Industry Committee on April 20th, 2010

[The Chair, Conservative, Michael Chong]

Welcome, members of the committee and witnesses, to the tenth meeting of the Standing Committee on Industry, Science and Technology, this April 20, 2010. We're here pursuant to Standing Order 108(2) for a study of Canada's foreign ownership rules and regulations in the telecommunications sector.

In front of us today we have two different groups of witnesses. From Globalive Communications Corporation we have Mr. Antecol, Mr. Lockie, and Madam Wood. From Public Mobile we have Mr. Krstajic and Mr. Kirby.

Welcome.

We'll begin with an opening statement from each group, beginning with Globalive Communications Corporation.

[Andrea Wood, Chief Legal Officer and Secretary, Globalive Wireless Management Corporation, Globalive Communications Corporation]

Mr. Chair and members of the committee, thank you for inviting Globalive to participate in your hearings today.

I'm Andrea Wood, chief legal officer of Globalive Wireless Management Corp., better known by its operating name, WIND. Sitting beside me is Simon Lockie, the chief legal officer of our Canadian shareholder and a member of the board of directors of WIND. Also with us is our vice-president of regulatory, Ed Antecol.

WIND launched its wireless services in Toronto in December and has since launched in three additional cities: Edmonton, Calgary, and Ottawa. We plan to launch in Vancouver in the next few months.

[Serge Cardin, Bloc, Sherbrooke, QC]

We lost our French interpretation, but it is now back.

[The Chair, Conservative, Michael Chong]

Okay.

[Andrea Wood]

We provide wireless service to tens of thousands of Canadians, and we anticipate growing our customer base exponentially as we roll out our offering to other cities and regions of the country. We currently have 1,500 employees in Canada. We've spent close to $1 billion and we aren't even close to finished.

Let me be direct: WIND is a proudly Canadian company. It has met all Canadian ownership and control requirements. To emphasize the point, the Governor in Council made no special exception for WIND, and it did not waive any restrictions.

Cabinet looked at our structure and quite rightly came to a different conclusion from that reached by the CRTC. It varied the CRTC decisions, as the Telecommunications Act has always permitted it to do.

Canada's wireless sector has been under-served by the three dominant wireless providers, and it is sorely in need of greater competition. Canada has less than 70% penetration in wireless, which according to the OECD put it 30th of 30 OECD countries--dead last. There may be arguments about the details of the OECD findings, but they're generally consistent with the findings of a number of other well-respected institutions, including Harvard's Berkman Center, and a number of studies conducted in Canada.

At a minimum, the OECD's statistics are directionally correct and they suggest a significant structural problem. The low penetration of wireless in Canada results from unnecessarily high prices, a function of the virtual oligopoly of the big three, which has created opportunity for companies like mine.

The entrenched, hugely capitalized big three enjoy some of the highest profit margins in the business world, earned through practices that limit competition and harm consumers, including long-term contracts with unreasonably high rates; punitive early termination fees; and fees for fictitious network services, such as system access fees and, more recently, Rogers' regulatory recovery fee.

Obviously the lack of real competition has a significant impact on costs for consumers and businesses and deeply important follow-on consequences for innovation and productivity in the Canadian economy. Clearly, competition is needed.

The battle has just begun. With its innovative online social networking community, WIND is listening to what Canadian consumers want from a wireless carrier and it is providing it to them: no contracts, identical plans available for pre- and post-paid customers, and simple and transparent plans offering numerous features.

We are connected to our communities, not only through our networks but through what we feel is our social responsibility. For example, following the CRTC decision we put our employees to work in their communities performing random acts of kindness for complete strangers. We are committed to continuing to build on our sense of corporate social responsibility and to giving back to the communities we serve.

It has been a good beginning, but we're only at the start of the long road. That is why we're here today to speak to Canada's foreign ownership rules.

I'll turn the floor over to my colleague Simon Lockie, who will now address that topic.

[Simon Lockie, Chief Legal Officer and Secretary of Globalive Communications Corporation, Director of the Board of Globalive Wireless Management Corporation, Globalive Communications Corporation]

Thanks, Andrea.

Good morning. This is at least the fourth time in seven years that there has been a major review of the foreign ownership restrictions for telecom. All three previous reviews recommended liberalization of these rules. The Telecommunications Policy Review Panel and the Red Wilson report both recommended a phased-in approach to the relaxation of the rules.

The first phase recommended by Red Wilson and the TPR would see the Telecommunications Act amended to give cabinet authority to waive the foreign ownership and control restrictions on Canadian telecommunications common carriers where it deemed the foreign investment to be in the public interest. The panel also noted that any investments in a new start-up telecom carrier, or one with less than 10% of the revenues in any given telecom services market, should be presumed to be in the public interest.

The second phase of liberalization would only take place after the completion of a careful review of broadcasting policy in Canada. Both reports were the culmination of careful review and consultation processes, each lasting a year, and both represent fair, balanced, and thoughtful responses to the realities of Canadian telecom. They do so without weakening any of the current protections for broadcast. In our considered view, we can do no better than to endorse these careful recommendations.

These policy reviews have provided good road maps to ensuring that Canada develops a strong competitive telecom industry. The recommendations made to this committee over the last few weeks are not realistic, nor could they achieve the widely acknowledged need for more competition in Canadian telecom. To be clear, we will not be making any recommendations about broadcasting today. We are a telecom company. We provide the pipes, not the content. Content and pipelines have different roles in the ecosystem; hence, they can have different regulatory frameworks.

We recognize that there is a converging environment between broadcast and telecom. We also believe it is important for cultural sovereignty that there are effective measures to promote the creation and distribution of Canadian content. A future broadcast policy review can resolve issues related to the separation of broadcast and content policy from telecommunications carriage. In the meantime, recommendations for a phased liberalization of foreign investment restrictions in telecom should not be delayed or forced to await a review of broadcast policy. Consumers need help now.

In our view, the key issue to increasing competition in telecom is facilitating access to foreign capital on reasonable terms. The existing restrictions on foreign control were never intended to discourage foreign capital investment in Canada, but this has unquestionably been the effect. The telecom business is extremely capital-intensive. Even having been successful in securing foreign investment, we know how hard it is, and the very expensive terms upon which it was secured reflects this reality. Under the existing regime, we also know it is very challenging to replace this expensive capital with capital on better terms.

CRTC chairman Konrad von Finckenstein has argued that Canada will attract enough foreign capital to create a competitive telecom environment if the percentage of voting shares in a Canadian telecom company that can be owned by a foreign entity is increased to 49% directly and indirectly. We disagree. Think about it. Simply increasing the amount of permissible foreign voting equity to levels that still do not confer voting control will not make investment in Canadian telecom companies substantially more attractive.

Worse still, Chairman von Finckenstein has recommended maintaining the highly subjective “control-in-fact” test. If our experience has taught us anything, it is that such a highly subjective test and the regulatory uncertainty that it creates is a disincentive to foreign investment. Canadian capital markets are relatively small, and in our experience the players are quite reluctant to jeopardize relationships or potential relationships with the big three. To grow our business to its fullest potential within the existing regime, we will need to access third-party capital, and securing that capital exclusively, or even primarily, in Canada will be a challenge. Doing it on terms competitive with the terms enjoyed by the incumbents will be impossible.

Many Canadian telecom carriers started up their businesses as foreign-controlled companies using foreign capital, including Bell and TELUS. It's ironic to hear those same companies complaining now that someone else might be looking to a major foreign investor to do exactly what was done to build this country's legacy telecom networks at an earlier stage in our history. The competitive imbalance in Canadian wireless was the impetus for the advanced wireless spectrum set-aside, but the set-aside itself is not enough. Companies need capital, and telecom start-ups not just capital, but lots and lots of capital.

As we have seen in the early days of wireless competition, absent quick robust growth, new entrants sometimes just hang around, make a little competitive noise, and wait to be bought out when circumstances permit. Competition is good for Canadians seeking wireless services, but capital is critical for companies like WIND that are seeking to compete long-term.

The existing telecom foreign control restrictions are, in our view, an overly broad and inefficient regulatory tool. In today's global environment, Canada needs a more nuanced and effective tool as soon as possible. The TPR panel and Red Wilson reports show the way.

This concludes our opening remarks, and we're of course happy to answer any questions.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Lockie.

We'll now hear an opening statement from Mr. Krstajic, of Public Mobile.

[Alek Krstajic, Chief Executive Officer, Public Mobile]

Mr. Chairman, ladies and gentlemen of the committee, many thanks for taking the time to hear us out today.

I am joined today by Bruce Kirby, our vice-president of strategy and business development. We've prepared a statement that was distributed to all of you yesterday and isn't actually that dissimilar from that of our friends over here at Globalive/WIND. I think it's going to be a common thing that you're going to hear, that allowing new entrants access to foreign capital sustains competition.

Instead of reading a prepared statement, let me tell you a little bit about Public Mobile, about who we are and what makes us a little bit different. Public Mobile was born out of the AWS auction, like all the other new entrants. We acquired a licence that covers roughly 19 million people, stretching from Windsor to Quebec City. Our intent is to build out that entire area. If we are successful in gaining more spectrum to expand geographically, we will do so.

We are different in that we agree with the facts in terms of where Canada is on wireless penetration. One third of Canadians don't have a wireless phone today. That's a fact, and it's actually a travesty. Compare that to the situation where when you look at broadband penetration, high-speed Internet penetration, we're in the top three in the world. I know from my years as an executive at Rogers when we drove the Internet business, you had a situation where there was a lot of price competition. Prices were driven down, and as prices go down, penetration goes up. That's not the case in wireless. However, it is changing now that there are new entrants.

The question really is, will the new entrants survive? I agree with my friends at Globalive again that access to capital is really what's going to determine that. In fact, access to readily available capital is the lifeblood of any new entrant. It determines how quickly we grow, where we grow, and are we going to be able to provide sustainable competition.

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 cellphones, it's because they're value-conscious. They live paycheque to paycheque. It's the way I grew up. I grew up in a family with a father who was a blue-collar unionized worker. We lived literally paycheque to paycheque. If you live like that and you sign up for a bill or you sign a contract for a cellphone, and you're expecting to pay $40 or $50, and then you find out you have roaming charges, system access fees, and all these other things that are unpredictable, and all of a sudden your bill is $80 or $90, you just don't have the money to pay that bill.

Public Mobile offers only one rate plan. It's $40. It's a flat rate. It's predictable, and it's unlimited talk and text. That is our key area of differentiation. There are no contracts, no credit checks. Those are also part of what we do, but they're not just implied, they're obviously direct. There's no need for any of those things if it's $40 and it's flat-rate.

The concept of Public Mobile was created on a platform that we use as our tagline, which is “everybody talk”. It's built on the concept that wireless communications should be a right, not a privilege that's afforded just to the few who can afford it.

We have, in the last year, worked very hard to build our network. We're launching Toronto and Montreal. We've already opened 25 stores in Toronto and Montreal, with another 25 opening in the next month and a further 25 the month after. We're in a very solid position. We're opening these stores in the areas where our target market—the working class—lives, works, and plays. In Toronto, you don't see our Public Mobile stores in the financial community. You sees our stores in Scarborough, on the Danforth east, in the west end, around St. James Town and Regent Park. You see it where the people who don't have cellphones are actually located.

A number of the challenges that we're going to face, like any new entrant, are really around the fact that there is a lot of inertia in the Canadian market. Inertia means once people get into a mode, they tend to stay in it. There are a lot of people who are with the incumbents right now and are used to paying the bills and don't look elsewhere. There are a lot of people who don't have cellphones today who say to themselves, I'm probably never going to be able to get a cellphone. I'm not going to have access to a provider who is going to provide me a cellphone on terms and conditions that I require. It takes millions and millions of dollars to advertise, to break through the clutter and be able to get the message out. It's going to be a long and difficult road to break that inertia for us, and that requires capital.

I think there is another thing that is not to be under-estimated. As the former president of Bell Mobility, I can tell you I have a very healthy respect for the power that the incumbents have. They are some of the largest organizations in this country.

When you get off a plane, a train, or get out of your car in Toronto, you can't help but be affected by Rogers in some way. The television that you watch is most likely provided by Rogers. The cellphone provider of choice and the dominant player in Toronto is Rogers. The Internet provider of choice in Toronto is Rogers. When you go to watch the baseball team, it's owned by Rogers and the stadium is called the Rogers Centre.

For the media, the radio stations, the publications that you read, many of them are controlled by the incumbents. This creates an inertia and a challenge for new entrants that again is only going to be overcome by time and by a lot of capital. In the long run, that capital will be deployed and there will be a good return on that capital, but it will allow sustainable competition to bring prices down and make cellphones more affordable for the average Canadian.

Canadians are by nature very conservative. The investment houses in this country and the pension funds in this country are very conservative.

[Mike Wallace, Conservative, Burlington, ON]

Say it again.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

They're Reformers.

Put a logo on that man.

[Alek Krstajic]

I'm not used to talking to politically charged rooms. When I said “conservative”--

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

You'd be more liberal with your thinking.

[Alek Krstajic]

Let's try it this way: it's difficult to get money from Canadians. How's that?

It's difficult to get money from Canadians for these types of investments. Canadians want to know that it's a sure thing. Capital outside of this country is a little bit more risk-embracing. As a result, you've seen new entrants popping up in other countries and regulation is a lot more relaxed in a lot of other countries. So you've seen prices come down, new entrants enter as a result of that and drive those prices down, and wireless penetration go up.

In Canada we are actually, I believe, the only new entrant that's been able to raise Canadian capital for equity beyond what we pay for spectrum. We have done a very good job of working hard to raise that Canadian capital. However, we feel that today we sit at a disadvantage.

We actually believe there is a place for multiple competitors in this space. We are not here to tell you that Globalive should or should not be allowed to operate. We are here to simply tell you that we and every other player in this market should be afforded the same rights and privileges that have been afforded to Globalive; that is, we should have the ability to bring on foreign capital. If the rules don't apply, then they shouldn't apply to us. If they do apply, then they should apply equally to everyone.

Thank you very much.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Krstajic.

We'll begin now with an hour and a half or so of questions and comments from members of the committee, beginning with Mr. McTeague.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Thank you, Mr. Chair. If I run out of time, I'm going to pass a few seconds over to Mr. Rota.

Witnesses, thank you for being here today. We very much welcome your presence and your insights. Obviously, you have come at this question from very different perspectives, although there are similarities.

Let me go right to the comments that I think both of you have touched on, and that's the question of availability of credit financing and capital in Canada. I did ask this question of the commissioner when he was at our meeting last week.

Do you feel that there is a sufficient level--and I think in the case of Public Mobile you certainly would probably be a good example of this being the case--of capital available to meet the demands of Canadians to in fact create more competition? Or do you feel that we have to go the foreign direct investment and ownership route?

[Alek Krstajic]

In our case we've been able to raise capital to launch, but I would say that our ability to continue to operate this company over the next five to ten years.... When you look at what you need the capital for, you need it to build your network, you need it to create your brand, establish your distribution, and then a cashflow trough. Remember, we are pre-revenue companies; we are starting from scratch. Think of us as an infant that needs to be nurtured. We're not an 18-year-old yet. We're really in a situation where there is no question, we're going to require more capital. It's not just access to capital, but on what terms and what the price of that capital is. If we're only allowed to get capital out of one pool, namely Canada, it's going to be very difficult. If we're allowed to get capital from multiple pools, then it's not only more available but the price of that capital goes down.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Mr. Lockie, would you comment?

[Simon Lockie]

I can expand on that a little bit from our own experience. When we were seeking financing for our wireless initiative, we talked to everyone you could possibly imagine. We talked to people domestically and we talked to people outside of Canada.

What we're talking about are extraordinary amounts of capital, and it's not simply a question of whether the capital is there; it's whether it will be deployed with you as a start-up in this scenario against the entrenched and frankly oligopolistic incumbents. There is also the question of the terms upon which it's available. It's a much smaller pool of capital with those other factors, and the cost of that capital gets very high very quickly.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Let me ask you this question, Mr. Lockie.

If there is an entrenched duopoly, triopoly--call it what you wish--in Canada, how much of an incentive would be required for foreign investors to make the investment if it's going to be difficult to establish a beachhead and create competition?

In other words, some of us are concerned about the commentary that there is a lack of competition in wireless, as evidenced by a number of standards, questionable as they may be; however, the real issue is how to find yourself in a position to attract that so-called foreign capital, should we have this liberalization, if in fact it's a closed shop to begin with.

[Simon Lockie]

Well, it is interesting that although the big three represent a significant a competitive challenge, over the course of their history they have also created a very attractive investment scenario for start-ups. Competition is very direly required, and that's recognized internationally. You need capital to do it effectively, certainly, but there is a lot of room underneath them.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

I just can't see a foreign investor walking in and saying that Canada is now open and liberalized, but I'm going to have to establish a significant amount of investment in order to catch up unless I can perhaps situate myself in certain communities where there's a guarantee that I might actually be able to penetrate the market.

Let me ask you a more fundamental question, and this is to both of you. Have you maxed out the allowable level of foreign ownership within your company? Under the rules as they currently exist, have you used the entire foreign content of voting shares and non-voting shares as it stands?

I'll ask you both the question. Either one can answer.

[Alek Krstajic]

Well, I'd like somebody to tell me what that number is. What's the maximum dollar amount that you can actually have? In the case of my esteemed friends over here, 100% of the money is coming from foreigners, but for us--

[Andrea Wood]

That's not correct.

[The Chair, Conservative, Michael Chong]

Mr. Krstajic, could you answer the question? Madame Wood, you can respond after that.

Go ahead, Mr. Krstajic.

[Alek Krstajic]

We went forward with a structure that we had initially been told would be all right in a pre-auction conversation. In a post-auction conversation we were told, "Wow, that would be precedent-setting. We've never had that little Canadian money in, so you really need to go back to the drawing board."

We went to that drawing board. I may have grown up in a working-class family, but I have invested millions of my own money into this company, and then I had to go out and dilute myself and the rest of my partners, both Canadian and foreign, and bring on some Canadian investment. I actually disagree with Mr. Lockie's statement that there was no Canadian money; they may not have been able to get any Canadian money, but I think that's because the owner who really owned and controlled the company was a foreigner.

We brought on OMERS, the Ontario municipal employee pension fund. We brought on the Thomson family, Peter Munk, and other big Canadians. They invested tens of millions of dollars. OMERS is our largest shareholder.

Are we at the maximum? I don't know. No one has actually told us what the percentage is.