Industry Committee on April 15th, 2010

[Kenneth Engelhart]

Essentially I agree with them. If you look at the wireless sector, most countries in the world have two big players, a third player that's hanging around, and sometimes a fourth player that is quite badly in fourth place. Canada has three big healthy wireless companies that are knocking each other over the head in competition every day. The idea that we're going to see five, six, seven competing networks in Canada I think is unrealistic.

[Ken Stein]

Our view would be that in terms of new services, from a customer point of view the most important is our ability to offer multiple platforms. It's difficult for new entrants to come in and be able to do that. From a customer point of view there would probably be that kind of consolidation because of the advantages of one provider being able to offer multiple platforms.

On the other hand, we've learned over the past decade that it's very difficult to predict how technology is going to unfold. It's going to be very difficult to see what the new wireless applications are.

We have some interesting ideas. We've waited a bit to be able to invest in a new technology for the wireless services we'll be offering. They will offer further applications, and I think that's going to provide more richness.

It may well be that there will be different entrants, if they can figure out certain niches. It's the same in programming services. We used to think there would be a few companies, then it became maybe 20 or 25 companies, and then it came back to a few companies again. It will go back and forth. The one thing we've learned about technology is that you get a lot of start-ups, a lot of them get consolidated, and then you get a whole bunch of other start-ups again. It goes in waves. There's no real defined number; it cycles through.

I think the main thing you want to encourage is large companies and small companies to be innovative and entrepreneurial and provide them with the opportunities to develop new kinds of applications. The ability to develop those kinds of applications is probably the problem we face in Canada. For whatever set of reasons, the ability to develop new applications is a challenge for us in Canada. I think that's going to be really important as wireless unfolds as a new platform.

[Brian Masse, NDP, Windsor West, ON]

The reason I started the questioning with regard to the profits and then with regard to the CRTC is that it leads to the real meat of this. You've taken a position on Globalive. For whatever reason, the minister and the government have decided to overturn the CRTC decision and actually go through a very unusual process with Globalive. I haven't seen that type of behaviour ever before. And there's motivation to do so.

Why do you think that motivation is there? I understand the argument of comparing apples to apples in terms of services and costs and what you get as a consumer, but I think Canadians generally don't feel they're getting the best value for what they're paying for services. That's the representation I get from my community and constituents. They do get some really good services, there are some products out there, but they always feel a bit behind. They also feel they're paying an extra premium and not having as much choice. That's probably why the government has taken such a position on Globalive.

The ministers are publicly complaining about competition. What do you think that says about the current situation?

[Ken Stein]

Can I just go back to the profit situation? My answer does relate to the point you're making right at the moment. We pointed out to the CRTC over the past few years that basic cable does not make money. The investments we make where we generate a return on our investment are in new services. Basic cable is so regulated and so constrained that there is not money to be made. As Bell pointed out to the commission, when the commission released its numbers before they released their value-for-signal discussions, they included in the broadcast distribution undertaking revenues telephony and Internet services. In the investments we've made, that's where the profits come from.

So if you're looking at Shaw as a company, you have to compare it with other companies of similar size and revenues and capital structures, and those comparisons are not.... Yes, we do well, but are we way up there in terms of a return on investment? No, we're not up there in terms of that kind of measurement. And that's the appropriate measurement to make for a capital-intensive company like ours.

In terms of trying to look at our customer satisfaction with our services, it's measured in the marketplace. We have nearly two million Internet customers because we provide value. We have a million phone customers—in the period of, what, four to five years—because we provide value. We maintain our basic cable subscribers because we maintain value. When I look at comparisons with the U.S. or in Europe, we own systems in the United States. Our basic cable in Canada is half the bill the people in Houston are paying.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Stein.

Mr. Rota.

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

Thank you, Mr. Chair.

Thank you for being here this morning.

Telecommunication networks are critical to the economy. It's becoming what telephone was years ago, and it's a basic service that has to be out there. We're finding more and more that if you don't have it, you're falling further and further behind. As parliamentarians, our goal is to ensure that services are widely available, modern, high quality, and reasonably priced. The argument I've been hearing, up until today, it seems, is that if you want better service, better coverage, you have to open up the markets and let the markets prevail. I believe, Mr. Engelhart, you mentioned that we have to work at it until markets take over and until we get to a certain point, and then it will be fine.

Now my concern is that by opening it up, we talk about foreign investment, and there's a difference between foreign investment and foreign ownership. I think Mr. Masse touched on it earlier, in that if we allow foreign ownership, then it's a whole different story. What ends up happening is we end up with a branch plant, and major centres will be covered but I'm not sure about rural Canada. That's an area that really interests me, being from a rural area.

How do you see the changes coming up affecting services in rural areas, or the changes that just happened, such as what happened with Globalive with the trust in the market?

[Kenneth Engelhart]

Globalive isn't going to do anything for the rural areas. They are honest about the fact that they are going to only provide service in the major urban areas. None of the new entrants will go to the rural areas. We're already doing a huge amount. This revolution in wireless broadband is something that I would urge this committee to take note of.

Up at our cottage, which is never going to have cable, never going to have high-speed Internet from the telephone company, I have my Rogers Rocket Stick—I know this sounds a bit like a commercial—I put it in my computer and I have high-speed Internet, and I'm down at the bottom of a hill, where you would think the radio coverage wouldn't be good. I have great high-speed. There are huge parts of the country that were never going to get broadband that have it now because of wireless broadband services that Bell, Rogers, and TELUS are rolling out. So this is a huge factor in promoting broadband growth.

Look, I would agree with your comments that the cost of capital has to be traded off against the head office jobs. I would agree with that. But in terms of rural broadband, I think Canada is doing much better than most countries.

[Ken Stein]

Can I just respond?

I have a cabin in Mr. Clement's riding, and I'm amazed at the level of television service I get through Shaw Direct and my Bell high-speed wireless service, which is phenomenal. Over the last ten years we have seen significant improvements in our access to communications and telecommunication services from whatever providers there are. So I think Canadian companies are doing a phenomenal job in rolling out service to rural and remote communities.

If the government really wanted to do something in this area, one of the things it could do would be to try to get Bell and Shaw Direct, and any others that want to participate, to invest in a Ka-band satellite capability in order to develop high-speed Internet services in remote areas. It would cost in the order of hundreds of millions of dollars, maybe billions, but it would be a phenomenal step to take. We would be world leaders in the innovative use of spectrum to provide high-speed Internet services in those areas. That would be a more innovative approach for dealing with these issues than allowing foreign entrants in, who aren't actually going to serve those areas. They're not interested in serving Red Lake, Ontario. As Kenneth pointed out, they're going to compete in Toronto.

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

That's exactly my concern with the opening up of the market. How does that affect you as far as servicing rural areas is concerned?

I have constituents come to me constantly who say they have no service. I'm not sure how well the Rocket works. I don't know if it even exists—but I guess it does in northern Ontario in certain places. Mine is a Rogers' phone and it works well throughout—I just want to point that out—wherever you get service, but there are a number of dark spots. Norm Hawirko, a constituent in my riding, is 20 minutes away from Temiskaming Shores. He's trying to run a business but can't do it.

How do we encourage that? Just last night I was talking to a lady, Cindy Duncan McMillan, from Farrellton, Quebec, just an hour north of Ottawa. That's not that far north. She runs a business selling beef, but to send her price list out, it takes 20 minutes because she's on hard wire. She tells me she doesn't have an alternative. How do we get around that?

I guess you anticipated my question and where I was going. Maybe, Mr. Engelhart, you can elaborate on what we can do as a government to ensure that rural ridings, rural constituents, get service.

[The Chair, Conservative, Michael Chong]

Briefly, Mr. Engelhart, and then we'll go to Mr. Braid as our last member.

[Kenneth Engelhart]

I can assure you that Rogers is working on that. We just recently announced a deal with Thunder Bay Telephone, which is going to roll out our broadband service in a joint venture to much of northern Ontario. I'm not sure if it includes your riding, but we have other deals in the works, including one in Manitoba, for example.

So pushing high-speed wireless broadband out to rural areas is very much a priority. We're doing that because of the competition between Bell and Rogers and TELUS. Many of our critics try to pretend there is no competition between Bell and Rogers and TELUS, but if you look at the vast investments we are making in the marketplace, you can see the competition is very fierce.

[The Chair, Conservative, Michael Chong]

Thank you very much.

The last member for our first panel is Mr. Braid.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

Thank you very much, Mr. Chair.

Thank you to the witnesses for being here this morning.

Mr. Engelhart, if I could start with you, please, sir, you referred in your presentation to the advantages of foreign liberalization. Could you outline what those advantages are?

[Kenneth Engelhart]

Yes. The main advantage really is the cost of capital. It makes it much easier and much cheaper to obtain investment, and that's not just equity investment. It's true of debt as well, because if somebody loans you money, one of their questions is “What happens if you don't pay me back?” The normal result from a debt instrument is that you acquire control of the company, but that's a huge problem if you're a foreign lender, because you can't acquire control of that company. You can't in effect take that company's assets as a pledge against your debt. So Canadian ownership rules affect the costs Canadian firms face in raising capital.

Also, in the venture capital space, one of the areas where Canada does need some work is in start-ups, which are funded by venture capital. Venture capitalists want to have a path to control of the company they are funding. That can't happen very easily with foreign ownership rules.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

Thank you. You're preaching to the choir on the importance of supporting start-ups, I might add.

I wanted to come back to an earlier theme, through questioning from both Mr. Garneau and Mr. Lake, with respect to the current limits for foreign investment. If foreign entrants are allowed into this space, why couldn't you just simply take advantage of maximum limits for foreign investment? You indicated you're not doing that now.

[Kenneth Engelhart]

We have no interest in selling part or all of our company to foreign investors or others. The Rogers family has no current plans to do that. I'm not here advocating for or against liberalization. I believe Rogers will do well under either scenario.

[Ken Stein]

I'd just like to say, from a Shaw point of view, J.R. Shaw didn't spend 40 years of his life building this company to turn around and sell it. Quite the contrary: we're always looking for acquisitions in terms of trying to expand the company and become more competitive. Our interest in the foreign investment issue, and Jim has said this, is we're interested in acquiring assets, not the other way around. Our interest in foreign investment is just to be able to raise the capital we need to extend services to our customers.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

Very good.

Finally, in this emerging digital age, I wanted to ask if you could comment on what you think the future looks like, what your customers will want in that future world, and how the regulatory environment can support where the future is going.

[Ken Stein]

What we've learned in this business is you can't predict what customers are going to do and respond to. The one thing we do know is that two of the most important things over the next decade are going to be television and broadband. And the ability to develop, in creative ways, content and ability to deliver that content to Canadians in an accessible way, and the richness.... You can't predict what kinds of applications are going to come along in terms of this.

My son runs security stuff for Facebook in the United States, and the biggest application is Farmville. Who would ever have predicted that would be a large application and be a big money-maker? You don't know how these things are going to respond. It's a very difficult game to be able to predict.

The one thing you can be sure of is that if we're able to continue to invest in it and to continue to build that capability then that will provide the opportunity for entrepreneurs to take advantage of it. And that's the kind of business we see ourselves in, to be able to provide that platform in multiple ways so Canadians can have the opportunity to develop new services for people that they want to have, and to let it rip.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Stein.

Thank you, Mr. Braid and Mr. Brazeau and Mr. Engelhart, for your testimony today.

We'll suspend for a couple of minutes to allow the panels to change. This meeting is suspended.

[The Chair, Conservative, Michael Chong]

We're coming out of suspension.

We'd like to welcome our new panel of witnesses. This is our ninth meeting of the Standing Committee on Industry, Science and Technology. We're here pursuant to Standing Order 108(2) to study Canada's foreign ownership rules and regulations in the telecommunications sector.

I welcome all of you. We have representatives from three different companies here in front of us today. From Bell Canada, we have Mr. Bibic. From MTS Allstream, Mr. Peirce, and from TELUS Communications, Mr. Hennessy. Welcome to all three of you.

We'll begin with an opening statement from Bell Canada.

[Mirko Bibic, Senior Vice-President, Regulatory and Government Affairs, Bell Canada]

Good morning, Mr. Chair and members of the committee.

I am pleased to share Bell's views on possible changes to Canada's foreign ownership rules in the communications sector. Before I do, I would like to briefly tell you about Bell.

We are Canada's largest communications company, offering wireless, TV, Internet, and wireline voice services to residential and business customers. We have 50,000 employees and $17 billion in annual revenue.

For 2009 and 2010, we will have invested $6 billion in capital, all in Canada and all during the great recession. This includes hundreds of millions of dollars to build the most advanced broadband network any Olympic games has ever had, which delivered every image and sound to more than 3 billion people worldwide.

Bell Canada is also now the largest R&D spender in the country. Ours is one of the most widely held stocks in Canada. So we touch Canadians not only as their communications service provider, but also as an investment and savings vehicle.

While we seek to be helpful by providing a concrete proposal, which we will do, developing our position has been a challenge. I say this because proposals typically are intended to solve an identified problem. In this case, the objectives are less than clear. There is a perception that wireless pricing in Canada is high and that we lag behind in investment and innovation. This simply is not correct, and misperceptions should not drive policy in Canada. We will soon have nine national or regional wireless carriers in our country. Only one European country has even five. Canadians already enjoy the second-lowest average wireless cost per minute among the G-7. I believe we are third-lowest among the G-8, and the ninth-lowest in the G-20. We have three providers operating on state-of-the-art 3G HSPA plus networks, and there will soon be more.

Bell's brand-new wireless network reaches 93% of the Canadian population. This means that since November 2009, thousands of small and rural communities across the country, such as Happy Valley-Goose Bay, Summerside, Chicoutimi, North Bay, and High Level, have had access to high-speed wireless broadband. We lead the world in wireless technology today. The U.S. in fact lags behind us.

That said, we do acknowledge the benefits of being global in our thinking. So Bell is not opposed to relaxing the foreign ownership rules, provided any new rules apply symmetrically between large and small carriers and between carriers who have broadcasting assets, known as integrated carriers, and those who do not. Symmetry keeps the playing field level and avoids favouring some carriers over others. You certainly heard my colleagues from Shaw and Rogers this morning express the same concerns rather emphatically.

Changing only the telecom rules but not the broadcasting rules will have little positive impact. As you heard this morning, almost every telecom carrier in Canada today--Vidéotron, Shaw, Rogers, Bell, etc.--has broadcasting assets, so a telecom-only fix won't help the integrated carriers, all of whom would still have to satisfy the current thresholds if the broadcast rules were left unchanged.

To the contrary, we would be placed at a cost of capital disadvantage relative to the pure-play telecom providers. Surely there is no public policy benefit to disadvantaging the integrated carriers, who all make significant capital investments in Canada, who offer service to large and small communities alike and who create tens of thousands of well-paying, highly skilled jobs in Canada.

Ironically, a telecom-only fix is equally unlikely to help new entrants because they likely would have to remain pure-play telecom providers with no scope to provide the converged telecom and broadcast offerings that consumers seek today.

Regulations should not force carriers to choose between having easier access to foreign capital and offering converged consumer and business services.

While we do not believe that there is a problem today, given our investment, innovation, and competitiveness, if the foreign ownership rules are to be liberalized, we think the best model is the one proposed by the CRTC: boost the foreign voting share limits for telecom and broadcast operating entities by up to 49% while retaining the Canadian control-in-fact test.

Now, Bell and the CRTC don't often agree on anything, so this might be a good start here.

Here's why we feel that the 49% model is the best approach. It's a meaningful increase to direct foreign investment in telecom and broadcast operating entities from 20% to 49%. And it avoids the need to establish complex holding company structures to comply with today's rules.

Also, the change can be applied symmetrically to large and small telcos and broadcasting entities. This would allow all players to benefit from increased foreign capital. And it would give them the flexibility to offer consumers the converged services they crave more and more. All the while, through the continued application of the Canadian control-in-fact test, it would address the concerns of those who wish to ensure that Canada's broadcasting assets remain in Canadian hands.

I close with this final thought. If Verizon, AT&T, and T-Mobile owned Bell, Rogers, and TELUS, Canada today would not have the world's best HSPA plus wireless networks, and certainly not in small and rural communities across the country. Only now are U.S. carriers beginning to roll out their own HSPA plus networks. Our success in leading the pack should be celebrated.

Given the time constraints, I'll close here. I thank you, and I welcome your questions at the appropriate time.

[The Chair, Conservative, Michael Chong]

Thank you, Mr. Bibic.

We'll now hear an opening statement from MTS Allstream.

[Chris Peirce, Chief Corporate Officer, MTS Allstream Inc.]

Thank you, Mr. Chairman, for the invitation to attend this morning.

With 6,000 employees across Canada, $1.9 billion in revenues, nearly two million total customer connections spanning business customers across Canada and residential consumers throughout the province of Manitoba, and a national broadband and fibre optic network that spans almost 30,000 kilometres, MTS Allstream is one of Canada's leading telecommunications providers.

We compete with TELUS in the west; Bell in the east; and Bell, TELUS, Rogers, and Shaw, among others, in Manitoba, where we are the incumbent.

We are the only national facilities-based competitor advocating for a pro-competitive regulatory and policy framework left in Canada. There were at least 14 facilities-based competitors present in Canada in 2000, all of which failed or were consolidated into the existing incumbents, in part because of Canada's foreign investment restrictions.

As a result of our history, we have unparalleled experience investing as a national competitor. We were the first competitor to successfully build out a national IP-enabled network. We did so at a cost of approximately $4 billion and with the consequence that, as AT&T Canada, we also underwent the second-largest CCAA proceeding in Canadian history as of that time. This was due in large part to the fact that we were paying $400 million in annual interest charges on the foreign debt required to fund our capital build, a situation no large incumbent would ever face.

My point is that MTS Allstream has a proven track record as an innovative and successful competitor and is one of Canada's most innovative telecom providers. We also have the scars to prove it, and the perspective, we believe, to contribute to this very important discussion we're having today about foreign direct investment and the need to increase competition and innovation in Canada's telecom market, and ultimately, economic productivity in Canada as a whole.

We offer a unique perspective on these discussions for two reasons: first, because we operate and derive half of our revenue respectively as an incumbent in Manitoba and a competitor across the rest of the country; and second, because as a competitor we have experience in trying to establish and maintain international partnership with AT&T and have directly experienced the negative effects of current foreign investment restrictions.

The government's decision to move forward and examine ways to increase foreign investment in our telecommunications sector is welcome news for Canadian consumers and business. It has been recognized for some time now that the current restrictions on foreign investment in the telecom sector are counterproductive to Canada's goals of maintaining leadership in the realm of telecommunications and ICT and of ensuring Canada possesses the infrastructure necessary to support and enable the innovation and productivity-enhancing technologies that are key to our economic success. Our national interest is represented in welcoming global investment to assist in this essential task and thereby empower Canadians and Canadian businesses.

The need for reform has been recognized in numerous reports and studies: the 2001 broadband task force report; the 2000 report of this standing committee, Opening Canadian Communications to the World; the Telecommunications Policy Review Panel Final Report 2006; and the 2008 competition policy review panel report.

Among the expert bodies that have studied this issue, there is remarkable unanimity. For the last decade, all have advocated scrapping the sector-specific restrictions. None have made the opposite case. In every case, the current rules have been recognized as slowing competition, innovation, and productivity.

What's more, Canada's rules are out of step with the rest of the world. According to the OECD, Mexico, South Korea, and Canada have the most closed markets with respect to foreign investment. Since this study was published, both Mexico and Korea have begun easing their restrictions, leaving Canada as the sole laggard in this regard.

In short, in 27 out of 30 OECD countries, a company like MTS Allstream would be able to access capital from anywhere in the world. This may help explain why so many international companies have effectively left the Canadian marketplace over the last decade, including AT&T, Verizon, MCI, Sprint, SBC, and British Telecom.

Greater foreign direct investment plays an important role in generating innovation, competition, and prosperity. Removing the current restrictions from the Canadian telecommunications market would bring tangible benefits. As the telecommunications policy review panel noted in its final report,

The economic case for liberalization of FDI is so well established in Canada and other OECD countries that the main area of economic debate is not whether it boosts domestic competitiveness and productivity, but by how much.

Greater direct foreign investment encourages the growth of efficient Canadian companies that can better compete at home and abroad. It would help foster a more dynamic and competitive business market. Indeed, Bank of Canada Governor Mark Carney is the most recent economic expert to link foreign direct investment to increased productivity.

One need only look at the oil and gas sector to see what can happen to Canadian industry when capital investment is allowed to flow unimpeded and Canadian corporate ambition is not snuffed at the border. In the 1970s, over three quarters of the industry was foreign-owned. The industry was highly regulated and subject to the oversight of the Foreign Investment Review Agency.

[The Chair, Conservative, Michael Chong]

Mr. Peirce, just one moment, please. If you could slow down just a little bit to allow the translators to keep up with you, that would be great.