By Peter Nowak — Manitoba Telecom Services Inc. has officially announced its intention to set up Canada's fourth national cellphone network in partnership with the Canada Pension Plan Investment Board and U.S.-based private equity firm Blackstone Group LP.
The Winnipeg-based company said it made a $340-million deposit in the form of letters of credit to Industry Canada on Monday. Each of the three partners will own one third of the new company, which will bid on wireless airwaves in a government auction scheduled to begin on May 27.
If the consortium acquires spectrum, it will appoint Andre Tremblay to head the management team of the new cellphone carrier. Tremblay was the founding CEO of Canada's previous fourth carrier, Microcell Communications, which operated the Fido brand, before it was bought by Rogers Communications Inc. in 2004.
Chris Peirce, head of regulatory affairs for MTS Allstream, which is Manitoba Telecom's wholly owned operating company, said the consortium's intention is to build a national cellphone carrier that will service both business and residential customers.
"We think the enterprise segment has not been properly approached by the existing carriers, so there's a real niche there from the MTS Allstream perspective," he said. "Bringing partners like this to the table ... also underscores the belief that there is a consumer play."
CPP and Blackstone both took runs at Bell Canada parent BCE Inc. when the company was up for sale last summer, but they lost in a bidding war.
Disrupt the market
The new consortium plans is likely to disrupt the Canadian cellphone market. In its lobbying efforts with the government last year, MTS said Canada was plagued by high prices and poor service.
Choosing Tremblay, who established Microcell quickly by lowering prices and offering better services than the big three, to head the new company is key to entering the Canadian market, Peirce said.
"He's taking to market a disruptive consumer strategy, if you think about the Fido brand and where it might have been going and what it triggered. He's been there and done that," Peirce said.
"The notion of price and being a disruptor in some fashion is probably key to gaining share. You're not going to make a splash in the consumer market in Canada by being a me-too."
New entrants such as the MTS consortium have been given special preference in the upcoming auction by the government, which in November ruled that the Canadian wireless market was not competitive enough. Canada's three big wireless companies, Rogers, BCE Inc. and Telus Corp., are prohibited from bidding on a 40 per cent chunk of spectrum that is reserved for new entrants.
Calgary-based Shaw Communications Inc. also announced on Monday it had put in an application to bid, although the company noted that participating in the auction does not necessarily mean it intends to build a cellphone network.
"If successful, the ownership of spectrum will provide strategic flexibility as it may be utilized in a variety of ways and in a timeframe yet to be determined as the competitive communication market evolves," the company said in a release.
Toronto-based Globalive Communications Corp., parent company of Yak Communications, also said it has submitted a bid application. Industry observers are expecting a number of other applications from as-yet-unknown entities, all of whom will be revealed by Industry Canada on Friday.
Montreal-based Quebecor Inc. has in the past said it intends to bid and spend at least $500 million building a network in Quebec, with a possible expansion to other parts of Canada. A spokesman for the company on Tuesday declined to comment on whether it had lodged an application ahead of the Monday deadline.
GSM vs. CDMA
Quebecor and MTS jointly lobbied the government for the new entrant rules last summer, an alliance that analysts said could be furthered after the auction concludes and the building of networks actually begins. On Tuesday, analysts said it was too early to tell what possible alliances will result.
"The way the rules are structured, the anti-collusion rules, one could expect a lot more alliances after the fact when the dust settles," said telecommunications consultant Mark Goldberg. "In September, there will be a lot of horse trading."
Acquiring spectrum will only be the first step toward setting up a national cellphone network, which analysts have said could cost up to $1 billion.
Peirce said the consortium addressed those concerns by lining up the necessary resources with patient capital and wireless expertise.
"It covers those bases you'd want to cover in order to say to your investors that this makes sense," he said.
There is also the question of what technology the newcomers will use. Both Bell and Telus use code division multiple access (CDMA) cellphone technology, which is used by less than 20 per cent of wireless providers in the world. New entrants are expected to use the more popular global system for mobile communications, or GSM, standard, which allows users to switch providers without buying a new phone.
MTS, which already operates a CDMA network in its home province of Manitoba, has not made any decisions on network technology, Peirce said. The consortium has also not decided where it will build or how it will brand its services.
Analysts, however, said the consortium is likely to set up shop first in Toronto, Montreal and Vancouver, and then other cities such as Calgary, Ottawa, Quebec City and Saskatoon
"That's an obvious no-brainer," said Lawrence Surtees, principal analyst of communications research for IDC Canada. "Business is Allstream's core, so you pretty much want to be in the top cities as quick as you can."
New network builders are also likely to spur a host of new resellers, or companies that rent airwaves from the owners to sell their own cellphone services.
"That's a major capital outlay, so you want to get as much use out of your network as possible," Goldberg said.
Analysts said the MTS consortium's $340-million deposit exceeds the minimum amount needed to bid on all of the reserved spectrum, which means the group could also bid on airwaves that are open to Rogers, Bell and Telus.
"That gives us the ability to look at critical mass in spectrum across the country," Peirce said. "New entrants are not restricted from bidding just on new-entrant spectrum."
A spokeswoman for Rogers would not confirm whether the company had applied to bid. A Bell spokesperson confirmed that the company had put in an application but declined to share further details. Telus did not immediately respond to requests for comment.
Auction applications must be approved by Industry Canada, which will announce the list of qualified bidders on March 31.