Rogers-Shaw deal subsidizes Quebec and Pierre Karl Peladeau at taxpayers’ expense

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Dvai Ghose is principal at Ghose Investment Corp. His clients include Telus Communications Inc. He is the former head of global research and strategic development for Canaccord Genuity Group.

On the surface, there is sense in allowing Rogers RCI-B-T to buy Shaw SJR-B-T if the latter’s Freedom Mobile is sold to Quebecor QBR-B-T, as is currently proposed. Since 2009, Quebecor has successfully built a fourth wireless carrier in Quebec, won about 20 per cent of market share and helped drive lower pricing. Having Freedom under Quebecor would surely alleviate any concerns that a combined Rogers-Shaw would unfairly dominate the market.

So why hasn’t this been enough to win the support of the Competition Bureau, which is currently challenging the deal before the Competition Tribunal? Here is the real problem: While wireless prices in Quebec are lower than in the rest of Canada, what is less known is how this was achieved – through billions in subsidies given to Quebecor by the federal government.

Selling Freedom to Quebecor amounts to further benefits for Quebecor shareholders at the expense of taxpayers across Canada. Ironically, the biggest beneficiary of the deal would be Pierre Karl Péladeau, the controlling shareholder of Quebecor, an avowed Quebec nationalist and former PQ leader.

Since 2008, Conservative and Liberal governments have consistently subsidized new wireless entrants by reserving spectrum – the airwaves used to transmit wireless signals – for them and by mandating roaming provisions that allow new entrants to use the Big Three’s networks (Rogers, Telus and Bell) where they have not built their own.

Explainer: How the Rogers-Shaw merger ended up in front of the Competition Tribunal

If we look at how much Quebecor has spent on acquiring spectrum versus the amount paid by the Big Three for equivalent spectrum, Quebecor has been getting a massive discount through federal subsidies. Since 2008, Quebecor has received about $4-billion in subsidies, including $2.4-billion for last summer’s spectrum auction – money that could have been used to subsidize wireless services for low-income Canadians.

The government seems happy to keep subsidizing Quebecor, even though the company has successfully gamed the system by selling some of its subsidized spectrum for enormous profit. In 2017, Videotron resold spectrum to Rogers and Shaw for $331-million in profit, money that has essentially been taken from the Canadian taxpayer and given to Quebecor. Even Quebecor’s $2.85-billion bid for Freedom in the current Rogers-Shaw deal appears to reflect some subsidy: While Quebecor’s bid has been accepted by Rogers and Shaw, it is $900-million lower than rival Globalive’s $3.75-billion bid, which does not appear to have the support of the Ministry of Innovation, Science and Economic Development Canada (ISED).

Quebecor has also greatly benefited from the mandated roaming rules, which regulate the prices the Big Three can charge smaller players. While those rules were designed to give new entrants time to establish national networks and invest in rural areas, the policy has failed. Roaming rules have resulted in Quebecor having lower wireless capital expenditures relative to population covered than the Big Three. Quebecor has spectrum that could provide service to more than 30 million Canadians, but its networks are largely in urban Quebec and it has only utilized 18 per cent of its rural spectrum.

Quebecor is not some upstart that needs help. It is a dominant regional telecom provider (much like Rogers and Telus were when they embarked on national wireless expansion, but without massive subsidies). It enjoys $4.5-billion in annual revenue, $600-million in net income and has a market capitalization of $6.3-billion.

In October, ISED Minister François-Philippe Champagne called a hastily arranged press conference to say he will only approve a Freedom sale to Quebecor if the company keeps Freedom’s wireless licences for at least 10 years, and if Freedom’s pricing is in line with Quebecor’s in Quebec. Those are responsible terms. But it is not surprising that Quebecor remains enthusiastic about buying Freedom despite Mr. Champagne’s conditions. Quebecor should be happy to keep the Freedom licences for more than 10 years because spectrum appreciates in value and ISED has never implemented its own network-building requirements. There is also no mechanism for ISED to police Mr. Champagne’s pricing mandate for Freedom after a sale to Quebecor.

But the biggest issue for Canadians is that 14 years after the first spectrum auction in 2008, the fourth wireless carrier still only appears viable with perennial government subsidy. What is worse is that while wireless prices have declined, we still have amongst the highest prices in the OECD. Most OECD countries have realized that a wireless market with four players maintaining their own networks is not sustainable, which is why the United States, Japan, Germany, Italy, Australia, New Zealand, Austria, Belgium, South Korea and Ireland have all accepted a wireless landscape with just three network operators. Despite that, they all have lower wireless prices than in Canada. Ultimately this proves that the government’s strategy has failed.

It is time for Canadians to realize that perennial subsidies for new entrants is not the solution. If a fourth player is really viable in Canada, it should not need subsidies 13 years after its launch. The government should look at alternative ways to secure more affordable wireless pricing while driving investment and innovation.