IT SEEMS OBVIOUS NOW that the federal government’s attempt at building more competition into the Canadian wireless market has been a failure.

With the benefit of hindsight, looking back at how the Canadian wireless market has evolved since the 2008 advanced wireless spectrum auction, I keep wondering: “what did the federal government think was going to happen?” Back then, in an ill-advised attempt to foster more competition to the burgeoning wireless market in Canada, the federal government offered any Canadian-led wireless newcomer a leg-up in that auction, setting aside spectrum that was just for newbies willing to gamble on becoming the fourth player in a market mostly dominated by the big three.

There were a number of takers, so it looked like a good idea back then to those investors, and it earned the federal government a surprising $4 billion in spectrum license fees, more than double what was predicted. Soon after, we saw four wireless entrants launch brand new businesses: Vidéotron, Wind Mobile, Mobilicity, and Public Mobile. Shaw Communications and EastLink each purchased spectrum as well but since then, Shaw has said Wi-Fi is its wireless future and that it plans to sell the rights to its AWS spectrum to Rogers. Out east, EastLink has built a network and has done a fair amount of hiring, but has been putting off its launch for a some time.

The big three, Rogers, Bell and Telus, thought that spectrum set-aside unfair and dumb. It was dumb all right, but not for the reasons the big three said at the time. What has happened in the Canadian wireless market since that time proves the madness of trying to wedge a set aside spectrum policy aimed at helping viable competition into a protected Canadian marketplace without first liberalizing the foreign investment rules.

Since the end of that auction, even prior to, the big three have gone on to play the hardest of hardball. They began to offer incentives to convince customers to sign up for three year contracts, with breakage conditions that confused and angered many of their customers. However, those contracts often assured their customers stayed with them (because who doesn’t like a “free” phone?). The incumbents created new brands (come on down, Koodo, chatr) specifically aimed at hammering the target market of the likes of Mobilicity, Wind and Public. As well, they made it very difficult for the newcomers to share towers, say the new guys, loading their existing structures full with equipment the new guys say isn’t being used despite Industry Canada rules that mandate such sharing, and they fought tooth and nail in the courts, in front of government and at the Regulator over a number of issues, adding further distraction for the new companies.

However, if I was any of the big three, I would have taken EXACTLY the same actions. When you’re in a dominant position in any business with shareholders demanding you at least stay there in the face of new competition – or better, provide more growth – you will use every bullet you have to shoot down the new guys, especially if you’re angry the government has given your new competition an unfair leg-up. Does Wal-Mart play nice with other retailers? No, they use their dominant position to rule the retail world. Does Apple allow sharing and easy-connectivity with other companies’ devices and apps? Hah! You either play by their rules, or you’re not allowed in the Apple Kingdom. Look through other industries. The examples are legion.

Like it or not, successful companies are ruthless, hopefully within the confines of the law, of course. This is NOT new. This is something the federal government should have seen coming and it should have taken the bold step, back then, to dismantle our foreign ownership restrictions on telecom (broadcasting, too, but that’s for another column…). The fact these new wireless companies had to launch with limitations on funding sources and how they structure their businesses and leadership has proved to be a severe handicap.

So now, closing in on five years after that auction, we have three underfunded start-ups looking to consolidate or maybe even get out of the business. Really, there are just two compatible ones – Mobilicity and Wind – since Public owns G-band spectrum and, as Mobilicity chairman John Bitove told us runs “on different tracks.” The projected future of these companies is not hopeful, to say the very least. It seems doubtful that Mobilicity and Wind can afford the upcoming 700 MHz auction as separate entities and a merger is assumed to be imminent. Neither can sell their AWS spectrum to an incumbent until a five-year moratorium has passed, which ends in 2014. (Also, since Public’s G-Band spectrum was not set aside, it can be sold to anyone at any time.)

While the federal government finally did open the borders to foreign investment in telecom to companies with less than 10% national market share last summer, it’s just way too little, way too late. The big three have profited under this protection for ages to collectively own over 90% of the market – and I don’t begrudge them that. They took advantage of the rules as they are and spent billions of dollars building large businesses that employ tens of thousands, providing products and services that Canadians love.

In the face of all that, its very difficult to envision a foreign investor could look at what has happened here in the last four years and say “yeah, investing hundreds of millions in struggling Canadian telecom companies with less than 10% market share is a great idea!” It seems that the big three, plus a few regional players, may simply be the market we’re always going to have.

Watch for Part II of our wireless market analysis on Thursday as we compare Canada to some other global markets, how lacking the iPhone really hurt the new wireless companies, and wonder why it’s taking Industry Canada so long to get the 700 MHz auction off the ground.

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