps in a big way.

If you have open-access rules - that is, smaller internet providers who don’t own networks but can use the ones owned by bigger companies for a fee - then you create the possibility for ISPs to start up from scratch. From there, you have to put yourself into the mindset of a person who actually starts a small ISP: what’s in it for them?

Some ISPs start up to service an area that is being neglected by the big guys. Some start up to provide some sort of alternative service that people aren’t getting from the big guys. Whatever the case, none of them start up without at least the modest goal of having a sustainable, profitable business. In the best-case scenario, they should have ambitions of success and, ultimately, riches. That’s the whole point of capitalism, after all: if success and money aren’t at least your outside goals as an entrepreneur, you probably shouldn’t be in business.

From there, there are at least two roads to riches for those entrepreneurs: either their small company grows and grows and becomes successful nationally, then internationally. Although it’s not an ISP, Waterloo, Ont.-based BlackBerry maker Research In Motion is a good example of this route. The other way is to get to a good enough size that you are bought by a bigger player, who is sometimes a foreigner looking to get into the market. This is exactly what happened in the Nordic countries, New Zealand and pretty well everywhere else that doesn’t have foreign ownership restrictions. Going this route is far from a bad thing for entrepreneurs: they can cash in for all their years of hard work and probably land a cushy, well-paying job with the acquirer on top of it. Or they can take their money and start up a new company, or if it were me, retire to Hawaii.

In Canada, this acquisition route isn’t an option because the only potential buyers are also the entrepreneur’s direct local competitors. Rather than buy them out, our big telecom companies can try to drive them out of business, which is what’s happening.

So what about the company looking to enter a new market through acquisition? What’s in it for them to buy a small ISP? Well, it saves them from having to start from scratch. It’s obviously way better to pick up an established business with an existing customer base and build from there, which gets to the crux of our reader’s question.

Starting from the ground up, though, is not impossible, especially where there is opportunity. That’s exactly what’s happening with our new mobile providers. There has been a lot of debate over whether Wind Mobile is Canadian-owned or whether it’s just a front for Egypt’s Orascom, but it’s an argument we wouldn’t be having if we didn’t have our onerous ownership restrictions. Foreign companies would likely have flocked to our 2008 spectrum auction, whether it was Orascom without its Canadian connection in Globalive, or Vodafone or AT&T or whoever.

That got me thinking about what would happen if our government actually did lift those ownership restrictions, which is where we can get into some fun speculation. Firstly, a couple disclaimers. I haven’t looked at the balance sheets of the various companies involved in the predictions I’m about to make, so I can’t say with any certainty if any of this would make financial sense. I’m looking at the future from a purely logical and strategic perspective.

Also, the government is supposedly mulling over different options for easing foreign ownership restrictions. Two of the most likely possibilities are that it drops the restrictions entirely, or that it allows limited foreign ownership for a period of time before throwing the gates wide open. That option would make it possible for foreign companies to enter Canada fresh or to buy existing small players, but they couldn’t start out by buying our big companies, such as Bell Canada.

My predictions are based on the first option, where the restrictions are lifted completely, but they could also apply to the second choice. With no further ado, let’s get to it:

• Bell and Telus merge: It’s a no-brainer and people have been speculating about it for ages. Telus did even attempt it briefly a few years back, but gave up because it was worried there would be competition concerns. At the time, I thought they should be allowed to merge because they didn’t really compete anyway - their territories don’t really overlap and their “competing” wireless services are basically identical. Now, they even share a wireless network, so why not let them merge? By uniting, the duo would form one large national player to take on the multinationals that would inevitably invade. They do overlap somewhat on business services, but one or the other selling off its business would be a relatively easy condition of the merger.
• Rogers and Shaw merge: This is another tie-up that has long been speculated about, but it has never happened because the cable companies are different beasts than the phone giants. Both Rogers and Shaw are products of strong-willed entrepreneurs who built their companies into the heavyweights they are today. The idea of selling out or merging was anathema to the founders and their families. But things change, especially when the barbarians are at the gate. If the ownership rules were dropped, the cable situation would rapidly turn into a case of who would blink first - would Rogers or Shaw be the first to sell out to a U.S. cable company such as Comcast? Both would be deathly afraid of the other doing it first because then they’d either have to find their own buyer or go up against an American behemoth alone. Therefore, it makes almost as much sense for them to unite into a national force as it does for the phone companies. The two have no overlapping cable services, although Shaw does have satellite TV on Rogers’ turf. But just like Bell and Telus on wireless, it’s hardly competitive. Rogers has wireless in Shaw’s territory and Shaw is planning to launch its own service, but I have to believe the Western company would be pretty happy if it could be saved that hassle and expense through a merger. Where things would likely get messy is in broadcast, with Rogers owning various City stations and Shaw owning Global. One or the other would probably have to be sold off. Oh, you could probably add EastLink out in the Maritimes to this merger too.
• Orascom takes full control of Wind: This one’s a no-brainer. Maybe Orascom then sells Wind to another multinational cellular company, like Vodafone, Telefonica or T-Mobile.
• AT&T buys MTS Allstream: Allstream used to be owned by AT&T before Manitoba Telecom Services bought it in 2004. AT&T has made noises to Ottawa in the past about loosening foreign ownership rules so that it could better serve its many business customers here, most of whom are multinational companies. AT&T would love to be able to own all of its own infrastructure, rather than leasing from the likes of Bell et al. Allstream would be a logical and probably affordable choice.
• AT&T buys Teksavvy: If AT&T also wanted to get involved with selling residential internet access, it could go with the time-honoured tradition of a new market entrant buying a local independent company. Teksavvy is pretty much the best-established indie ISP, so there you have it. AT&T is not the only potential buyer, though. Teksavvy could be tied to a deal that acquires one of Canada’s new wireless companies as an acquirer looks to add service bundling capability. A good example is Vodafone New Zealand, which bought small ISP iHug a few years back. Just about everywhere else in the world, Vodafone is a pure mobile company but in New Zealand, it added wired internet in order to compete against the bundles of the incumbent Telecom. It’s an interesting approach that could work here.
• Mobilicity cashes in big: Mobilicity, the other new wireless carrier with operations in the top cities, would be a prime takeover target, given that Wind is already in a long-term relationship, so to speak. If AT&T really wanted to go for it all, Mobilicity would be another arrow in the quiver. Otherwise, any of the big multinationals would probably be happy to get a foot into Canada through the company. That’s probably what the founders have been thinking since the beginning.
• Quebecor goes it alone: Quebec’s Videotron is another successful cable company and it appears to be doing well with its newly launched wireless service. Parent Quebecor pretty much controls the province’s telecom and broadcasting, so unless a company from France wants to take a run, that’s one fiefdom likely to remain untouched.
• What about Public Mobile? No one really knows how the other new wireless company is doing since it hasn’t been forthcoming with numbers, but many people aren’t giving it much of a chance. If Public could survive long enough for the foreign restrictions to come down, it could conceivably attract a buyer.

So, to boil it down, in my dream world of Canadian Telecom 2.0, there would be two major television service players (a combined Bell & Telus versus a merged Rogers & Shaw), three major ISPs (B&T, R&S, AT&T) and four major wireless companies (B&T, R&S, AT&T and Wind). That may not seem like a huge step up from what we’ve got now, but there would be several subtle but important improvements.

Unlike many of the new companies we have now, all of the players would be well financed and on solid ground. Having AT&T, or some other big multinational, would also be a big plus because of the buying power it would bring. AT&T, for example, has more than 90 million wireless customers in the U.S., versus the 7 million or so at each of our big providers. Getting a phone from the company would inevitably be cheaper - kiss those god-awful three-year contracts goodbye - which means the others would have to step up their games. A third, hungrier ISP would also be very welcome. Lastly, there would also be the continued threat of new entry, which is something we just don’t have right now.

The last and most important change is that this finally deregulates the market, which moves away from what I call the worst of both worlds - a mutant hybrid of regulation that is having clearly horrible results where the government has to step in and overrule the CRTC every few months. Who knows: deregulation may not be the way to go and perhaps telecommunications is a business that simply needs to be heavily regulated. We’ll never know unless we fully go one way or the other.