Gartner
The Canadian government has initiated a review of a highly controversial issue: foreign ownership rules for telecommunications companies.
Recommendations
- The scope of Canada’s review of foreign ownership rules must be expanded to incorporate cable operators and satellite companies. To exclude these groups totally skews any outcome.Any changes in the foreign ownership restrictions should include all carriers, including the established ILECs. To do otherwise would create an artificial competitive environment that would slow industry convergence and unnecessarily handicap the ILECs, which would be reluctant to invest in new services and thereby negatively impact development of telecommunications in Canada.Changes in foreign ownership rules should not be made if they are simply to be replaced with a politicized licensing regime.Despite any foreign ownership rules changes, the Canadian government cannot expect investors from Canada or abroad to make marginal or uneconomic investments, for example, in broadband networks and applications in remote and underserved communities. The Canadian government must provide targeted incentives to stimulate investment in those areas.
Introduction
On 19 November 2002, Canadian Industry Minister Allan Rock asked the House of Commons Standing Committee on Industry, Science and Technology to review legislation regulating foreign investment in the telecommunications industry.
The 1993 Telecommunications Act substantially limits foreign voting equity and prohibits foreign control of companies in the telecom sector. Foreign investors are limited to one-third of the voting stock of telecommunications holding companies and one-fifth that of operating companies.
Gartner Dataquest Perspective
Any Changes Will Be Debated Intensely
The limits are seen as defending national sovereignty by protecting Canadian culture from domination by U.S. or other foreign influences.
Arguments For
Those calling for looser limits say greater access to foreign capital would help companies compete more successfully against Bell Canada and Telus. Indeed, a near monopoly still dominates many segments of the telecom marketplace, as shown by the following:
- In the consumer local market, the incumbents have 99.7 percent of the access lines.In the business market, incumbents have 89.7 percent of the access lines.
Competitors are leaving the business market as a raft of competitive local exchange carriers (CLECs) have declared bankruptcy (for example, C1 Communications, Norigen, Cannect and Stream Intelligent). The financial woes of the No. 3, 4 and 5 national carriers (AT&T Canada underwent court protection, followed by financial restructuring; Call-Net Sprint Canada was forced into financial restructuring; and Group Telecom underwent court protection and was acquired by 360networks) effectively creates a national duopoly between Bell Canada and Telus.
Arguments Against
Opponents say that relaxing the rules in the telephone industry will increase pressure on the government to do the same in cable TV, broadcasting and publishing. Opening these sectors to greater foreign ownership, they fear, would result in handing over Canadian culture to giant media multinationals, especially U.S. companies.
Straddling the Fence
Two big players in Canada have feet in both camps. BCE has extensive media interests, including CTV, the biggest private television network, and the Globe and Mail, a Toronto-based national daily newspaper, and Bell ExpressVu, a direct-to-home satellite company. Rogers Communications, the controlling shareholder in Canada’s No. 3 wireless venture with AT&T, is also the country’s largest cable TV operator, a major magazine publisher and the owner of several specialty channels and radio stations.
What Has Stimulated This Debate?
The state of competition – or more specifically, the lack of competition within the Canadian telecommunications market – has precipitated this debate. However, for many companies, this review is “too little, too late.” Primarily because of a funding shortage, an extensive list of CLECs have left the market. No financial review will bring these carriers back or remove the financial stigma their demise placed on the investment community, no matter where the origin of the investor. One must wonder whether AT&T would have bowed out of total acquisition of AT&T Canada if foreign ownership rules had been changed earlier.
Will This Result in a Flawed Process?
Gartner Dataquest agrees with Rock’s assessment that “the telecommunications industry is critical to the development of the knowledge-based economy. We need to be assured that all aspects of its regulatory regime are world class.” However, Gartner Dataquest maintains that this could become a politically motivated, flawed process.
Why a Review Now?
Although Rock espouses the advancement of Canada’s knowledge-based economy, the timing raises the question of whether the review is motivated by the minister’s political aspiration in running for the leadership of the governing Liberal Party.
Too Narrow a Review?
Gartner Dataquest asserts that a review of foreign ownership alone is too narrow. Rather than addressing the entire regulatory regime, Industry Canada is only reviewing foreign ownership restrictions for telecommunications carriers. Not addressed are the cable, satellite and publishing industry foreign investment restrictions. Heritage Canada’s Minister Shelia Copps, who has the mandate for these industries, has expressed no interest in reviewing the restrictions because of cultural protection concerns. Also, no discussion has been made of reviewing the role of the regulator, the Canadian Radio-television and Telecommunications Commission (CRTC), which has stumbled in its mandate to increase competition in the telecommunications industry (see “Canada’s Telecoms Regulator Stumbles” [TELE-WW-NT-0223]).
The government must recognize that any changes will affect the new converging marketplace for years to come. Like it or not, such regulations or controls are the largest factors shaping the marketplace. In our view, addressing only one aspect of the framework is flawed. Worse still, by addressing only telecom foreign ownership restrictions, government may be creating more problems than it solves. In a converged market where companies compete in numerous industries, to favor one company over another will only create false regulatory markets that will, in the longer term, fail and result in further deterioration of the industry. The Canadian government only needs to look to the United States to see an example of this.
Would Investment Now Come to Canada?
Even if the foreign ownership rules were relaxed, is anyone prepared to step up with investments in the Canadian telecom market? To assume the United States or the capital markets of Europe and Asia/Pacific are prepared to invest in Canada’s telecom industry is overly optimistic. The meltdown in the global telecommunications market has been precedent-setting – $2 trillion in market capitalization has been lost. The markets will rebound and dollars will be available, but not in the short term (see “The Rise and Fall and Rise Again of North American Carriers,” ITSV-WW-DP-0407).
Even when investment dollars are available, it must be appreciated that foreign ownership rules are only one set of criteria that must be met to attract investment in Canada. The regulatory regime must be changed so that new competitors have a chance to prosper. To date, very few new entrants have survived.
Options for Change Under Consideration
Remove Foreign Restriction Rules and Replace Them With Licensing
Industry Canada in its “Discussion Paper” is questioning whether foreign investment restrictions should be replaced with a licensing approach. Currently, only providers of international telecommunications services are licensed. Under the new scenario, there would be no ownership restrictions, but mergers and acquisitions would be examined on a case-by-case basis. In essence, Industry Canada is simply changing the rules, not eliminating them. The final outcome would be that investments would be judged on the political whims of the day. Foreign investors would be reluctant to invest confronted by an unstable environment without defined rules. Equally, the established carriers would be concerned about any new investments, not knowing what government action would befall them.
Change the Rules Selectively by Carrier
Industry Canada also raises the specter of different rules for the incumbent carriers based on size. For example, Bell Canada and Telus would still have foreign investment restriction rules, while smaller carriers would not. It would seem Industry Canada is determined to have greater competition even if it adversely impacts the industry. Canada has one of the best communications systems in the world. In broadband distribution, it has the second-highest per capita penetration, second only to South Korea. In the second quarter of 2002, Canada’s “teledensity” was 99.7 percent. To impose special rules on the incumbents, effectively restricting their competitiveness, would only result in their reduction in further investments and the innovation that comes from them.
The market doesn’t need to supply the least-expensive service, have the most competitors or even be orderly. However, it must be vibrant and innovative if Canada is to remain competitive globally. To handcuff the largest players would be a disservice to Canada.
What the Government Should Do
Because this is such an important issue that will shape the converging communications marketplace and the Canadian economy, the government should carefully consider its next steps. For this Gartner Dataquest recommends the following:
- Broaden the scope of the review. If the review examines only one element of the regulatory regime, it is bound to fail. It will only create an environment that will need fixing later.Consider all aspects before rendering an opinion or making a change. Seek comments and input from interested parties. Encourage industry/consumer participation. A public review of the system obviously has merit but won’t necessarily lead to radical change. This is one instance in which the process is more beneficial than the results. We will learn whether there is a public consensus for change. However, considering how flawed the process is, it is questionable if the recommendations will be implemented. It is very possible the fate of the foreign investment restrictions review will meet the same fate as many of the recommendations of the National Broadband Task Force – being shelved.
Likely Outcomes [return to Table of Contents]
After Canadians review and comment on the foreign investment restrictions, the analysis from the Standing Committee on Industry, Science and Technology will go to Industry Canada. The analysis probably will reveal no clear mandate for a change in legislation that includes only the telecommunication carriers. Even with the Liberal party’s majority and an effective legislation rubber stamp, Industry Canada lacks the consensus needed to bring new legislation to the House of Commons. The process will simply be delayed.
If Industry Canada does increase the scope of the review, allow the committee to perform a thorough investigation and consider all aspects to have a sound policy, the outcome can be beneficial to both the industry and Canadians.
Key Issue
What will be the impact of regulatory, government policy and operator privatization on public network services?
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