What Happens If Verizon Doesn’t Come?

Heritage Minister James “Macho Man” Moore. Ooh yeah, dig it!

If there was any remaining doubt about where the federal government was coming down in the wireless war currently raging in Canada, Industry Minister James Moore put the issue to rest Tuesday evening with a rather sternly worded post on his website.

Bell Canada board member Anthony Fell provoked the reaction by first penning an open letter published in the Financial Post, wherein he charged the government of reacting to “a political populist initiative to capitalize on a misinformed public view of Canada’s telecommunications industry” through its alleged efforts to spur Verizon into expanding into the country.

Moore was having none of it: “Unlike Mr. Fell, I do not believe the public is misinformed. I think Canadians know very well what is at stake and they know dishonest attempts to skew debates via misleading campaigns when they see them,” he wrote. “Equally, Canadian consumers know instinctively that more competition will serve their families well through better service and lower prices.”

In the world of professional wrestling – which this over-the-top fight has at times resembled – that would be known as a “finishing move.” Bam! Cue Moore’s music and hit the pyro.

Until now the government has played it pretty cool, with Moore, his predecessor Christian Paradis and Prime Minister Stephen Harper all maintaining that they are simply committed to promoting more wireless competition. But the Industry Minister’s extraordinarily harsh words spell out in no uncertain terms what the government really thinks of Bell, Rogers and Telus.

Given that, an intriguing question emerges: What happens if Verizon doesn’t enter Canada?

Many industry observers agree that the clock is running out for that to happen, since the deadline for registering to participate in the next auction of spectrum licenses – which is simply a must for any player – is just a month away, on Sept. 17. Verizon could conceivably participate in some fashion after that date, but that would likely lead to some muddy waters. If the company is going to enter Canada by acquiring Wind and/or Mobilicity, such deals need to happen really, really soon.

So, what if the company ultimately decides against pulling the trigger, or some other forces prevent it from coming north? What then?

The government is clearly displeased, so some sort of intervention would be very likely. Here are some possibilities, along with their respective likelihoods or desirability:

Another buyer: Verizon isn’t the only entity interested in acquiring Wind and/or Mobilicity. Private equity buyers – at least one of which could be stealthily backed by Rogers – and current Wind chairman Anthony Lacavera are also in the game. Neither option is particularly desirable, though, because they would likely result in one of two things; either the smaller companies continue to be relatively poorly resourced compared to their bigger competitors, or they simply become speculative investment vehicles that will be sold to the Big Three just as soon as the government allows that to happen. In other words, status quo.

There is one other unspoken possibility. Remember that scene in Return of the Jedi where the ghost of Obi Wan wistfully tells Yoda that Luke Skywalker is their last hope, to which Yoda replies, “No, there is another.” That scenario may apply here too. Verizon is the only big wireless company we know of that has approached Wind and/or Mobilicity. That doesn’t mean others haven’t. A source close to the situation tells me that T-Mobile has also kicked the tires on at least Wind. Intriguing? You betcha.

Either way, a big, international wireless company would be the most desirable buyer of the new entrants, since it would be a “strategic investor” looking to grow its businesses, rather than just a speculator out to turn a quick buck. Multinational players also tend to have track records of expanding into other countries and staying there, so that helps.

More regulation: If a big strategic investor doesn’t materialize, the government may be faced with something it once considered ideologically unthinkable – further regulation. With its anger evident, the sky really could be the limit here. Moore could conceivably direct the Canada Radio-television and Telecommunications Commission to start cooking up a scheme to regulate prices.

I don’t see it happening, mainly because the CRTC’s Wireless Code hasn’t even officially taken effect yet (it kicks in in December). While those incoming rules have already caused the industry to reprice services, notably getting rid of three-year contracts, nobody will know for some time what the full effect of the regulations will be. In this case, it’s probably wise to let one coat of paint dry before applying another, at least in regards to things like pricing. (Interesting Sept. 2 update: It looks like I might be wrong on this point, as the CRTC has just announced that it is probing wireless carriers’ roaming charges.)

Crown corporation: Now here’s a crazy idea – what if the government itself got into the wireless business? This could happen with an acquisition of one of the small players or an entirely new firm could be formed to compete against the Big Three. A government-run corporation could introduce de facto discipline into the market by effectively controlling prices. It’s not unheard of. In 2007, the government of New Zealand bought small internet provider Orcon in an effort to instill exactly that kind of discipline.

Such an event would be extremely out of character for the Conservative government and would kick up all kinds of issues, but then again, we all do weird things when we’re angry.

MVNOs: One regulation that could gain currency in the event that no big wireless white knight emerges is the institution of a mandated wholesale scheme, similar to what exists in wired home broadband. Under such a system, any business that wants to would be able to buy minutes and data from wireless network owners at discounted rates set by the CRTC, then resell them at their own prices.

There are two reasons why, on its own, this would be a horrible idea. For one, such operations – known as mobile virtual network operators (MVNOs) – have a tendency to flop far more than they succeed. Secondly, as anyone who has followed the constant game of regulatory football that is wholesale broadband can attest to, the country needs another headache-inducing system like this like it needs a hole in its figurative head.

Structural separation: As the saying goes, all roads lead to Rome, which in this case could be the forced splitting of wireless networks from the companies that sell services over them. It’s a harsh-sounding step, but it’s actually not all that bad and can be the most agreeable solution to all parties involved, including the network owners themselves.

Basically, it’s a step further than MVNOs in that a network owner spins off its infrastructure into a separate company, which then effectively sells wholesale access to all comers – including its parent – on equitable terms. The split removes huge capital barriers for those looking to get in on the action, which inevitably spurs competition that leads to better services and lower prices. It’s truly Darwinian in that it opens up the field and challenges the best to survive, a market-forces concept the Conservatives are fond of. The network owners also reap the benefits of this competition, since they end up getting revenue from all the players.

The system has had some positive effects in the United Kingdom ever since BT split its broadband operation in 2006. Not only is broadband dirt cheap there, the company has also seen its stock price more than double.

All of Canada’s big wireless players have entered into network-sharing agreements already. An extra kick in the pants from an angry government into letting all comers onto those networks may perhaps be the most logical and palatable way forward if some well-resourced foreign competitor doesn’t end up materializing.