Based on the economic narrative examined in Chapter 2, the arguments in favour of removing foreign ownership restrictions appear compelling. Indeed, to the extent that removing foreign restrictions could help increase competitive pressure in the wireless market, and potentially improve some of the market features, such a change in policy would likely be beneficial to the economic welfare of Canadians. This is the economic case. However, there are also important social and equity dimensions to the foreign ownership question. This section examines the elements related to those aspects.

A. Possible Equity Implications of the Status Quo

Public Mobile, a new entrant in the wireless market that appeared before the Committee, suggested that the extremely low level of cellular mobile penetration is indicative of the fact that the large incumbents are not interested in servicing markets that are considered less lucrative (rural, low-density, or lower-income individuals). Public Mobile has made no secret that it is going after the markets that are underserved by the large incumbents:[47]

Public Mobile, unlike some of the other new entrants, is actually not competing head to head with some of the incumbents. We aren’t going upmarket. We aren’t offering BlackBerrys and smart phones. We’re actually aimed directly at what we refer to as “the unserved market”. We’re going after the working-class Canadians who require predictability in their bill. If you did the research and really looked into why working-class Canadians, that one third of Canadians, don’t have cell phones, it’s because they’re value-conscious. They live paycheque to paycheque.

The Committee does not have any evidence to substantiate the claim that the large incumbents are more interested in going after the high-end market segments, but notes that the low level of cellular mobile penetration in Canada relative to other countries does indicate that a large swath of the Canadian population is not using wireless phones at this time. Of course, reasons for this underutilisation could be multi-fold. For example, since wireline and wireless are sometimes considered substitutes, a reasonably priced and well served wire line market would act as a deterrent to an increase in cellular phone penetration. A poor wire line infrastructure has in fact been an important catalyst to increasing cellular phone penetration in some countries. Moreover, cultural differences could play a role in the lower Canadian utilisation levels as well. Nonetheless, the difference is so important in mobile cellular penetration between the Canadian market and other OECD markets that the Committee is of the view that pricing in the Canadian wireless market segment must be playing a role to some extent. In particular, the two studies surveyed in Chapter 2 would suggest that Canada is not a low-price country in terms of mobile phone service.

Consequently, some portion of the Canadian population may decide not to own a wireless phone because of pricing concerns. This creates an “equity” issue whereby “working class” Canadians could be priced out of the market. As relayed to the Committee by Alek Krstajic, CEO of Public Mobile, this constitutes an argument against maintaining the status quo on foreign ownership rules to the extent that the current rules do not favour an increase in competitive pressure in the wireless market, which could lead to a decrease in consumer prices and an increase in market penetration.

B. Possible Problems Resulting from the Elimination (or Partial Elimination) of Foreign Ownership Restrictions

i) Differential Treatment of Telecommunications Carriers and Broadcasting Distributors

Officials from Industry Canada indicated to the Committee that the removal of foreign ownership restrictions is under consideration for telecommunications industries only, not for broadcasting industries. Since broadcasting distribution undertakings (BDU) are regulated under the Broadcasting Act, a number of witnesses (e.g., MTS Allstream, Shaw, Rogers, Bell, Telus) that are integrated market players (i.e., that are both telecommunications common carriers and BDUs) informed the Committee that they strongly oppose the potential differential treatment of telecommunications carriers and broadcasting distributors with respect to the liberalisation of foreign ownership rules. They indicated that technological convergence has resulted in corporate convergence, and that creating an artificial difference between the two types of businesses from a regulatory standpoint would put them at a competitive disadvantage.

Before the advent of the Internet age, telecommunications carriage and broadcasting distribution were clearly separate undertakings from a technological and corporate standpoint; one was dealing with phone service, the other with television. Technological convergence has changed this reality. In the broadcasting distribution segment, firms that used to be strictly considered phone companies (e.g., Bell) are now going after the market share of what used to be the sole preserve of established BDUs (e.g., Rogers, Shaw, and Videotron). Conversely, these established BDUs are now trying to take a share of the home phone market away from the traditional phone companies. Both types of businesses are competing head to head in the Internet broadband market segment. In the wireless segment, two of the dominant players (Bell and Telus) have their origins in the traditional wireline phone segment and one (Rogers) has its roots in the traditional broadcasting distribution segment. Given this reality, it could be argued that the integrated players (Bell, Telus, Rogers, Videotron, Shaw, MTS Allstream) are direct competitors in the fixed phone, Internet broadband and cable distribution segments. Moreover, as a result of the latest spectrum auction, two new entrants in the wireless market are from the traditional broadcasting distribution segment (Videotron and Shaw). Therefore, wireless telephony constitutes an additional market segment where major integrated players will compete against each other.

In this context, it is not surprising to see why these integrated players (Telus, Rogers, Shaw and MTS Allstream) are in favour of removing the ownership restrictions if applied equally to both telecommunications common carriers and BDUs. If foreign ownership restrictions are removed under the Telecommunications Act only, it would expose the integrated players (i.e., those that are both telecommunications common carriers and BDUs) to the competitive threat of non-integrated players (pure-play telecommunication common carriers) that would have unlimited access to foreign capital.

This competitive threat would perhaps force the integrated players to spin off their telecommunications carriage businesses (i.e., create separate telecommunications carriage subsidiaries) in order to make them eligible to receive unlimited foreign capital investment. Such changes could, however, affect their “integrated offerings” (whereby television, Internet, phone services are bundled in a single package) since phone and Internet services would now be offered by different subsidiaries. Therefore, removing foreign ownerships restrictions for telecommunications common carriers only could be considered inequitable from the integrated players’ perspective.

It should be noted that the Telecommunications Review Panel was acutely aware of this issue in its 2006 report. Although it recommended partial removal of foreign ownership restrictions starting with the telecommunications carriage segment as a first step, it also recommended that the federal government undertake a complete review as to how these changes could apply to BDUs without affecting broadcasting content.

ii) The Phased-in Approach

Both the 2006 Telecommunications Review Panel and the 2008 Competition Policy Review Panel proposed a phased-in approach to the removal of foreign ownership restrictions. In the first phase, the federal cabinet would be granted authority to waive foreign ownership restrictions for telecommunications common carriers when a foreign investment is deemed in the public interest. According to both panels, a presumption would be made that foreign investments in any start-up telecommunications common carrier or one with less than 10 % of the total revenues generated in any telecommunications service are in the public interest. The second phase, which would take place only after a complete review of broadcasting policy, would consist of greater liberalisation of foreign investment rules to players of all sizes and would extend this liberalisation to broadcasting distribution undertakings (but not to broadcasters). Large established market players that appeared before the Committee typically opposed a phased–in approach on the ground that it provides an unfair competitive advantage to smaller players or new entrants.

iii) Impact on Employment

Telecommunications carriage and broadcasting distribution cannot be considered in the same manner as a plant producing goods; moving all equipment into another country to take advantage of lower costs is not an option. From this perspective, foreign ownership could appear to be less of a threat to employment levels than is the case in other industries. However, witnesses on both sides of the foreign ownership debate indicated that a decrease in head office jobs (including research and development) in Canada could result from the removal of foreign ownership restrictions. To use a specific example, if Verizon Corporation, a major U.S. telecommunications company, were to acquire the telecommunications carriage and broadcasting distribution activities of Bell Canada, this would likely result in a decrease in the number of head office jobs in Canada. Professor Globerman of Western Washington University offered a dissenting view on this issue. He suggested that global value chains are making location a very fungible item in the elaboration of corporate strategy and that companies are moving activities to where it’s efficient to do those activities. In this light, according to the Professor, it could be the case that by saying no to foreigners, Canada is denying itself the opportunity to do more research and development.

Notwithstanding this last argument, loss of head office employment is a possible undesirable by-product of removing foreign ownership restrictions. This undesirable impact has to be weighed against the possible advantages of this policy change described earlier.

iv) The Rural-Urban Digital Divide

It was made clear to the Committee that the first stop on the road to more competition in the wireless segment lies in urban areas. Given higher population density, urban areas are much more profitable than rural areas for telecommunications common carriers. New independent players in the wireless segment (e.g., Public Mobile and Globalive) made no secret that they intend to target urban areas first. They further pointed out that as urban markets become saturated, competition would naturally move to rural areas. According to them, rural areas will eventually reap the benefits of allowing foreign ownership, but with a time lag relative to urban areas. Incumbent wireless operator Rogers Communications made reference to the approach of their new competitors:[48]

Globalive isn’t going to do anything for the rural areas. They are honest about the fact that they are going to only provide service in the major urban areas. None of the new entrants will go to the rural areas. We’re already doing a huge amount. This revolution in wireless broadband is something that I would urge this committee to take note of.

The equity issue embodied by the rural-urban divide would perhaps not be a major problem if removal of foreign ownership restrictions led to increased competition and lower prices in urban areas while also benefiting—or at least not harming—consumers in rural and remote areas. A scenario where prices in rural areas increase as a result of increasing competition in urban centers cannot, however, be completely ruled out. Cross-subsidising between profitable and non-profitable business segments is a well known practice in the telecommunications industry. This raises the spectre of cut-throat competition in urban centres leading to higher prices in rural and remote areas through geographical cross-subsidisation practices from major market players in the wireless segment.

Some witnesses who appeared before the Committee pointed out that the best way to deal with urban-rural divide issues is through a government direct subsidy program (funded from general revenues). This last option is the one that is typically favoured by economists since it is considered the least market distorting and the most efficient. This option was also recommended by the 2006 Telecommunications Review Panel to fund broadband expansion in areas that are considered less profitable to commercial operators.[49]

Also mentioned in the urban-rural divide debate is the fact that the goal of a business, whether Canadian or foreign-owned, is ultimately to maximise profit, not to achieve a given societal objective. From this perspective, there is not much difference between a Canadian telecommunications company and a foreign-owned one; neither will invest in a project for the sole purpose of providing services to rural and remote areas if the project is not commercially viable. Only government policy could ensure that such investments are undertaken.

v) Market Concentration and Competition in the Long-term

As shown in Chapter 2, most OECD countries have three wireless operators that hold the vast majority of the domestic market share. From this perspective, Canada’s situation is not much different than that in other countries. Witnesses indicated that in the long run, the Canadian market cannot possibly sustain eight or nine players in the wireless segment. Therefore, by removing foreign ownership restrictions, Canada could run the risk of having the worst of both worlds: end up with the same number of operators as is the case currently (or even a lower number) and have those few operators be foreign-owned. In such a scenario, the increase in the level of competition resulting from the removal of foreign ownership restrictions could be a temporary phenomenon tantamount to a “hit-and-run”, with operating margins and prices being driven down in the short-term by the increase in the number of operators and the removal of foreign ownership restrictions. This would ultimately encourage consolidation through buy-outs or bankruptcies of the weaker elements. The end picture could be an increase in market concentration, a lower level of competition and perhaps even higher prices.

Professor Globerman from Western Washington University indicated that it should be precisely the role of the Competition Bureau to protect and promote competitive markets and prevent this scenario from happening. In contrast, Peter Murdoch (from Media, Communications, Energy and Paperworkers Union of Canada) took issue with relying on the on the Competition Bureau:[50]

[Y]ou heard that Canada’s Competition Act will prevent large foreign companies from buying up Canadian telecommunications firms and acquiring market dominance. But even domestically this legislation has not worked well. It certainly has not stopped Canada’s cable systems from buying up their competitors so that five companies now set the prices for 90% of all cable subscribers in Canada.