Beyond a casual glance

At a casual glance there appears to be no compelling reason to change Canadian telecommunications foreign ownership rules. Investment remains strong, prices are low and Canadian residential and business customers enjoy a variety of service choices. In short, there doesn’t appear to be any problem that needs fixing. Why then are non-incumbent carriers clamoring for change? And why are incumbent carriers fighting changes to the rules? Let’s look first at the practical implications of removal (or lessening) of foreign ownership restrictions. A key implication is that instead of borrowing funds from debt markets, a service provider could raise funds through the sale of equity. The costs of equity financing are typically lower than debt, and therefore the service provider’s cost of capital should accordingly decrease. In some cases it might even represent a necessary source of funds when further debt financing cannot be arranged. Given the need of new carriers to invest heavily in building out their networks, the cost savings could well mean the difference between being around for the next battle versus becoming an obit item in a Decima Publishing news item. If the equity financing is provided by an established non-Canadian carrier, then various benefits can arise from scale and scope economies (e.g. marketing and network management) as well as freer transfer of technologies and other propriety processes or properties. In addition, the costs of compliance with the rules will be either diminished or even eliminated. These costs include both hard expenditures (e.g. legal and regulatory costs) as well as soft costs (e.g. executive time spent on making sure that de facto non-Canadian control does not occur). Would incumbent carriers benefit from any of these potential cost-savings? Yes, but not nearly as much as competitive carriers. Moreover the financial health of the ex-Stentor members has never been better. Good rate of return The incumbent carriers have enjoyed stellar returns since the implementation of price caps. In the last three years, the incumbents as a group have averaged returns in the 11% to 15% range. By comparison, the larger competitive wireline carriers (AT&T Canada, CallNet, and Group Telecom) have all reported losses in each of the last three years. In the year 2000, the combined loss for all three competitive carriers topped a billion dollars. The incumbents, however, reported net income of roughly $2.5 billion. The incumbent carriers appear to have the competitors feeling the heat, if not getting totally fried. They have no incentive to provide the competitive carriers a potential lifeline through the removal of foreign ownership restrictions. As consumers, we have all enjoyed the benefits resulting from the introduction of competition in Canadian telecommunications markets. The only way those benefits will continue to be available to Canadians is if competition endures. The removal of foreign ownership rules does not compromise the achievement of any real Canadian national objectives – but their removal goes a long way to ensuring we have ongoing competition in the Canadian marketplace. Dr. Gerry Wall is president of Wall Communications Inc and a former publisher of Network Letter.

Beyond a casual glance

News | August 13, 2001

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