How much protection does telecom really need?
The telecommunications industry in Canada may have among the world’s strictest foreign ownership rules, making it an easy target for criticism about the lack of competition and high prices, but it certainly wasn’t that way at its inception.
Americans owned the Bell Telephone Co. of Canada when it was incorporated by a special act of Parliament in 1880. Legislators then — and for decades after — were apparently unfazed by foreign ownership in the quest to connect the country with telephone service.
Indeed, it wasn’t until the federal government enshrined the Telecommunications Act in 1993 that foreign ownership restrictions came into play. At that time, telecom had become entwined with broadcasting, where foreign ownership was seen as necessary to protect Canada’s culture.
But recent moves to relax the rules, albeit only for smaller players, and dramatic changes in how people communicate leave questions as to what protectionism accomplishes and whether it’s still necessary in an industry dominated by wireless and internet technologies that are already largely global.
To understand the current environment, let’s first rewind 138 years to Bell’s incorporation by government charter in 1880, the same year a U.S. company bought the Canadian patent rights to Alexander Graham Bell’s telephone.
Bell’s father and owner of those rights, Alexander Melville Bell, sold them to the National Bell Telephone Co. of Boston, which would eventually evolve into AT&T Inc.
FOREIGN OWNERSHIP RESTRICTIONS CAME INTO PLAY IN 1993.
Armed with a government charter that enabled it to string telephone lines along public rights of way, the Canadian subsidiary effectively monopolized service in just a few years, according to Robert Babe’s book Telecommunications in Canada.
Over the years, regulations shifted as the telephone became more popular. For example, in 1906 Bell Canada was pulled under the powers of the Railway Act, ushering in principles of universal service, just and reasonable tolls, nondiscrimination of customers and network connectivity.
Provincially and municipally-owned telephone services cropped up in the West, while Bell grew in the East and kept issuing stock that Canadians eagerly bought, particularly after the Second World War. AT&T did not divest its final shares until the mid-1970s.
The other major development was the emergence of broadcasting. In 1968, the government passed the Broadcasting Act, which strengthened restrictions on foreign ownership to address fears that Canada’s culture would be swamped by an American one given the ease of accessing cross-border television signals.
As a result of the act, Canadian content quotas came into effect and the Canadian Radio-television and Telecommunications Commission was created to manage the show. The government in 1976 then transferred the responsibility of telecommunications to the CRTC from its spot in the transportation framework.
Former CRTC chairman Konrad Von Finckenstein said the intention behind foreign-ownership rules was to ensure broadcasting remained in Canadian hands. “It’s all driven by our desire to protect Canadian culture and ensure we don’t get swamped by Hollywood,” said Von Finckenstein, who chaired the regulator from 2007 to 2012.
Ottawa further swung toward protectionism in the 1980s when the deregulation of telecommunications began in a bid to usher in more competition. A 1987 communications policy paper that first floated the idea of foreign-ownership restrictions came in tandem with free-trade negotiations with the U.S., where such restrictions were already in place.
Canada’s rules came into effect in 1993. As it stands now, foreign ownership of a telecommunications company is limited to no more than 20 per cent of a company’s voting shares and no more than 33.3 per cent of the voting shares of a carrier’s holding company, and an effective total limit of 46.7 per cent (as long as the foreign entity doesn’t have control). On top of that, at least 80 per cent of the board members must be Canadian citizens.
Canada kept these strict rules even as the international telecommunications market started to shed protectionism in 1997, when 69 countries, including the U.S., committed to opening up markets through a World Trade Organization agreement.
But in 2012, Canada loosened its rules slightly, absolving companies with less than a 10-per-cent market share from any foreign ownership restrictions. No foreign entity has moved into Canada under these relaxed rules.
One reason: The Organization of Economic Cooperation and Development still ranks Canada’s sector as among the most restrictive alongside Iceland, South Korea, Mexico, Israel and Japan.
“Canada has restrictive foreign ownership rules in telecoms and broadcasting which are intended to support Canadian cultural objectives but which also reduce competitive pressures,” the OECD said in 2016. “Greater competition in telecoms and broadcasting could lower prices and increase access to fast, highquality networks, raising business efficiency by enhancing the synchronization of goods, services and payments in the supply chain.”
Former CRTC commissioner Timothy Denton, chair of the Internet Society of Canada and one of the advisers on the 1987 communications policy paper, doesn’t recall any controversy when the ownership measures were introduced, especially since the U.S. had similar protections for its domestic industry. “There was very little public debate about them as I recall,” Denton said, adding that broadcasting was the bigger focus at the time. “It could be we were just matching the U.S. practice. It may have been thought of as a good housekeeping measure. Their importance later became more evident.”
But if the point of foreign ownership is more competition, Denton isn’t convinced that lifting foreign ownership restrictions would do much.
“You’d have Comcast versus Verizon instead of Bell versus Telus,” he said. “It would not increase competition.”
Nevertheless, the industry has faced considerable criticism, especially since Canada has some of the highest wireless prices and some of the lowest consumption rates in the world, according to numerous studies based on OECD and CRTC data. (The Big Three telecom players contest this, stating it’s difficult to compare services given the higher quality of their networks — also debatable.)
To improve competition, Denton called for wireless resale, where small competitors could sell services on larger networks without spending billions to duplicate the infrastructure. The CRTC refused to mandate wholesale access to wireless networks earlier this year, but will consider the policy in the future.
Former CRTC chairman Von Finckenstein agreed that foreign-ownership provisions are becoming irrelevant given the technological revolution since their inception. After all, consumers can access any content at any time over the internet.
“Broadcasting has become really less important than telecommunications,” he said. “It’s really questionable whether we still need the foreign protection for Canadian content.”
For one thing, protectionism stymies economic development and dries up investment sources, he said, adding the government slightly reduced restrictions in 2012 because of concerns about a lack of wireless competition.
Such concerns sparked a debate in 2008 when Ottawa moved to increase competition by ushering in more wireless players, including Wind Mobile, whose billionaire Egyptian investor Naguib Sawiris found himself in a legal battle over his financial backing of the project.
Even though the 2012 rule change allowed him to invest in Wind, he gave up in 2013, stating he’d never invest in Canada again after the federal government blocked his purchase of MTS Allstream Inc. by citing national security concerns.
Around the same time, U.S. giant Verizon Communications Inc. indicated it was interested in entering the market, much to the chagrin of the incumbent wireless players, which launched a public campaign against the possibility.
In 2013 Bell chief executive George Cope took the unusual step of publishing a letter that said it would be “profoundly unfair” for Verizon to enter under the rules for smaller players.
“We do not believe a U.S. company four times the size of Canada’s entire wireless industry combined requires special help from Canada,” he said.
Ultimately, Verizon didn’t enter the market, and the foreign ownership drama dissipated.
But as protectionism once more emerges around the world, Wind Mobile founder Anthony Lacavera, who sold Wind to Shaw Communications Inc. in 2016, said Canada must start thinking about growth instead of protecting its home turf.
“Our telecom companies should get bigger.
“We think Bell Canada is a big company, but when you put it up against any global wireless carrier, Bell Canada is tiny, actually,” he said.
Lacavera, who knows all too well how foreign-ownership restrictions can dampen business prospects, given his experience with Sawiris, said Canada’s telecoms should expand beyond their domestic borders, much like the U.K.’s Vodafone Group PLC or France’s Orange SA have, in order to diversify given trade uncertainties.
Of course, that means grappling with competition. As it stands, Canadian carriers have some of the highest operating margins, Lacavera said, adding that prices dropped when the new entrants hit the market in 2008.
“The Canadian companies would stand up very well and be very competitive, gain market share,” he said.
But they have to want to expand, he said.
“As long we keep these limitations in place domestically, they’re not going to want to.”