Why should Cabinet gut the law to fix a problem of Orascom/Globalive's own making?

November 2009 should go down as a sea change month for wireless and broadband competition in Canada. It sure has been an awesome start to the month for our team at TELUS.

Two new national networks (ours is better of course) that erase the competitive advantage Rogers has had on GSM. New international roaming agreements across 200 countries, competitive supply of iPhones, Android phones and a range of other devices. Massive extension of the new networks deep into rural and remote areas that were previously unserved in terms of broadband coverage.

On November 5th, TELUS launched a network that is clearly top tier in the world. It’s a network that allows Canada to leapfrog to the top of the heap when it comes to broadband wireless infrastructure. Infrastructure that is available on a competitive basis. That's not debatable anymore. Network equipment vendor Huawei in a full page ad last week, described it as "one of the fastest and most advanced cell phone networks on the planet."
How big? Try 1.1 million square kilometers big. That's 4X the size of Rogers 3G network. And its way ahead of the 3G networks in the USA. How did we get there? Competition and a billion dollars of private investment made this happen in the middle of the biggest recession in a generation.

Now that should be cause for celebration for everyone who was concerned that there was not enough competition in the market, or that Canadian broadband infrastructure has been lagging our trading partners, or that subsidies are needed to close the broadband gap. No matter your point of view on that, clearly all those items on that wish list just got checked off. Again as a result of private investment and the need to respond to existing competition.

But in Ottawa, the big noise around broadband and wireless is not the fact we have brand new leading edge networks but rather on the impact of the CRTC's decision that found Globalive, a prospective new wireless entrant, non-compliant with Canada's foreign ownership laws because Orascom a global carrier with 15 times the number of subscribers TELUS has, controls 82 percent of Globalive’s capital structure. This (the CRTC decision) is not really surprising, given that the evidence presented by Globalive itself, in an open and transparent hearing, proved beyond any reasonable doubt that Globalive was way offside. Not a little offside but miles off side. Yet somehow this seems to be everyone's fault but Globalive's.

So ignoring evidence that, with or without Globalive, there will be 4 to 6 competitors operating in most urban markets in 2010 and from 2 to 4 in most rural and remote areas, rhetoric has reached epic heights about a failure of Government policy unless Cabinet turns a blind eye to Globalive's obvious non-compliance. Never let the facts get in the way of a good story! In some quarters, Cabinet is being called upon to overturn a legal decision of the CRTC, even though that would fundamentally undermine the law and gut the ownership rules that apply to every telecom and wireless carrier, broadcaster and cable company now operating in Canada. All to ensure an ineligible foreign carrier, Orascom, can enter the Canadian market with a capital structure not permitted for every other company in Canada. Let’s call it the Globalive “special”.
There is a lot of noise about the loss of a competitive market if Orascom is not allowed to play by its own set of rules. In fact, the front-page story in the National Post on November 5 was not about the launch of new advanced networks that have already brought an end to Rogers GSM monopoly, but about the fall out from Orascom's now obviously ineligible participation in the AWS auction. An auction process that Financial Post editor, Terry Corcoran referred to as a "as a distorted shambles in which prices were grossly exaggerated by Mr. Sawiris' (Orascom's) authorized participation." Authorized but ineligible as it turns out.

The AWS auction has been a sore point with TELUS. NERA estimated those "grossly exaggerated prices" cost the industry over $2 billion in overpayments because of flawed design and cost TELUS an extra $400 million from inflated prices, including from a bidder that had no right, it now seems, to have been in the auction in the first place. To realize we were forced to pay that penalty because, in part, a key bidder was ineligible to participate is a bitter pill to swallow.

How much is $400 million. It’s almost twice as much as the Government of Canada is prepared to allocate to broadband stimulus/expansion for fiber and wireless. $400 million we can't spend to expand fiber in our own IPTV network expansion to compete with cable in the the TV business.

There should be no sympathy for Orascom. It placed a bet it could get into the market with a plan that was offside. It can't claim the CRTC process was a surprise. All bidders knew that the CRTC requirements were part of the compliance regime. It made a risky decision and lost. It can hardly be surprised irrespective of the PR noise it is now pushing out.
Face it, it would be pretty hard to imagine that any Canadian lawyer or bank, faced with a plan where 82 percent of the capital structure was foreign controlled, wouldn't have advised that the Orascom/Globalive game plan was a very high risk proposition. Orascom rolled the dice. In fact most critics of the CRTC decision actually agree the CRTC had no choice under the law but to reach the conclusion it did reach.

But now the CRTC is being painted as a villain for upholding the law, and Cabinet is being asked to essentially ignore the law in order to help Orascom enter a market in a way other foreign carriers are prevented from. I bet Cabinet won't get sucked in. The law is the law. And right now it's a law that every wireless and telecom carrier, cable company and broadcaster is forced to abide by.

Moreover, if Cabinet were to overturn the CRTC and allow Globalive to operate with control of 82% of its capital structure held by one foreign carrier, it would automatically trigger MFN clauses in NAFTA and violate other commitments made by Canada under the GATS. The CRTC would be forced to allow companies like Viacom or Disney similar rights in broadcasting because the criteria it rejected would now guide all future proceedings.
Effectively to make Orascom Canadian, Cabinet would have to gut all laws regarding foreign ownership in the communications sector, turning every carrier’s business strategy on its head. That's not about to happen. Orascom's problems are of it's own making and these are problems it could fix without standing the rule of law on it's head. It's not going to happen because it does not need to happen to ensure competition.

Clearly competition is operating with all engines firing. First, lets go back to the GSM monopoly Rogers has. It’s dead and buried as a result of competitive investment that had to be made irrespective of the auction. Open access? Can you say Android? Network supply? Start with the TELUS and Bell builds that cover around 90 percent of the population on HSPA and HSPA plus and that's global superiority that is top tier. Add Rogers HSPA and HSPA plus network across Canada and coverage with the fastest and most innovative networks on a competitive supply basis is a fait accompli. That's three national networks all on the latest HSPA technologies.

Now add Videotron in Quebec and you have even more competitors there. MTS Allstream and SaskTel already dominate in terms of market share in Manitoba and Saskatchewan so add even more competition there as well. (p.s. how did the auction policy ever decide that the dominant carriers in these two provinces were new entrants?)

Assume Shaw and Eastlink will move in the west and Atlantic Canada. Both have spectrum and Shaw just launched a $600 million debt offering. Remember too that under the auction rules cable companies get preferential treatment as new entrants. Under the policy cable companies get government help to compete. I am not making this up. It’d be nice if TELUS got the same deal in TV but those are the auction rules.

But what about real "new entrants" you might ask? Well the other new entrants are not going to be hurt if Orascom refuses to abide by the rules and goes home. In fact they become the big winners. According to a recent report by The Convergence Consulting Group, if Globalive does not enter then new entrants like Dave and Public Mobile probably add another 900,000 subscribers.

So even without Globalive we can expect at least 3 incumbent national carriers, new cable entrants in addition to Rogers across most regional markets and new national players like Dave and Public Mobile. That suggests 4 to 6 competitors in every major market in Canada and from 2 to 4 in rural areas. All without any need to gut our laws to fix Orascom's obviously offside business case.

This month while countries like Australia are pouring billions into broadband subsidies, private investment may have just closed 40% of Canada's broadband gap and is extending wireless broadband on a competitive basis to over 90 percent of Canadians. All with private money and all compliant with Canadian laws. That's a remarkable achievement. So here's the big question for Ottawa before it takes a step that is as irrevocable as it is unnecessary. Does anyone really believe Orascom/Globalive would ever had gone deep into our rural areas or is it just another urban play? Testifying before a Senate Committee, a Globalive executive tried to deflect the question by saying that service in those areas is very challenging economically. Really? Putting aside that astonishing statement of the obvious, if there are going to be 4 to 6 competitors in every urban market, is it worth breaking the rules for Orascom in a way that changes the game for scores of Canadian companies that have abided by the law?

This is a matter of law not policy and if policy dictates a change in the law that's up to Parliament to enact.