The head of a wireless startup and an executive of a veteran carrier painted radically different pictures of the state of cellular competition in this country to a telecom conference this week.
Anthony Lacavera, chairman of six-month old Wind Mobile portrayed his firm to the Canadian Telecom Summit in Toronto as David and the incumbents as arrogant, insatiable Goliaths, while Robert McFarlane, CFO of Telus Corp. sounded an alarm on the dire consequences of policy-maker meddling in free market affairs.
“We searched across Canada and ultimately around the world for a strategic investor,” he said. “At home we were consistently dismissed or ignored by the big financial institutions. I was told numerous times to go back to our cute little Yak (Lacavera’s dial- around long distance service) when we approached large Canadian investors to back us.”
Only Egyptian-based Orascom Telecom Holdings SAE was willing to become the company’s shareholder and financier, putting up the $442 million for spectrum Wind’s parent, Globalive Wireless Management Corp. spent spectrum in the 2008 AWS auction, plus millions more to build its network.
Wind nearly didn’t off the ground when the Canadian Radio-television and Telecommunications Commission (CRTC) ruled the depth of Orascom’s involvement in the company meant it wasn’t Canadian controlled. The federal cabinet over-ruled the commission, saying Globalive met the required test.
But Lacavera said the long term viability of building a national wireless competitor will require greater relaxation of the foreign ownership rules than currently proposed — increasing the direct and indirect foreign ownership limit to 49 per cent from 46.7.
“The restrictions on foreign control were never intended to discourage investment in Canada, but that has been the effect,” he said. “If we want full, meaningful wireless competition in Canada we have to be able to fund it, and if we can’t find funding in our own backyard we have to allow for foreign capital and facilitate access to it.”
Nonsense, said McFarlane. If competitors want to succeed they should do what Western Canadian incumbent telco Telus did: invest strategically, cut costs mercilessly, merge operations where it makes sense, focus on growth markets and find innovative financing.
In 2000, Telus bought wireless firm Clearnet Communications Inc., which launched two networks in less than two years and raised over $3 billion in funding, he said. “Compare that to the story of new entrants today.”
In 2003, he added, when Telus was reeling from the bursting Internet bubble it continued to make large strategic investments.
“Those strategies paid off,” he said. “We had an excellent long term planning and management team that could attract the capital of $25 billion over the last decade right here in Canada. That investment transformed us from a (Western Canadian) regional player to a national competitor so radically different that today over 72 per cent of our nearly $10 billion in annual revenues come from wireless and data.”
McFarlane repeatedly dismissed the viewpoint that government has a role to play in encouraging competition in the telecom market by regulatory means.
“Canadian policy makers are again debating failed models for managing competition and technology, this time in the Internet and wireless markets,” he said. “Government decisions on income trusts and wireless auctions over the past four years have resulted in billions of dollars in capital destruction in the telecom sector.”
The best way to facilitate competition and investment in telecom is to ensure the right incentives exist for carriers to keep investing in new networks and to assume the risk of the accelerating the deployment of new technologies, he added.
Certain myths, such as the belief that the market is not competitive, persist in the telecommunications industry, he said. But Telus’s average revenue per subscriber for wireless voice services has declined by 21 per cent over the past four years due to intense competition. It has seen even greater declines — 30 per cent in the last four years — in its legacy landline business, he noted.
With the government yet to set the rules for the upcoming 700 Mhz spectrum auction, tentatively set for next year, McFarlane also criticized the “faulty” 2008 AWS auction design – which guaranteed spectrum for new entrants — that resulted in incumbents overpaying $1.4 billion on spectrum.
He painted a dark picture of the future should policy makers fail to heed the warnings of facilities-based telecommunications firms.
“You can create all the new entrants and resellers you want, but if there is no business case or real customer service differentiation to support their strategies, the only lasting impacts will be to reduce industry returns necessary to fund long term investments in critical new broadband technologies in the future with the inevitable rationalization through competitive failures or M&As and consolidation,” he said. “We may not be able to fix past mistakes, but we don’t need to repeat them.”
Bernard Lord, president and CEO of the Canadian Wireless Telecommunications Association, who also spoke at the event, said there are “simple steps” policy makers can take to accelerate investments in the wireless market, such as moving quickly on the upcoming 700 and 2500 MHz spectrum auctions, freeing up additional spectrum, repurposing spectrum to higher value uses and increasing the transparency of spectrum allocation.
The government should also adopt a cost recovery formula and reduce annual spectrum fees, he said. In 2009, Canadian wireless carriers paid $130 million, or just under $6 per subscriber, while U.S. carriers paid just under 6 cents per subscriber.
“Anything else is a tax on innovation and will slow down rollout of future networks,” he said.