Industry Committee on April 20th, 2010

[Simon Lockie]

It's a bit of an economic question. I thought Mr. Globerman did a very good job talking around these types of issues. If you accept the proposition that capital is required for competition and you accept the proposition that competition creates circumstances that are better for consumers, then it's a very quick line to get there. I think the market will dictate what the balance is. Right now, the market isn't competitive, so you have extraordinarily high profit margins and extraordinarily low penetration. That's what we think will be resolved.

[Mike Wallace, Conservative, Burlington, ON]

Turning to the Public Mobile folks, I appreciate your coming today. You have been to my office before to talk to me about these issues.

The one issue I have in general, and I thought you might be able to shed some light on it today, is that I find that companies in my area—for example, steel companies, Dofasco and so on—have been swallowed up. All steel in this country has been bought by foreigners now; there's no Canadian steel company. Then I'll hear people ask, why did the government allow that to happen?”

I push back a little bit, that Canadians are not great at investing in themselves. I think you said they're a little more risk-averse, especially on the capital side, than other countries may be.

Based on your experience and background, can you tell me what obstacles the government has put in place or are there to keep Canadians from investing in Canadian companies? Are they structural, are they policy-based? What are the issues? Why are Canadians not coming to the table more readily for investment opportunities, in your view?

[Bruce Kirby, Vice-President, Strategy, Public Mobile]

The answer is, there is no simple obstacle that prevents Canadian investors from doing so. Some of it has been an evolutionary process in Canada. Big institutional investors are actually a relatively new invention in Canada. The big pension funds only go back essentially 20 years, when the teachers' pension plan was created, and a number of the others have come in from that.

In other markets, particularly south of the border, large pension funds, large foundations, and trusts of various kinds have been around going back a hundred years and therefore have simply had more time to build up some of the capability. This becomes an important factor: it takes a certain amount of time to get over that risk aversion.

Part of it is that when people succeed and do well in these kinds of things, it becomes easier to attract additional capital in the future when they have the opportunity. And this has been a big problem.

It's interesting that you talk about concerns with the takeover of the steel industry. I find that an interesting comparison to telecom. The concern always, in such things as the steel industry, is that it gets taken over by a foreign competitor who then moves the manufacturing somewhere else. That is never an issue in the case of telecom.

Public Mobile is building out to operate across Ontario and Quebec, because that is where we have a licence. Our network will sit wherever we have a licence, and our customers will sit wherever we have a network. The level of ownership we have, or who owns the company, will never impact the fact that the bulk of our assets, our infrastructure, our operations, and the jobs we create will always sit where our service is, because that's where our customers are and how we happen to serve them. That is not the case with some other industries.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Kirby.

Thank you, Mr. Wallace.

Mr. Masse.

[Brian Masse, NDP, Windsor West, ON]

Thank you, Chair, and I thank the delegations for being here.

Over the eight years that I've been here and seven on this committee, we've heard the other entrants on multiple occasions, but this is the first time for us to hear your case, because you're new to the whole debate.

I want to make sure I understand your structure. We have a flow chart. I'll start with Globalive, to understand who we're talking with in terms of what you represent in the company. I have a structure here wherein we have the three major investors over top and then Globalive underneath.

Can you explain to us where you sit, as legal counsel, and what department you're in—and as well Mr. Antecol?

[Simon Lockie]

Sure.

Ed Antecol is vice-president of regulatory of the fixed-line operation, if you look down on the left-hand side, Globalive Communications Corp. So that's legacy business. We've been around for about 12 years now.

I am chief legal officer of the fixed-line group of companies. I'm also chief legal officer of the Canadian shareholder, AEL Holdings, up top. I'm also on the board of directors of Globalive Wireless. Globalive Wireless, operating as WIND Mobile--the chief legal officer is Ms. Wood here.

[Brian Masse, NDP, Windsor West, ON]

Okay, thanks. That's helpful, because the chart doesn't explain all that, and I want to make sure that we understand the right positions.

As well, for Public Mobile, are you the CEO?

[Alek Krstajic]

I'm the CEO of both the holding company and the operating company, and Bruce is also an officer of both the holding company and the operating company.

[Brian Masse, NDP, Windsor West, ON]

Could we get Globalive to submit something more comprehensive? That would be interesting. You have seven of eight board directors who are Canadian, and they're not here today. I'd be really interested to see a little bit more of the structure of Globalive.

On my first question, I'd like commentary from both of you. The CRTC chairman came forth and gave us testimony that despite the new entrants coming into the market, he expects there will probably be only two or three, perhaps, at the end of the day, after maybe takeovers and acquisitions. That was supported.... I'm going to read a New York Times quote, from Mr. Sawiris, the chief executive of Orascom, who said: “The next few years will witness major consolidation. All small and medium-sized operators are looking for appropriate M & A deals to be...in place on the new world map.”

What I worry about is we open up the restrictions here and we don't necessarily achieve a more competitive market because we go back to a select core of operators and competition really isn't increased.

Can I get both of your comments on that, please?

[Simon Lockie]

Sure, I'd be very happy to provide my perspective on that.

What Mr. Sawiris said, I think, is a view that would be shared in almost any industry across the world. The reality, in my view, is that what we need, as Canadians, is a vigorously competitive market, and the market will determine how many parties would be the efficient way to do that.

By reducing restrictions on foreign capital, what you do is permit vigorous competition, and the threat of increasing competition coming in down the road is a very strong competitive factor. None of the existing big three have had that threat, and it's very evident if you look at the profit margins. So that is what we would be addressing.

I want to speak just a little bit about something else. The reports that we're endorsing, the recommendations we're endorsing, aren't necessarily opening the floodgates in that sense. We're endorsing an approach where cabinet would review these things and deem whether they're in the public interest or not, and that's an interesting input for them to have.

Now, there's a rebuttable presumption with respect to the smaller operators and no such presumption with the larger operators that it would still have to be in the public interest. And there are examples with the Investment Canada Act, which I think probably most people are familiar with, about the kinds of commitments and understandings that can be reached in permitting those types of transactions.

[Brian Masse, NDP, Windsor West, ON]

Do you have any comments?

[Alek Krstajic]

I think Simon's right that you're going to see consolidation across the board. I don't think the fact that there may or may not be consolidation should really be at the heart of a decision on whether to allow more foreign capital into this sector. I think it really comes down to what it is that you want to achieve in the long run. If what you want to achieve is sustainable competition, then you've taken the first step, which is you had an auction, you set aside spectrum to make sure that there were going to be new entrants, and here we are. Like us or not, here we are.

The second step is, again, that infant analogy: now make sure that you don't make a mistake that undoes the first good step, which was creating competition; now make sure it's sustainable. And the way you hurt that situation is either not having an environment where we can get more capital, or, quite frankly, having rules that apply in some cases and not in others, which creates uncertainty, which makes it difficult for me to get more capital.

[Brian Masse, NDP, Windsor West, ON]

Unlike Mr. Wallace, when I look at some of the cases, I think Canadians actually do want to invest in Canada. Just look at RIM wanting to purchase assets of Nortel. We can look at what's happening in the mining industry with Xstrata, which is choosing not to refine minerals that we have so that they can increase profitability in operations abroad.

There are capabilities here, and I would like to thank the research department for providing the committee with this very good paper on the returns from the current incumbents. For the last four years, aside from one case, and for several years in most cases, they have been good returns, and there has been some serious investment, so I think there is a good case for people to invest in it, period.

Second to that, would you agree to enforced consumer rights in regulations? I am looking for guarantees that there is actually going to be the so-called panacea. People seem to think that if we have this increased competition, you are going to pass on lower rates, you are going to pass on better service, and consumers are going to get a better product. What's in it for the public, and how do we guarantee that?

[Alek Krstajic]

Simon said he's not an economist. I'm not a lawyer, but I am an economist. My belief is that the right thing to do in this instance is not to try to overregulate that part. If you allow sustainable competition in the form of new competitors such as ourselves, what you get is a pretty simple equation. If you don't have a cellphone, we need to take you, the customer, and show you the reason you should get one. We have to understand the obstacles to be overcome. We have to create value. If you are a customer with an incumbent and we're trying to get you to come over to us, it is about increasing value and what the levers on value are. It's what you offer in product, service, and price.

I would argue that as long as you don't have three simple players and as long as these are sustainable competitors, you are going to get what you want for the end user, which is lower prices and higher penetration.

[Brian Masse, NDP, Windsor West, ON]

I don't want to be a cynic, but I have heard that before in terms of many other products and services. I think one of the reasons that we had the incumbents under protection was to create a national infrastructure, and it was for more than just the consumer end of it: it was national security and a whole series of different elements of the devices that we are using throughout the system.

I would like to hear whether there is a commitment for increased consumer protection in the philosophy of your companies. Maybe there's not.

I'm not satisfied, and I think that maybe the vast majority of Canadians are wrong. They don't feel as consumers that they are.... You argue that the incumbents are not giving those services, but what would you do differently to guarantee that they will be passed on to them?

[Simon Lockie]

What I would suggest there is that you take the fairly broadly accepted leap of faith that competition creates choice, drives down prices, and does all the good things that consumers want and need. That is the stated purpose for the AWS auction that led to our being here today.

As far as guarantees go, there are existing mechanisms, and to the extent that the government feels it needs to regulate to achieve specific policy ends or to get specific protections, it should do that. The reality is that the blunt-force tool of restricting foreign ownership and control hasn't been achieving those needs. Frankly, we are actually suggesting what the TPR and Red Wilson are suggesting: that we eliminate that blunt-force tool for telecom, because it just isn't working.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Masse. Thank you, Mr. Lockie.

We'll go now to Mr. Rota.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

Thank you, Mr. Chair.

Thank you for coming out today. We appreciate it.

It was interesting last week when we had different players make presentations as well. One of the questions was on how much foreign capital they had. Most of them built up with very little foreign capital or foreign investment, and they seem to have done okay. I realize the rules were a little different, and that was probably their biggest concern. Their concern was that the process wasn't clear, and I hear that concern echoed this morning. The rules are subject to...I think it was Mr. Krstajic who mentioned “the regime”. I find that an interesting term when it comes to this government, but I won't get political on this one--

[Some hon. members]

Oh, oh!

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

As policy-makers and parliamentarians, we have to look at the long term, and I am concerned about some of the things I'm hearing. In the short term it sounds as though we're going to get great competition, meaning we're going to get great prices. One of the terms that was brought up as well was, as I think Mr. Krstajic mentioned, sustainable players, yet in every study we've looked at, and as you even mentioned yourselves this morning, in time it all boils down to about two or three players again.

How does that benefit Canadians? You have very adventuresome investors come in, and once the consolidation takes place again down the road, it was mentioned that we might end up in another monopoly situation. That is great for investors, but how does that benefit Canadians in the long run? Down the road they again end up with a monopoly, or two or three players; the investment that came up is not Canadian, but from another country; and when you owe money, the people you owe money to basically control how you run your company, no matter how you look at it.

Maybe you can comment on that.

[Bruce Kirby]

Yes. Ultimately what matters the most for consumers is not the exact number of competitors at any given point in time; it's the ability of new competitors to come in and give them new opportunities through innovation, through new services, through new businesses.

The problem we've had for the last number of years is that there have been three players. They are roughly equal, frankly, as everyone understands. They operate like a nice simple oligopoly, and there has been no opportunity for new entrants of any kind to come in. It was in that environment, by the way, with its Canadian ownership and control requirements--and they've all been fully Canadian-owned--that they have, to put it quite bluntly, taken advantage of the chance to screw the consumer. That is what happens when you have an environment where you don't have that freedom.

What you're going to have now are a series of new entrants coming in. We don't know how each individual one will evolve; they may consolidate down. The answer is that over a period of time, you may get to a smaller number of players than initially entered. There are still a whole series of provisions in terms of competition law that protect you from consolidating back to a pure monopoly, although they were allowed to get down to that three-player situation that we have had for the last little while.

What's important at that point and over a long period of time is having an environment that allows other new investors to come in, that allows the creation of other new entrants over time, and that ultimately keeps that dynamism in the market. It's that dynamism in the market that drives the change that ultimately gives the protection Mr. Masse was alluding to for consumers.

[Alek Krstajic]

The practical matter is that we have introduced a flat-rate unlimited model, and WIND has a flat-rate unlimited model.

I can tell you that the incumbents never had, and still don't have, a flat-rate unlimited model. Who benefits from that? The consumer benefits. Are we taking lower margins? There is no question that we are.

To go back to Mr. Masse's question, look at what we put into the market when we had the ability to put anything we wanted into it. We put in a low-margin product that benefits consumers. Why? That's the way to break inertia. That's the way to get consumers who don't have a cellphone to buy one.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

I'll let you go, and then I'll ask another question.

Go ahead, please.

[Simon Lockie]

I agree with what both Mr. Kirby and Mr. Krstajic said.

The reality is that it takes a lot of capital to create a competitive alternative to the existing oligopoly, and the threat of new competition coming in is a very effective competitive tool. It's something that the Competition Bureau, for example, looks at when it is determining how competitive an industry is.

That, I don't think, can be understated. There will be continuing competition so long as you remove this barrier to entry and to capital. That's how I would sum it up.

I would also just like to clarify one point: Rogers, Bell, and Telus all started with enormous amounts of foreign capital. Bell and Telus in particular were foreign-controlled.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

Very good.

Mr. Lockie, maybe you can clarify one of the things you mentioned. I jotted it down as you mentioned it. Did you say that when an applicant is coming forward, the cabinet would review every application?

Am I clear on that? My understanding is that there is a process in place, and everybody would have to go by the same rules. That's what the problem is here: the rules changed midway through. I'm just wondering how this would work. You mentioned it, and I just want a clarification on it.

Do you believe that cabinet should ultimately make the decision? Then we're really into a regime that nobody wants. I wanted to give you the chance to clarify that statement.