Ottawa’s wireless licence review could trigger legal spat, analyst warns

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The federal government risks a legal fight if it blocks big wireless carriers from purchasing spectrum assets from mobile upstarts, says a new analyst report.

Jeff Fan, who covers the telecom industry for Scotia Capital Inc., argues that Industry Canada is tempting fate with its review of wireless licence transfers. That consultation could result in new rules for spectrum transfers between mobile carriers, with the potential to alter the industry's competitive landscape.

A final decision is expected as soon as May, and carriers worry that Ottawa will change the terms of existing spectrum licences to prevent major players like Rogers Communications Inc., BCE Inc. and Telus Corp. from bulking up on spectrum, which are the radio waves used to provide wireless service. Already those incumbents collectively control about 85 per cent of Canadian spectrum, and Industry Minister Christian Paradis has said his objective is to ensure sustainable competition in the wireless sector to keep prices low for consumers.

Still, Mr. Fan contends that Ottawa could trigger a nasty legal battle if carriers feel their contract rights have been violated, especially in a scenario where Ottawa retroactively changes licence terms.

"Violating contractual obligations could lead to legal actions initiated by the new entrants against IC [Industry Canada] if it denies the transfers to incumbents. Rogers eloquently articulated this in its submission. The new entrants did not go as far to suggest this in the filings but we suspect they are all sharpening their pencils on this potential move," wrote Mr. Fan in his latest Converging Networks report.

"Remember, if new entrants can't sell to the incumbents, they lose on how much they would get back. We estimate this could be up to hundreds of millions of dollars, which would be very material. While carriers may be hesitant to sue the regulator, it is important to remember that many of the new entrants' backers may not have intentions to maintain goodwill with IC."

A lot is hanging in the balance. Rogers Communications Inc. has struck an "option" deal to eventually acquire unused spectrum from Shaw Communications Inc., while financially-strapped upstarts such as Wind Mobile, Mobilicity and Public Mobile are in play. Already, Telus has entered talks to acquire Mobilicity.

On Monday, Mr. Paradis suggested that it was never the intent of government policy to see the AWS spectrum that reserved for new entrants during the last auction "end (up) in the hands of incumbents."

Rogers, this country's largest carrier, is among those that have told Industry Canada it would be a mistake to alter the terms of existing spectrum licences, such as those for the AWS band, to prevent carriers from swapping spectrum.

"It was in part on the basis of these rights that bidders in the AWS auction (as well as other spectrum auctions) valued the spectrum and formulated their bidding strategy. This provision contributed to the $4.2-billion raised in the AWS auction," Rogers said in its submission. "Changing this key attribute of AWS spectrum involves changing the rights of bidders in that auction after the fact – a change that flies in the face of the principles of contractual certainty that the Department strives to attain in its spectrum auctions."

The language from new entrants has also been stark. Mobilicity, for instance, has said Ottawa's consultation has "further impinged access to capital for new entrants" because investors are worried that spectrum assets could become less liquid.

"Legal actions could be a real messy situation for IC," added Mr. Fan. "Imagine Wind and Mobilicity suing the government for allegedly breaking contractual terms on the licences they obtained four years ago. We think this development would not help IC's case of attracting new strategic investors. We thought the list of interested strategic investors was already short. If this messy situation materializes, we think it is safe to say even the insane would not bite at the opportunity."

Mr. Fan, however, takes his argument one step further – flatly suggesting that Ottawa give up its dream of ensuring at least four carriers in every regional market. Canada may be the second-largest country in the world in terms of geography, but it has a relatively small population of 35 million.

"Don't fight a battle that cannot be won. Stop listening to the consumer activists and groups criticizing the wireless industry with outdated information," said Mr. Fan. "Canada is not large enough to support four facility-based competitors. IC should focus on the CRTC code to protect consumers and provide the CRTC with more power to enforce the code appropriately."

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