The Fraser Institute's controversial proposal to open up Canada's wireless market by eliminating limits on foreign ownership will add a spark to the debate about competition in the sector but is unlikely to be put into practice, telecommunications analysts say.
"It's a stunningly provocative suggestion," said independent technology analyst Carmi Levy. "It would represent a seismic shift in Canada's telecom landscape. It makes for great headlines, but it's not very likely."
The Fraser Institute suggested in a report released Monday that the government should remove restrictions on foreign ownership of telecommunication companies and apply the same rules to both domestic and foreign firms operating in Canada.
Currently, foreign entities can only control companies that have a market share of 10 per cent or less, and this, along with the setting aside of some wireless spectrum solely for new entrants, thereby limiting the amount controlled by incumbents, promotes inefficient competition, the author of the report, Steven Globerman, argues.
Allowing foreign investors to enter Canada on a larger scale through mergers and acquisitions would "increase competition and provide tangible incentives for wireless companies to improve service and pricing for Canadian consumers," the Fraser Institute said.
The conservative think-tank's contribution to the heated debate over ownership and competition in the wireless industry comes mere weeks before the mid-September deadline for applicants who want to bid on the latest batch of wireless spectrum that will be up for grabs in the January 2014 auction.
The upcoming spectrum auction has attracted heightened attention of late because of rumours that U.S. telecoms giant Verizon is considering entering the Canadian market by either buying up smaller players like Wind or Mobilicity or bidding on spectrum itself.
Canada's "big three" telecom companies — Bell, Telus and Rogers — have warned that Verizon's entry could give the U.S. company an unfair advantage in the Canadian market and have also called on the government to loosen the auction and ownership rules to allow them to bid on all blocks of the spectrum and to buy up smaller players like Wind and Mobilicity.
Broadcasting Act would have to be changed
But while many analysts saw the benefit of discussing possible changes to Canada's telecom rules, few thought the scenario proposed by the Fraser Institute was possible — not least because it would require changes not just to the Telecommunications Act but also to the Broadcasting Act.
"Practically speaking, allowing external-to-Canada companies to bid for and buy a Canadian carrier with greater than 10 per cent national market share is an impossibility," said telecommunications analyst Iain Grant of the Seabord Group.
"Changing the Broadcasting Act means rebuilding the entire structure of Canada's cultural industry and how it is financed ... Changing the telecom act, a relatively trivial task, took over a decade."
The federal government lifted the ban on foreign ownership in the telecoms sector in 2012 but only up to the 10-per-cent market share limit and only after extensive "debate, studies and consultative dialogue," Grant said.
That's in part, says Levy, because telecoms are considered "a national treasure" in Canada.
"Successive governments, whether Liberal or Conservative, have been careful not to shift regulatory position too radically," Levy said.
4th player will face hurdles
Even if foreign ownership limits were lifted, any foreign entrant would still have large obstacles to overcome before conquering a decent chunk of the Canadian market, analysts said.
"It is incredibly difficult to enter any telecom market. Overcoming the technical hurdles, the regulatory hurdles, then marketing yourself to consumers that have been entrenched," he said.
"You also need a player that can stick around for the long-term. Let's say Verizon buys Wind, it will be a small, fourth player. You can't simply buy your way into the market. It takes time."
Levy sees a more likely outcome of the debate the Fraser Institute has ignited as a possible inching up of the current 10-per cent ownership limit to perhaps 15 or 20 per cent.
Ian Nakamoto, director of research at the Toronto investment firm MacDougall MacDougall & MacTier, agrees that it would be difficult for Verizon or another foreign player to get a foothold in the saturated Canadian market
"Even Verizon comes to Canada, the average person doesn't know it. It will all come down to prices," he said.
'We've had many tries at competitors coming in, and they've all failed.'— Ian Nakamoto, MacDougall MacDougall and MacTier
"It's a mature market. If this was 15 years ago, where the wireless penetration was much lower, then I could see a foreign company coming in here and establishing a beachhead. Most people now have a wireless phone, so the incremental numbers are relatively small."
Past experience demonstrates that even with government support, new players have a hard time succeeding in the Canadian market. Wind, Mobilicity, Public Mobile all benefited in the last spectrum auction in 2008 but have still struggled and are now looking to sell off their assets to larger players like Verizon and Telus.
"We have a large geography with a relatively small population … so, how many carriers does Canada justify?" Nakamoto said. "We've had many tries at competitors coming in, and they've all failed."
The Public Interest Advocacy Centre, which advocates on behalf of consumer interests, said a measured approach to loosening the restrictions in the wireless market seems to have worked best in Canada and warned that opening up the entire telecoms market could simply amount to nothing more than "money trading hands with no net consumer benefit."