The Future is Unfriendly for Mobilicity Acquisition by Telus

The Future is Unfriendly for Mobilicity Acquisition by Telus

The Federal Government recently announced it would not allow Mobilicity to transfer the wireless spectrum it owns to Telus, effectively blocking a deal for the incumbent to acquire the smaller new entrant. Many see this as a victory for consumers and a bolstering of the Government's initiative to spur competition in the wireless market, while others are concerned about the immediate future of Mobilicity customers and the long-term effects on future investors.

Originally "Dave Wireless", Mobilicity formed to take part in the 2008 Advanced Wireless Spectrum (AWS) auction that reserved portions of the spectrum for bidding to new entrants into the market. As a condition of the reserved auction, these new entrants were restricted from transferring the spectrum to incumbents (groups which previously held rights to portions of the wireless spectrum) for five years. A hallmark of the Federal government's plan to increase competition in the wireless industry, the reserved auction was hailed at the time as a positive step for consumers. Wind Mobile and Public Mobile were two other new entrants as a result of the 2008 AWS reserved auction. The launch of these three companies was seen as a boon for consumers by increasing competition and ultimately decreasing prices, while improving service.

The reserved auction was only one facet to a Federal Government plan which also included regulating access to incumbent assets, and debate over foreign ownership of telecommunication firms. The initiative was in response to earlier commentary by consumer advocates that Canadians suffered high costs and low service, allegedly stemming from a lack of competition between the three incumbent firms.

Good Move?

Consumer advocates commend the recent decision as reinforcing the purpose of the reserved auction - that incumbents should not be allowed to acquire parts of the spectrum specifically set aside to spur competition. They also argue that a 4th alternative provider is needed to increase competition and bring down prices, and by effectively blocking the deal, the Federal Government is ensuring an additional competitor continues operation. These advocates also believe that new entrants like Mobilicity have fulfilled their purpose, and consequently consumer prices for wireless communications have come down.

Bad Move?

Going forward, we must ask whether blocking the acquisition of Mobilicity by Telus could be detrimental to Mobilicity consumers, if it could deter future investors, and whether it might have an overall negative impact on the industry. Without outside investment, Mobilicity appears to be heading for bankruptcy, meaning an uncertain future for its 250,000 customers. In the long-term, there is a fear that blocking the sale to Telus will signal to potential investors that a divestment strategy involving incumbents will not be allowed, thereby restricting their ability to get returns on those investments. Without the ability to sell their ventures to the biggest potential customers (the incumbent wireless firms), new potential investors will anticipate lower returns, likely resulting in decreased investments in Canada's wireless industry. Less investment would lower competition, leading to precisely the opposite outcome intended by the Federal Government. If this comes to fruition, it is difficult to see how Mobilicity going bankrupt will benefit consumers either in the near- or long-term.

4th Player Needed?

Given all three new entrants who launched under favorable circumstances are now facing financial troubles and uncertain futures, it raises the question - what is required for a new firm to be competitive? As part of the Government's 2007 strategy, wireless spectrum was set aside for only new entrants, foreign ownership rules were relaxed, and access to incumbent assets was forced by regulation. Even with all these favorable concessions, Mobilicity cannot turn a profit and both other new entrants Wind Mobile and Public Mobile are up for sale. The failure of all three of these raises the issue that perhaps the wireless market was not as uncompetitive as Canadians were led to believe. If the market was so uncompetitive and consumer prices so high, how could not one of these three become profitable after four years of operating under favorable conditions and with the ability to "cherry-pick" customers in the most concentrated urban markets? Could this be a sign that perhaps the current market is competitive, and prices are not unduly inflated?

Canada currently has three national wireless providers. Much commentary has been written discussing prices in Canada, and concerning competition in the telecommunications market. Nobody, however, has been able to explain why having a fourth alternative provider would dramatically lower prices, and improve service. Some have suggested with the perceived failure of the Federal Government program to spur competition, they should instead focus on regulating the incumbents or utilizing other methods to enforce competition. Either way, the Federal Government will soon be forced to acknowledge that its efforts so far have been insufficient to create a viable fourth competitor in the wireless market.

Alex Buonassisi is an IPilogue Editor and a JD Candidate at Thompson Rivers University.