TORONTO – It’s a message the entrenched telecom incumbents have been hammering home all three days of the 2011 Canadian Telecom Summit: Don’t hate us because we’re beautiful.
Okay, maybe “beautiful” is kind of a stretch, but executives from Bell Canada, Rogers and Telus are dying to make it clear to anyone who’ll listen that while they do have millions of subscribers and excellent profits, they have also been the ones who have taken most of the risks on wireless and other telecom investment in Canada – so how can that mean rules have to be built (like those to come concerning the 700 MHz wireless spectrum auction) to restrict what they do?
(Ed note: CRTC chairman Konrad von Finckenstein affirmed yesterday while speaking at the Summit that strong, profitable telecom companies are good for Canada.)
The message Telus chief financial officer Robert McFarlane carried to Summit delegates – which includes representatives from government, regulators and virtually all other communications companies in the country – in his Wednesday luncheon speech was no different than his telco confreres (except when it came to his company’s call for protections from the vertically integrated, content-owning companies like Quebecor, Rogers and Bell).
In his speech, McFarlane referenced mega-popular content streamer Netflix and how it taxes all networks, including those of Telus, but at a far lower risk rate than the network owner/operators. He said Netflix spends about 3% of its sales on capital expenditures where for Telus, that number is 20%.
“The question isn’t whether one is good or bad,” he told Cartt.ca in an interview post-speech, but “you have to make sure that someone is incented and rewarded for actually building, not just for arbitraging or riding over for free, and that’s one of the public policy challenges going forward.”
He added he isn’t looking to place limits on Netflix and other video streamers specifically, but wants to make sure those in charge of laws and policy don’t penalize the network owners who are spending hundreds of millions a year on their systems. “What we’re saying is that firms such as ours which invest a lot of capital and continue to invest a lot of capital in new technologies don’t get penalized,” he said.
One example he cited was the idea of functional separation – where the service providing, retail sales channel is separated from the network building and operations itself. That’s a non-starter for all wireless and wired telecom and cable companies and ISPs.
“Another example on the wireless side… is the spectrum auction design where we found ourselves having to pay a significant premium to what was paid in the U.S. for the same spectrum because of auction design… that was a made-in-Canada disadvantage,” he said of the 2008 AWS auction where part of the spectrum was auctioned as a set aside and the other an open one. Telus believes operators paid $2 billion more, collectively, than they would have with an open auction.
When asked about Videotron’s idea to cap the upcoming 700 MHz auction in a unique way where companies which already own low-frequency spectrum in the 800 MHz band can only bid on one block of 700 spectrum while those not owning 800 in a certain region can bid on up to two blocks of 700, McFarlane cited recent history in dismissing such new rules.
Under the Videotron plan, Telus could buy two blocks of 700 MHz spectrum everywhere but B.C. and Alberta, where it has used 800 Mhz spectrum since launch. “In Western Canada, we would be completely disadvantaged relative to Rogers and Bell, if that type of policy was implemented,” said McFarlane of Videotron’s plan
(Ed note: However, if Industry Canada likes another other idea – to consider the HSPA network-sharing Telus and Bell, which is a proposal presented to the ministry by Shaw and Mobilicity – as a single entity, neither company could bid on two blocks in very many places. CORRECTION: A previous version of this story noted here that Videotron had also requested the two big telcos be considered as one bidder for the auction. While Videotron CEO Robert Depatie referred to the two companies as "Belus" during his own CTS presentation on Wednesday, the company has not asked Industry Canada for the two companies to be considered as a single bidder. Cartt.ca regrets the error.).
Rewind to the acquisition of Clearnet by Telus in 2000, McFarlane said. “There was a spectrum cap in place and we were forced to repatriate, for free, 20 MHz of PCS spectrum which then was re-auctioned and purchased by Bell,” said the CFO, who was part of the Clearnet team at that time.
“Then fast-forward to the time of the Microcell acquisition (2004).” Telus was the first bidder for Microcell (Fido). When it bid, the same spectrum limit on wireless companies was in place as when Telus bought Clearnet, so the company valued Microcell based on the amount of spectrum it would have to give up.
“Subsequent to the launch of our bid the rule was changed, concurrent with Rogers announcing their bid,” says McFarlane, “which obviously took into account the value of that spectrum and they were above ours. And to win, you had to go at a premium to where they were at, so they had basically boxed us out.
“It was public policy change in the midst of a hostile acquisition that favoured one organization over another,” he added.
Understanding the history of the industry and how policy changes can dramatically affect the fortunes of companies is crucial for the folks at Industry Canada now pondering the 700 MHz auction rules so while it looks like there’s some logic to Videotron’s proposal, said McFarlane, “what it means is you’re entrenching an advantage to Rogers and Bell (and other wireless companies)… so shouldn’t we also have the opportunity to get two blocks in our western areas because they have more spectrum than we do in their incumbent areas?”
Industry Canada is expected to release the rules of the 700 MHz auction in the fall.
