06/03/2013 06:26 EDT | Updated 08/03/2013 05:12 EDT

Can Anyone Take On Top 3 Telecom Companies?

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Global communications

Telecom analyst Eimon Hoey has a rather pessimistic view on the prospects of new competitors entering an already crowded and competitive telecommunications market, dominated by three incumbents.

"Do these guys have a chance? The entrants? The answer is no," Hoey told CBC News. "Unless the [industry] minister is willing to change 30 to 40 years of bad policy."

Despite government efforts to create a more competitive playing field, the top three — Bell, Rogers and Telus — still control about 90 per cent of Canadian cellphones while the three more recent market entrants — Mobilicity, Public Mobile and Wind Mobile — are all up for sale.

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Meanwhile, Telus has already made a $380-million bid to take over Mobilicity, a potential acquisition, needing government approval, that moved one step closer last week after an Ontario court approved the deal. The next day, Rogers and Quebec-based Videotron announced a network sharing agreement that would include the option of allowing Rogers to acquire Videotron's Toronto spectrum licence.

And, with Calgary-based Shaw Communications Inc. saying earlier this year it had abandoned its cellular network plans and worked out a deal for Rogers to purchase its unused network spectrum, observers question whether it's at all possible for a new national competitor to go head-to-head against the incumbent carriers and carve out their own slice of the Canadian telecom pie.

'Writing on the wall'

"I think the writing is on the wall, the prospects are clearly dim," said telecom analyst Carmi Levy. "Almost without exception, all the newcomers are struggling to boost their subscriber numbers.

"As a result, we can expect other dominoes to fall before this is all done," he said.

Many analysts commend the government for its attempts to open up the market. Back in 2007, Ottawa announced that it would auction off a portion of the wireless spectrum specifically to new wireless company entrants in a bid to foster more competition in the industry.

But, as Levy says, the government did not do enough to ensure those new players would survive long term.

"They simply opened up this spectrum and assumed the free market would be enough to sustain them. But clearly in a market as heavily regulated as this, free market economics aren't enough," he said.

Although spectrum was reserved for new companies, the cost of the wireless highways are enormous, saddling new investors with huge capital costs.

"Before you've even signed up your first customer, you're already on the hook for billions of dollars worth of spectrum," Levy said. "Therefore you have to bring in deep-pocket investors who are willing to survive the long haul until their customer base grows to the point that they can survive."

Market saturated

The auction also came at a time when the market was already quite saturated, said analyst Troy Crandall of MacDougall, MacDougall & MacTier.

"The problem is that these new entrants were so late to the game that the penetration rate was so high in Canada and they were entering a mature market already," Crandall said, adding that the Canadian market may only have room for one additional competitor.

"For a competitor to come in now, I'd probably say yes, it would be extremely difficult unless they were able to come in with some niche-like product that the market doesn't currently have," he said.

But Levy said consumers must also bear some responsibility for the dearth of cellular choice.

"Canadian consumers, for all their complaining about lack of choice in wireless and telecommunication services, when push comes to shove, they tend to stick with what they know and, as as result, they have clearly, over the last three years, been relatively hesitant to try anything new," he said.

Yet the problems go deeper than that and can be traced back decades, Hoey said. Back in the mid-1980s, the government failed to project the growth in telecom subscribers, and handed out free spectrum to the incumbents and their predecessors, Hoey said, allowing them to avoid huge startup costs.

"From the policy perspective, it's a mess. It's a mess because Industry Canada awarded itself the obligation to create winners and losers," he said.

This initial allocation of spectrum, along with foreign investment rules, tied up potential capital, and has discouraged more players in the market, Hoey said.

"At the end of the day, the demise of Mobilicity, the possible demise of Wind and the demise of Public Mobile is largely because of access to capital," he said.

Not a 'ghost of a chance'

Unless Industry Minister Christian Paradis makes some bold moves, like regulating the incumbents on rates and service and removing all foreign investment rules, there's not a "ghost of a chance" of redeeming the system, Hoey said.

Some analysts are a bit more optimistic. Canada has lifted some restrictions on foreign investment in firms with less than 10 per cent of market share by revenue. The government is also set to auction off another batch of spectrum in November, with no one company able to buy more than one of four blocks of available spectrum.

As for competitors against Rogers, Bell and Telus, some companies have been able to enjoy success in regional markets, like Videotron in Quebec and Eastlink in the Maritimes.

Also, Naguib Sawiris, whose company financially backed Wind when it started up, recently purchased Manitoba-based Allstream, leading to speculation that the Egyptian billionaire could make a play to reclaim Wind.

"This isn't somebody who doesn't know the barriers, doesn't know the issues, doesn't know the problems of Canada's marketplace. This is somebody who has actually studied it very well," said analyst Iain Grant of The Seaboard Group consulting firm. "So I think what comes out of this is a totally revitalized Wind. Which happens to fit in perfectly with the government's mandate to increase competition."

Grant said there have been mistakes made when it comes to issues like roaming conditions, tower sharing and spectrum allocation, but that the government has learned a lot over the last five to six years.

"Paradis came out in March saying the government will consult with the industry with the view of changing some of those rules. Would it have been better to have done that three to four years earlier? Yes. But government isn't known for its lightning speed."

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