The Canadian Telecommunication Market: The Failure of the Market

“The decision not to do a wireless launch is probably the correct one, in our view,” Mr. Allen wrote in a research note. “If they could have secured a partnership with Rogers, then we think the economics might have been sensible. But having watched Videotron and other new entrants over the last year, the cap-ex cost to do it alone is very high (likely $1-billion for Shaw) and returns have been more modest than initially expected.”

–          Shaw kills wireless network plan, Iain Marlow, Globe and Mail Website; Thursday, Sep. 01, 2011

Shaw Cable is a multi-billion dollar company that is traded on the TSX, and has been on the Canadian Media landscape for over 30 years. It has bought Global’s old television and Cable assets. This is a company that has revenue and has been increasing its dividends. Shaw Cable is not a company that is losing money and yet it is not going to move forward with its planned cellular network.

In 2008, Shaw paid $190-million in spectrum auctions held by the Federal Government. The auctions were supposed to free-up some of the Electromagnetic spectrum in Canada to allow for new cellphone companies to enter the Canadian market. These auctions were supposed to allow for competition in a market which has had very little.

Shaw was one of many companies that decided they wanted a piece of the “oligopolic” market controlled by Bell, Rogers and Telus. This time we were told it was going to be different. For let us not forget we have been done this road before. In the early nineties we had five players in the cell phone market: Clearnet, Bell, Rogers, Telus and Fido. In 2000, Telus bought Clearnet for $6.6 Billion Dollars. Fido, on the other hand, went bankrupt once and its reconstituted form was then bought by Rogers. Or put different, the incumbent players have a very big head start. This is what Shaw found. And it is not the only company to find this.

In the early nineties, the CRTC and the federal government indicated that they wanted to have more competition in the telecommunications industry. At that time, the move from a utility based model to a more retail pricing model was seen to be the start of lower prices and more competition. At that time, AT&T said that this was an opportunity to “return” to the Canadian Market. It worked with three banks to create an ownership structure which was acceptable to Canadian Law and started to do business in Canada as AT&T Canada. From the early 1990’s to 2003, AT&T Canada tried to compete with the incumbent telephone firms. Fasken Campbell Godfrey, for example, participated as outside counsel for AT&T Canada Corp. when AT&T Canada and MetroNet Communications Corp. merged on June 1, 1999. The transaction, valued at approximately $7 billion, is just one example of AT&T’s commitment to this effort. Yet, it failed when AT&T Canada went bankrupt. It was reconstituted as Allstream and that was eventually sold to Manitoba Telephone Systems: an incumbent telephone company.

So I would think it has to say something about our market, if a major cable company decides it is not in their best interest to start a cellphone arm for which they have already paid $190 million dollars. As most commentators have indicated, Shaw could not even think of selling their existing spectrum for the purchase price. The likelihood is that the asset has decreased in value by $30 to $40 millions dollars.  Additionally, as more spectrum is sold by the federal government the value of the spectrum will likely decrease more. So it says something when a successful company is not willing to enter a market which is seen to be lucrative.

It is true that one could look at the entry of EastLink Communications, Videotron, MTS, Wind Mobile or Mobilicity into the space as a success. However, how long will any of them last? As mentioned earlier, previous players have been either bought out or driven under. The market is supposed to help consumers, but it has not.  Consumers have not seen the value that a more open market brings.

Part of the problem is the high costs of entry. Globalive’s essentially borrowed $508-million from Orascom (now VimpelCom) to create a network. These are large sums of money to gamble and the Canadian capital market would not put money into such a venture. Or put differently, Canada is a large country. Geographically larger than the US, China and Brasil, Canada’s population is not distributed in a logical way. When, I drive for four to five hours, moving from Toronto to Ottawa or Calgary to Kelowna BC; I want to have a signal throughout the voyage even if there are not people around. This means that cell companies have to build, maintain and repair many seldom used transmitters.

Additionally, Canadian companies are not allowed to borrow from the international market. Now in my opinion that is a good thing. We want our communications companies to be Canadian for national security purposes. Globalive, Orascom, an Egytian company, is now owned by VimpelCom, a Russian Company. When it comes to free speech, I want companies that are accountable to a Canadian Parliament. The only way that that can be guaranteed is by making sure the company is based in Canada.

So the question is: how can we create a national communications grid, without a lot of foreign capital or foreign control that is competitive with countries like the Netherlands, England and the US?  I would argue that we need to take a look at NAV Canada. For a modified version of that model seems to be the way that European Countries run their phone systems. Or put differently, a joint cost sharing model might allow Canada to have the best telecommunications grid in the world.

Nav Canada is a privately run, not-for-profit corporation that owns and operates Canada’s civil air navigation system (ANS). It paid $1.5 billion dollars to the Canadian government to gain that right. Since November 1, 1996, it has been responsible for the safe, orderly and expeditious flow of air traffic in Canadian airspace. It works simply. It charges pilots and aircraft operators a fee to use its services. So if you use a terminal, you get charged a fee. If you use their weather research services, you get charged a fee. If you get directed to land at an airport, you will likely be charged a fee. Given that Nav Canada has seven area control centres, 41 control towers, 58 flight service stations, eight flight information centres and over 1,000 ground-based navigational aids, it is clear that Nav Canada will get you at some point. So, it should not be a surprise that Air Canada notes that Nav Canada will charge its clients a Surcharge. The “NAV surcharges within Canada are either 9 / 15 / or 20 CAD based on distance.” For transborder passengers, the charge is $7.50. “This surcharge is collected to cover the fees that Air Canada pays to NAV Canada to operate Canada’s Air Navigation systems.” The revenue from the fees is returned to the system. No dividends are paid to outside companies, unions interests or stakeholders. Not even the federal government gets a fee. That cannot be said about other players in the airline industry such as airports or airlines. All of the revenue goes to the upkeep of the system. So the system continues to be the best in the world.

The same type of system can apply to our telephone, cable and wireless companies. The federal government could purchase the communications infrastructure from Wind, Mobilicity, MTS, Shaw, Rogers, Bell, Telus, Cogeco, Videotron, Eastlink, Sasktel and any other firms. The system could be combined, streamlined and upgraded.  

Once upgraded, a privately run, not-for-profit Corporation could manage access from the consumer side and the supplier side. A fee for each could be charged. Such a fee would allow the system to be competitive and upgraded over time. The fee could be $10/month or $20/month. Of course, content would be extra and that content would be provided by the same old firms: Shaw, Rogers, Bell and Telus. Additionally, with one system that is maintained for everyone, the savings would be enormous. Shaw, Bell, Telus and Rogers would have less infrastructure costs so they would likely expand into each other’s regions. Furthermore, retail customers would get additional savings because new entrants would come into the market providing actual competition.

Every Canadian could have access to the best wireline and wireless network possible. Like the British or Dutch, we could have a leading edge fibre-optic network. Like the rest of the world, we could have a phone network that is actually using 4G or 5G technology, rather than our present network which uses 3G techonology but is 4G compatible.

Companies are increasingly requiring the best technology in the world to do business. Just as companies look at tax rates and the condition of roads, companies want to ensure that the communication infrastructure they depend on is reliable and cable of instantaneous video reception. This means that online seminars, webinars, video conference calls and other video meetings are possible. In this area, Canada needs to catch-up, for we find ourselves at the bottom of the OECD pack.  This is a simple way of fixing a system which needs investment and money. This is a Liberal way of solving our telecom problems. The question is will somebody take up the challenge.

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