Market News- Canada will allow foreign ownership changes in the telecom industry- What are the impacts to Canada?
12 March 2010

Market News- Canada will allow foreign ownership changes in the telecom industry- What are the impacts to Canada?

Changing government regulatory rules mean sweeping changes on the horizon for the Telecom industry in Canada. What are the impacts to Canada?

On March 8 2010 the Canadian government announced proposed changes in the telecom industry during the government's Speech from the Throne. The Coles notes summary: Canada will eliminate restrictions on foreign ownership in the regulated telecommications sector.

The reality may be much less dramatic.

A day after the Throne Speech, the federal budget made reference only to removing foreign ownership restrictions on Canadian satellite companies, but not to the much broader telecom sector as a whole. But the exact details are not known yet. This kind of policy change will pave the way for more changes in this industry.

The Candian budget did not fully reinforce what was said in the "Throne Speech" and this has led to widespread confusion in the industry, as big telecom companies, analysts and investment bankers tried to figure out the government's actual intentions.

Industry experts agree with some of my guesses about the future trends. Liberal industry critic Marc Garneau said he thinks the Harper government still intends to move forward with liberalizing foreign ownership rules, despite the ambiguity contained in the budget. The Conservative government hasn't quite figured out how to go about it and that is why all of this still is very confusing.

I believe it is the Canadian Government's intention to begin changing the telecommunications landscape. Canada is saddled with three big companies that monopolize and control the pricing, keeping prices artificially high. Canadians pay the highest rates for telecommunication and wireless services in the World. Telus, Rogers, and Bell have definitely conspired to keep revenue high by keeping prices high. A competitor called Wind has recently appeared in the Canadian market to disrupt (partially owned by Egypt's Orascom). This is the beginning of change and the floodgates will open up with time.

Analysts expected a flurry of mergers and acquisitions after the announcement but it is more likely that change will slowly evolve over several years. Canada is, in fact, more likely to see regulatory reform in line with recommendations from blue-ribbon panels that date back at least four years. A phased in approach will be taken to ensure the market does not implode.

The clearest merger on the horizon is a Bell and Telus. They co-developed their 3G+ network together and they are collaborating strategically. This would bring the West and East of Canada together into a single telecom. It is fairly easy to see that this is definitely on the horizon. There will almost certainly be renewed attempts to create "Belus," a merger of BCE Inc.'s Bell Canada and Telus Corp.

The Canadian business markets were in a frenzy when the annoucement was made. Ottawa's plodding regulatory community was stunned, and Canada's big telecom companies were shaking and cautious. The federal government appeared to be striking down barriers to foreign investment in Canada's "satellite and telecommunications industries."

"We will remove the existing restrictions on foreign ownership of Canadian satellites as a first priority," wrote Industry Minister Tony Clement's press secretary, Lynn Meaha (quoted in The Globe and Mail- Monday, March 08, 2010).

The important thing to gain from the Government of Canada's is that change is on the horizon and Canada recognizes the need to fundamentlaly overhaul the painfully expensive industry and this is slowing innovation and growth in Canada in general. Wireless technology is so expensive in Canada that it creates inequalities in access to technology and information.

Industry Minister Tony Clement's press secretary, Lynn Meaha goes on to say-- "Our government will also be investigating the existing restrictions for the telecommunications industry. This is a complex issue involving changes to business models, rapidly evolving technology, and existing legislation, such as the 1993 Telecommunications Act." This is a typical political answer you get fromn a Canadian poltician. About as informative as concrete.

Bell, Telus and Rogers Communications Inc., meanwhile, were cautious and cagey, with experts weighing in on the implications of new competition suddenly having access to very deep, foreign pockets - and whether they themselves could be bought out by a gigantic foreign telecom player. Its great stuff. If anything it puts the industry back in it's place and forces a rethink. Bell launched a customer service enhancement marketing campaign immediately, offering longer hours and more access to customer service.

There was a time when you had to call between 8:30 am and 6pm to get customer service, and had to wait on hold up to 1/2 hour to talk to someone. It was bad, really bad. That is just how bad Telecom has become in Canada. Expensive and poor service. This is about to change with these massive changes on the horizon. Competition means effort will need to be expended to keep customers happy and retain those customers. Greedy Canadian telecoms will need to rethink their approach to interacting with their customers and the wheels are turning. Bell has a long way to go in this area.

FAQs and Analysis Summary

What are the current foreign ownership rules for telecom?

Foreigners cannot own more than 20 per cent of a Canadian telecom provider's voting shares; nor can non-Canadians own more than one-third of the voting shares in a carrier's holding company. At least 80 per cent of a company's board of directors must be Canadian. And the holding company is also not allowed to be controlled "in fact" by foreigners, which is what originally held up Egyptian-backed Globalive Wireless Management Corp. from launching Wind Mobile.

What did the government actually say?

In the Speech from the Throne: "Our government will open Canada's doors further to venture capital and to foreign investment in key sectors, including the satellite and telecommunications industries, giving Canadian firms access to the funds and expertise they need."

In the budget: "Consistent with the recommendations of the Competition Policy Review Panel, the Government is acting in Budget 2010 to remove the existing restrictions on foreign ownership of Canadian satellites."

In an e-mail to The Globe and Mail: "Our government will also be investigating the existing restrictions for the telecommunications industry. This is a complex issue involving changes to business models, rapidly evolving technology, and existing legislation, such as the 1993 Telecommunications Act."

How could Ottawa change the rules?

Changes in telecom foreign ownership would require statutory amendments to the Telecommunications Act through Parliament, experts say, which would in turn require the support of an opposition party (Liberals are a go; NDP, not so much). Industry Minister Tony Clement has mentioned adding telecom companies to the foreign investment aspects of the Investment Canada Act, but legal experts said they were confused as to how one act could go on to trump another.

What could all this mean?

Depending on what rules are relaxed, and when, it could mean widespread consolidation. Mergers and acquisitions could ricochet through the telecom industry. Bell and Telus could merge. Cable companies could sell out to large American companies. Rogers might buy out Cogeco Cable Inc. And huge international conglomerates might chose to invest in small Canadian start ups.