Canadian GovernmentPoses considerable risk to public safety and national security Impacts integrity of Canada’s telecommunications sector Telecommunications systems are backbone of all critical infrastructure systems in CanadaTherefore, key component of national strategy to protect such infrastructureHinders authorities’ ability to follow intelligence priorities set by CabinetCanada is not alone in its concernsIn October 2011, the U.S. barred China’s Huawei Technologies Co. from bidding for work on a national emergency networkRecently, Australia banned Huawei (China’s largest telecom equipment manufacturer) from contracts to build a national broadband network being developed by the government
Harper government announces foreign ownership rule changes to Telecommunications Act in March 2012 C-38 – essentially remove barriers to investment for companies that need it mostIs this a move to liberalize the entire sector?
New entrants:Wind Mobile, Public Mobile, Mobilicity, VideotronRegional incumbents: MTS Allstream. MTS, which sells phone, TV, Internet, and wireless services in Manitoba could be the most immediate beneficiary. MTS, which has struggled to grow, could end up being acquired by a foreign company (namely, AT&T, which held an ownership stake in Allstream more than a decade ago under name AT&T Canada). Back in 2002, AT&T Canada filed for bankruptcy protection citing huge debt balances and a ‘parent’ that was not obligated (per Canadian ownership rules) to step in. Cairo-based Orascom, which backs newcomer Wind Mobile, would also benefit from the change. Because of ownership restrictions, Wind Mobile had no choice but to take on a huge amount of debt instead of receiving equity stakes by its deep-pocketed parent.
Example 1: Wind Mobile is backed by Orascom Telecom Holdings SAR. Orascom recently merged with Amsterdam-based Vimpelcom Ltd., the world’s sixth-largest wireless carrier
Canadian Wireless Industry: Deregulation or Protectionism?
AGENDA• The Structure of the Canadian Telecom Space• The AWS Auction and its Outcome• Incumbents’ Reaction to New Entrants• Government Changes to Foreign Ownership Policy• Winners and Losers• Financial Community’s Thoughts• Is it Worth It?
CANADIAN TELECOM SPACE BEFORE AWS AUCTION Tier I / High Value (National) Tier II / Discount (National)
THE NEW AWS TELCOS Tier II / Discount (Regional) Tier III / Mass Discount (Regional)
INCUMBENTS REACT TO NEW ENTRANTS Tier I / High Value (National) Tier II / Discount (National and Regional) Tier III / Mass Discount (Regional)
FOREIGN OWNERSHIP RULES• Up until recently, foreign investors could own up to 46.7% in combined direct and indirect stakes in Canadian carriers• CRTC had considered three options: Increase direct ownership to 49% Full ownership of telecom providers with less than 10% market share Complete removal of restrictions• New rules are designed to increase investment and competition in the sector
GOVERNMENT POLICY CONSIDERATIONS Poses considerable risk Concerns regarding to public safety and security risks orDeregulation… Status Quo… national security employment impact • Telecommunications systems overstated are backbone of all critical • No control over physical infrastructure systems in telecom infrastructure Canada connected to millions of Hinders authorities’ homes ability to follow Canadian control will not intelligence priorities set guarantee Canadian by Cabinet jobs Canada is not alone in • Carriers already outsource customer service jobs its concerns • Retail and corporate sales will • In 2011, U.S. barred China’s remain in Canada regardless Huawei Technologies Co. from bidding for work on a national emergency network
OWNERSHIP RULES CHANGE: BILL C-38 • Restrictions lifted for any wireless carrier with less than 10% market share by revenue • Designed to spur investment and competition in a sector dominated by the Big 3Remove barriers to investment for companies that need itmost…
WINNERS AND LOSERS New Entrants and Regional Incumbents Rogers Communications Inc., BCE Inc., Telus Corp. • Together control more than 90% of the market
WINNERS: CONSUMERS AND BUSINESS“THERE ARE 30 OECD MEMBER COUNTRIES, AND ONLY THREE COUNTRIES HAVE INVESTMENT AND OWNERSHIP RESTRICTIONS THAT APPLY TO ALL PUBLIC TELECOMMUNICATION OPERATORS. THESE COUNTRIES ARE CANADA, MEXICO, AND KOREA. OF THE THREE COUNTRIES, CANADA HAS THE MOST SEVERE RESTRICTIONS.”
WINNERS: NEW ENTRANTS• Ability to raise further capital?• Team up with multinational peers?• More competitive offerings for Canadian?• Greater market share and growth?
LOSERS: INCUMBENT CARRIERS• Regulations are asymmetrical, for the benefit of small players• Rules benefit foreign competitors while discouraging domestic entry• In a wireless industry where 1/3 net subscriber adds captured by new entrants despite smaller network coverage, limited distribution, fewer handset selections, huge concern• Differential treatment under the Telecommunications Act and the Broadcasting Act• Gives companies with access to capital a competitive advantage (ie. Wind Mobile)
LOSERS: INCUMBENT CARRIERS (CONT’D) For Rogers, short-term impact not meaningful Rogers has no major partner unlike other two incumbents, which can share wireless spectrum Bell Canada says it is a "solution in search of a problem” May see long-term disadvantage against Bell and Telus Telus relatively quiet, given recent allegations by smaller competitor Globalive regarding Telus’ foreign ownership stakes
WHAT DOES THE FINANCIAL COMMUNITY THINK?“This is positive for the smaller players, especially the likes of Manitoba Telecom.” – Greg Macdonald, Macquarie “…probably the most balanced way to do it, it starts us down the road of greater foreign ownership in the telecom space but at the sametime it attempts to protect the incumbent players.” – Carmi Levi, Independent analyst “…competition in the low end of the wirelessmarket should remain fierce…and possibly step up into the mid market segment...spurring M&A and presenting event risk to investors” - Madhav Hari, Standard & Poor’s
IS IT WORTH IT?Employees 29,000 55,000 41,000Revenues $12.65B $19.9B $10.5BMarket $14.6B $30.9B $18.0BCapitalizationHead Office Toronto Montreal Vancouver
IS IT WORTH IT? 25.5 million mobiles 125,000 Jobs$7.51/month more than USA $43.05B in Revenue $2.3B savings per year $63,5B in Market Capitalization Protect Deregulate