Drunken Prime Minister Overturns Courts, Allows Foreign Ownership

Imagine the following scenario: The Canadian telecommunications market is dominated by a few large firms. A foreign venture capitalist, let’s call him Jay, sees an opportunity to make some money by starting up a competitor in Canada, ostensibly to provide quality service to Canadians and bring down the high prices that incumbent providers charge. Jay already owns a vast communications network in other countries, so he’s got both the capital and the expertise to make a run at the Canadian incumbents.

The Government is happy to help Jay start a new telco in Canada. Like him, it also argues that allowing foreign competition will put pressure on the cozy Canadian incumbents, resulting in lower prices and better services for the Canadian public. Jay is happy to invest because he sees an opportunity to make a lot of money. But he’s not satisfied with just collecting service fees from customers; Jay’s got loftier goals in mind.

Jay starts up a subsidiary with the help of the Canadian government, and appoints his man in Winnipeg, let’s call him Aaron, to run his new business in Canada. After concocting agreements with provincial governments and railway companies to be able to build the requisite infrastructure, Aaron immediately starts a price war to steal customers away from Canadian incumbents. Aaron’s able to offer below-cost pricing since his company is cross-subsidized by his foreign investor’s tremendous bankroll.

Now, lower prices for necessary services are undoubtedly good for the Canadian public. But Jay didn’t start up his business out of the goodness of his heart; he started it to make money, which he’s certainly not doing by providing service below cost. So how is Jay going to turn a profit?

The Canadian companies react by meeting the upstart’s prices, which puts a major squeeze on their own revenues. Smaller margins mean that incumbents can’t pay out the regular large dividends that their shareholders have come to expect, causing their stock prices to to dip. The more heated the price war becomes, the more that dip starts to look like a plunge. It’s at this point that Jay orders Aaron to start buying all that devalued stock, effectively taking over the Canadian incumbents, and establishing his own monopoly over the Canadian telecommunications industry.

The incumbents’ disheartened shareholders jump at the chance to dump their plummeting stocks. But the Canadian companies aren’t willing to go down without a fight: they go to the courts, which agree with them and decide that full foreign ownership of Canadian telecommunications is illegal.  Aaron’s no pushover himself, though, and in an outrageously bold move he goes straight to the Prime Minister, gets him drunk, and convinces him in his inebriated state to overturn the court’s decision, effectively legalizing Jay’s monopoly over Canadian telecommunications.

Now, at this point I’m sure you’re finding this all a little far-fetched, perhaps even quite fishy. After all, Stephen Harper isn’t exactly known for his love of the drink. You’re right to be suspicious, but you’ll probably be surprised why.

The PM I was talking about wasn’t Stephen Harper, it was Sir. John A. MacDonald. Our venture capitalist was Robber Baron Jay Gould, and his man in Winnipeg was Erastus Wiman. The telecommunications industry I’m talking about existed in the 19th Century, and was made of Telegraph companies. The Canadian incumbent was the Montreal Telegraph Company, and Gould’s “new entrant” was The Great North Western Telegraph Company. [1]

The preceding scenario isn’t hypothetical, it’s historical. It actually happened. In just one short year, from 1880 to autumn of 1881, Jay Gould gutted the Canadian Telegraphy industry so that he could buy it up at rock-bottom prices, establish his own monopoly and begin funnelling profits to his American company, Western Union, founding member of the North American Telegraph Association Cartel.

By 1881, under Gould’s strategic leadership, Western Union had gained a virtual monopoly over Canadian telecommunications from Manitoba to St. Johns, Newfoundland. Its monopoly over the press, which reciprocally relied on telegraph companies for distribution and generated the lions’ share of the Telegraph industry’s profits, lasted 30 years, until 1910. Western Union’s monopoly over East-Coast communications lasted until 1929, and its control over transatlantic communication lasted nearly a hundred years, only relinquishing ownership of undersea cables as recently as 1972.[2]

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On March 14, 2012, alongside its announcement of the 700MHz spectrum auction rules, Conservative Minister of Industry Christian Paradis announced that foreign companies will be permitted to fully own Canadian telecommunications companies that control less than 10% market share. This move was made ostensibly in the interests of promoting competition for the benefit of the Canadian public, although you can imagine at this point that the case being made for public benefit might not be so clear cut.

In 2008, foreign-owned Wind Mobile entered the Canadian telecommunications market through the back door. In 2009, its license to operate in Canada was rejected by then-CRTC Chairman Konrad von Finkenstein, on the factual grounds that it didn’t meet Canadian ownership requirements. Although I can’t comment on whether or not alcohol was involved, the Harper Conservatives varied that decision, allowing Wind to continue Canadian operations. Wind’s competitors, Telus Corp. and Public Mobile Inc. challenged the variance, taking their claim all the way to the Federal Court of Appeal, which sided with the Conservative decision in 2011.

In the 19th Century, provincial governments facilitated the establishment of Western Union’s Canadian subsidiaries by granting exclusive access to public land for the construction of necessary infrastructure. Mirroring that decision in the 2008 AWS spectrum auction, the Harper Conservatives subsidized Wind Mobile by granting it privileged access to licenses for the public radio spectrum necessary to build a wireless network. Since then, prices for wireless services have predictably come down amidst new competition, as have incumbents’ profit margins. Sound familiar?

We might see Egyptian billionaire Naguib Sawiris as the Jay Gould to Wind Mobile CEO Anthony Lacavera’s Erastus Wiman.  As with the Great North Western Telegraph Co., the Canadian government has bent over backwards to facilitate Wind Mobile’s Canadian operations.

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After the government’s announcement that foreign ownership restrictions will be lifted, valuation of Manitoba Telecom Services, Inc’s stock has soared on speculation over a possible takeover by foreign interests. Combined with Lacavera’s threats to boycott the upcoming auction (due to a decision not to grant privileged enough access to more spectrum), this news has led to MTS being declared “the winner of Ottawa’s telecom policy change.”

I find it by no small measure ironic that foreign investment in Winnipeg, where 132 years ago Robber Baron Jay Gould decided to begin his takeover of the Canadian telecommunications industry, is today being touted as its saviour.

The Conservative government is not ignorant of the past. The historical record shows that although allowing foreign ownership may bring prices down in the short run, foreign companies don’t make huge investments for the sake of justice and fairness. They do so to make money. Investors like Nawiris and whoever (possibly) buys MTS aren’t interested in a sliver of the pie, they’re coming for the whole thing.

Government and industry rhetoric about the altruistic intentions of foreign companies hides the grim reality, recurrent throughout history, that foreign investors will always be first and foremost interested in lining their own pockets, not in putting change back into yours.

Reference:

[1] Babe, Robert E, Telcommunications in Canada, University of Toronto Press, 1990. p49-50.

[2] Ibid, p 50-53.

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3 comments

  1. Brilliant piece of work, Ben. Deft use of the references to Jay Gould and the Great North Western/Western Union in 1870/80s. You’ve added additional focus on Jay Gould, too, that I found interesting. You should send a link off to Richard John, as well.

  2. Martin · ·

    You said it yourself, Wind Mobile competes by givings us a good service for a low cost. Isn’t that what really matters when it comes to cell phones in Canada? I’m tired of paying 55 dollars a month for my phone. I’ve heard we have some of the highest mobile costs in the world.

    1. Martin,

      You’re right to point out that Wind is currently offering discounted rates, and it has brought the price of service down, as I mentioned in the article.

      The question is: will it last? In the past, new competitors like Wind have entered the Canadian market only to be bought up by Telus, Rogers and Bell just a few years later. (Telus bought Clearnet, which you might remember as “Mike Mobile” in 2000, Rogers bought Microcell, which is now marketed as Fido, in 2004, and Bell bought Virgin Mobile in 2009.)

      There is a lot of speculation around the possibility of a merger between two of the three new entrants. (Wind, Mobi, Public) In that event, it is likely that two would form together to attempt to compete on a more even playing ground, while the third will probably be bought by one of the ‘Big Three’. More competition is undoubtedly good for consumers, whether that competition comes from foreign investment or not.

      Unfortunately for many of us in Canada, we do not have the choice to subscribe to Wind. The closest comparable rate to Wind’s Unlimited Talk, Text and Data plan ($40+$10 Premium Data) here in Manitoba is $75 with MTS, and it doesn’t even have unlimited voice or any long distance.

      If a privately owned fourth national competitor does emerge, it is likely that we will see somewhat reduced rates, although the extent to which prices will reflect the change will likely not be as drastic as they are now once market share redistribution has stabilized.

      Historically, publicly owned companies, like MTS and Sasktel, have offered lower rates than their privately-owned counterparts. Instead of pursuing a policy that would promote companies whose goal is to provide the best service at the lowest cost, the government’s currently policy direction encourages the entrance of more privately owned companies whose primary incentive for operation is profit maximization.

      So, in short, the purpose of my article was to highlight the fact that historically foreign owned companies, like monopolistic privately-owned Canadian ones, have not helped to reduce Canadians’ telecommunications expenses, and in fact have often contributed to exactly the opposite. Options other than allowing private foreign competitors to operate in Canada exist, and are desirable, but the Conservative Government has ignored this possibility in their most recent policy announcement.

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