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Government changes rules to attract new entrants

|Written By Judy Van Rhijn

The wireless telecommunications sector is abuzz following the March announcement by Industry Minister Christian Paradis about a new spectrum auction in 2013 to release more broadband into the market.

The relaxation of the foreign ownership rules will give new entrants better access to capital, says Gary Jessop.

Increasing competition and attracting new market entrants remain a preoccupation for Industry Canada, but it has altered its approach from the 2008 auction with some startling announcements.

This time around, the government will impose caps on the amount of broadband each entity can own, namely a two-band restriction in any tier for all players and a one-band restriction for large providers with more than 10 per cent of the market nationally or more than 20 per cent of the market in their tier.

The idea is to guarantee that new wireless competitors as well as the incumbents have access to the spectrum up for auction. In the 2008 auction, the government set aside 45 per cent of the defined spectrum for new entrants only.

Gary Jessop, a partner at Blake Cassels & Graydon LLP, sees this as a win for the incumbents in the sense that they’re able to bid on all of the spectrum, not just a part of it like last time.

“It makes it likely that Rogers, Telus, and Bell will be able to get three out of the four prime bands and one will be available for a new entrant.

That achieves what the government is looking for: new entrants and the ability to grow the market.”

Another change causing a lot of talk is the removal of foreign ownership restrictions with respect to wireless firms that have a national market share of 10 per cent or less.

Since the market totals about $40 billion now, this will affect firms with less than $4 billion in revenue.

David Elder of Stikeman Elliott LLP says the ownership rules go hand in hand with the spectrum auction.

“The government is hoping that a combination of a cap with improved ability to raise capital from foreign markets will allow new entrants to get the capital they need and buy at market rates.

It will bring in a lot of foreign capital not just for bids on the auction but for infrastructure, investment, and rolling out the service.”

Jessop agrees that the relaxation of the ownership rules will give better access to capital. “One thing’s for sure: it will raise a lot of money for the government and that means it will be expensive for bidders and a prime source of capital is south of the border or overseas.”

Jessop was in New York when interviewed and talking to potential clients and other law firms about the proposed changes to the foreign ownership rules.

While he thinks there are many foreign firms interested in the Canadian market, he warns that these are early stages.

“They want to see the details to see if there are any wrinkles in the rules before they get too excited. It goes without saying that they are always looking for opportunities and Canada is a nice, easy market. We have 35 million people with a stable economy and stable infrastructure.”

Jessop believes that early participants will benefit most, at least in the short term, as it becomes more difficult to obtain a share of the market.

Elder, however, says that as some of the 2008 entrants have been disappointed at the amount of market share they’ve been able to attain, some foreign investors might not be so eager to jump in.

“Others may see the new rules as making the climate for investment better,” he says, noting that if smaller entrants obtain more than 10 per cent of the market because of natural growth rather than by acquisition, they keep their foreign ownership exemption.

“This might appeal to companies like Horizon and AT&T enough to entice them to spread north,” he says.

Other measures announced relate to the requirement to ensure that rural Canadians have equal access to telecommunications services. Bidders for spectrum will have to put their service out to 90 per cent of their footprint within five years and 97 per cent in seven years.

“Radio spectrum does not follow the contours of population,” says Elder. “If they focus their infrastructure and investment where they have the most customers, this leaves rural dwellers without all the advantages.

It is provided for now as a condition of the licence but it does still give carriers the ability to pinpoint where they will extend services and they’ll do that where they get the most revenue.”

Roaming and tower-sharing rules aimed at supporting competition and limiting the proliferation of new cellphone towers have been a thorny issue since the last auction. The government has responded by tweaking some of the rules that require carriers to share services.

“New entrants have long complained that even though the rules provide that incumbents must share, the reality is that the agreements, particularly with respect to tower sharing, have been very difficult to negotiate,” says Elder.

“There are often strongly opposing views to the point that new entrants are putting up their own towers. They’ve got to get into the market and they can’t wait. This means it’s more expensive and there are more towers, which was what the requirement was designed to stop.”

One new measure is a significant reduction in the time frame for moving on to arbitration when the parties can’t agree. “No other jurisdiction requires mandatory roaming,” says Jessop.

“The government has chosen not to step in and regulate it. They have indicated the potential issues but are leaving them up to the participants to resolve.”

The final highlight is the reservation of 10 megahertz for the exclusive use of the public safety community. Lobbyists are hoping to increase that to 20 megahertz, the amount received by the American public safety sector, before the auction takes place.

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