Industry Minister Christian Paradis says the new measures will allow new wireless carriers into the market and foster greater competition in the telecom industry after the auction expected next year.
"We want to have a fourth player, wherever you are in the country," Paradis said.
"This is the bottom line here: we have the three incumbents. We want to have a fourth player. So what we are bringing here are the tools that will likely help to achieve this target."
Canada's wireless market is dominated by Telus (TSX:T), Rogers (TSX:RCI.B) and Bell (TSX:BCE).
The changes to the auction rules will let at least four companies obtain spectrum in each of Canada's 14 licence areas, effectively making one block available for one of the smaller players.
As well, companies with less than 10 per cent of the telecom market will no longer have restrictions on foreign investment.
The government is also applying measures to the 700-MHz wireless spectrum auction to ensure rural Canadians receive the same level of service as people who live in bigger towns and cities.
Companies that hold more than one block of spectrum will have to provide wireless services to 90 per cent of their coverage areas within five years, and to 97 per cent of their coverage areas within seven years.
Antenna tower-sharing and roaming policies will also be changed, and a certain portion of the spectrum will be set aside for public-safety services such as firefighters and police.
Amit Kaminer, an analyst at the SeaBoard Group, a telecommunications and technology consulting firm, said Industry Canada tried to balance the interests of all sides.
"Relaxing the foreign ownership rules of smaller firms is an important step in the right direction but without set-asides the incentive for the new entrants to bid in the auction in the first place is greatly reduced," he said.
"That said, the caps structure does leave small but important opportunity for the new entrant to access a limited amount of spectrum."
Wind Mobile and Public Mobile — two of Canada's smallest cellphone companies — had threatened to sit out spectrum auction if space wasn't set aside for smaller players like themselves.
Anthony Lacavera, chairman and CEO of Wind Mobile, said Wednesday he was pleased by the decision to lift the foreign ownership limits, but said that the cap system handicaps the smaller companies because there isn't enough of the valuable 700 MHz spectrum available.
"What the incumbents can buy makes the remaining dribs and drabs we can get not enough," he said.
"The problem is the government is letting them buy too much, so we're not able to get enough to offer competitive solutions to these guys."
Globalive Communications Corp., Wind Mobile's parent company, has faced challenges to its ownership structure. Egyptian company Orascom holds a 65 per cent equity stake in Globalive, but does not hold voting control and only a minority of board seats on the company's board.
Paradis said the government had to strike a balance.
"When you sit down with the new entrants, and when you sit down with the incumbents, sometimes on some points, they will say things that are very different," he said.
Rogers spokeswoman Patricia Trott said the company would review the minister's decision carefully.
"We've always said a fair and open auction is the best way to ensure Canadians have access to the best and latest technology," Trott said.
Michael Hennessy, Telus senior vice-president, regulatory and government affairs, described the decision on spectrum as "balanced," saying it meets the government’s objective to increase consumer choice, promote sustainable competition and ongoing investment in technology such as LTE, as well as expansion of service in rural markets.
"We recognize the minister had to make tradeoffs in this decision and we felt he did so in a fair and transparent manner," he said.
However, Hennessy said his company was hopeful that this is just a first step in the process.
"We would encourage the government to work towards further liberalization that would put us on an equal footing to our global trading partners and lead to even more innovation."
The new spectrum up for auction has the ability to allow cellphone calls in elevators, deep in underground parking lots in big cities and in basements and attics in suburban areas.
The frequencies, made available by the switch to digital television signals, also provide better and more affordable coverage in rural Canada because fewer cellphone towers are needed to provide coverage.
The government said it will hold the 700-MHz auction in the first half of 2013, to be followed by auction of the 2500-MHz spectrum within a year.
Liberal Industry critic Geoff Regan called the changes announced Wednesday disappointing.
"It is clear that today's announcement will not lead to cheaper cell phone bills or better rural service for Canadian families," Regain said.
"These half-measures put forward by this Conservative government will only maintain the status quo, supporting a market dominated by the 'Big Three.'"
In 2008, the federal government set aside radio spectrum for newcomers opening up Canada's cellphone industry to more competition and raising more than $4 billion for federal coffers.
The auction saw the debut of Wind Mobile, Public Mobile, Mobilicity and Quebec-based Videotron (TSX:QBR.B) all launch into the cellphone market.
The combined market share of all the new entrants is about four per cent, according to Industry Canada officials.
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