Industry Minister Christian Paradis said Tuesday the government would use all tools at its disposal to ensure there are at least four wireless competitors in every region of Canada.
Telus and Mobilicity had sought an exception to a federal policy that prevents a transfer of spectrum from new, small carriers to the large incumbents for at least five years after the licences were issued.
But Paradis' strong language suggests Telus would still have a high bar to clear to obtain permission for the purchase of Mobilicity's spectrum even after February 2014, when the initial limitation expires.
Telus, which has warned in the past that Mobilicity won't be able to survive without financial help, called the decision "unfortunate" for Mobilicity's 250,000 customers and 150 employees and debtholders.
"(They) now face considerable uncertainty due to the pressing financial challenges facing the company," Telus said in a statement.
NDP critic Glenn Thibeault accused the government of creating a shambles in the wireless sector, adding that if Mobilicity went out of business, "consumers will be left holding the bag," along with the creditors.
But the minister said it was not a "foregone conclusion" that Mobilicity will go bankrupt.
Mobilicity chief executive Stewart Lyons said he was reviewing the minister's announcement and will "be speaking with Telus and other stakeholders and will have more to say in due course."
Wind Mobile CEO Anthony Lacavera said he's interested in acquiring Mobilicity.
"I think this opens up a new opportunity for discussion with Mobilicity," Lacavera said from Toronto.
Mobilicity's subscribers and network would give Wind Mobile more critical mass and its spectrum could be added to Wind's spectrum in the transition to a faster, next-generation network.
He also said VimpelCom, which had put Wind Mobile up for sale, may want to keep it now that there's certainty on the rules from the federal government.
"I think the government made a very good move in providing the market with clarity on how spectrum transferability rules will be applied," he said.
The government has long sought to increase competition in the wireless sector that has been dominated by Bell (TSX:BCE), Rogers (TSX:RCI.B) and Telus (TSX:T). During a 2008 sale of additional spectrum, Ottawa set aside a portion for new entrants in an effort to create a new national carrier and strong regional providers.
While the policy attracted several new players, most of the independent carriers — operating the Wind, Mobilicity and Public Mobile networks — have struggled to make money and are currently up for sale.
Videotron, part of Quebecor (TSX:QBR.B), has been more successful in the Quebec market, but Calgary-based Shaw Communications (TSX:SJR.B) decided against using the spectrum it bought to start up a new wireless business.
University of Ottawa law professor Michael Geist, who specializes in e-commerce, called the decision "defensible," but said the government needs to go much further if it is to achieve its goal of increasing competition in the sector.
"The government needs to do more than simply buy time by enforcing the five year spectrum set-aside rule," he wrote in his blog Tuesday. "There are a host of other possibilities, including fully opening the market to telecom and broadcast distributors, tough rules on domestic roaming and tower sharing, a full set-aside in the forthcoming spectrum auction, or a regulated wholesale market to create a strong class of MVNO (mobile virtue network operator) competitors."
Paradis refused to acknowledge that the government's policy objective failed, saying that since 2008, consumers have seen the average price for wireless services decline by 18 per cent.
"We will not allow this progress to be lost or undermined," he said. "I will not hesitate to use any and every tool at my disposal to support greater competition in the market.”
To that end, Paradis said he will postpone the next auction of 700 megahertz of spectrum — originally slated for November — to Jan. 14, 2014 in order for the industry to adjust to the new policy parameters.
Spectrum refers to radio waves over which cellphone networks operate, carrying voice and data.
In essence, the policy keeps in place the five-year limit on transfers of set-aside spectrum, but then places a second hurdle in the way of industry consolidation. Any application for transfers would be rejected if, in the view of the government, it results in "undue concentration" and therefore reduces competition.
Paradis said transfers will be decided on the merits on a case-by-case basis.
The minister said the new policy will be posted sometime in June and will be based on recent consultations with the industry and Canadians.
"It will give industry the clarity and predictability they need to chart the future of their companies," Paradis said.
Critics have long maintained that the government should loosen or eliminate foreign ownership rules to increase competition, but Paradis said Ottawa is not prepared at this time to go that route. He noted that in 2012, the government lifted foreign ownership restrictions for companies with less than 10 per cent share in the market.
He received support for that position from Amit Kaminer, an analyst with the Seaboard Group, who also agreed with the minister that the wireless landscape in Canada had been transformed since 2008. Now the minister needs to go further, including setting aside all the spectrum in the January auction to new entrants, he added.
"The challenge now is to make competition long-lasting and make it sustainable," he explained.
Telus shares gained two cents to close at $35.81 on the Toronto Stock Exchange.
Note to readers: This is a corrected story; An earlier version said the stock closed down two cents