Cause for Concern for Canada's 3 Telecom Giants

Will government intervention spell the end to their reign?

Jul 15, 2014 at 9:30AM

Canada's government is once again trying to manipulate its country's telecommunications industry. For many years, the climate has been rather exclusive of start-ups trying to break into the market, leading to the growth of the "Big Three," Rogers (NYSE:RCI), Telus (NYSE:TU), and Bel(NYSE:BCE). Historically, new companies that form either can't compete with their overwhelming control, or are bought out, like in the case of Fido Solutions by Rogers in 2004. But, new legislation plans to offer wireless spectrum to smaller companies without "Big Three" competition, so the future of these stocks is uncertain.

Unfair legislation?
To wrestle some of the wireless spectrum from the three deeply entrenched companies ruling the waves, Canadian Industry Minister James Moore announced on July 7 that, in a new auction of wavelength rights, over half will be reserved for new entrants. Across the country, 30 MHz wireless service blocks are to be designated only available to newcomers. This means, no matter what, a company like Bell cannot bid on the rights to these blocks. Additionally, the government plans to prevent a repeat of the numerous takeovers seen in the past.

Moore justified the auction rules, stating, "The rules for this auction will encourage more competition in the wireless market, ensuring the interests of consumers come first"

It is clear that the government is more concerned with the interests of consumers than its country's telecom companies. To change the current situation, however, many critics are in favor of laws like these. These new laws might just be enough to usher in another big competitor, while hitting the wallets of the "Big Three".

New challenger
The big break that Quebecor (TSX:QBR.B), a company based in the province of Quebec, needed could now be here. The company isn't new to the game, with over 500,000 wireless subscribers, but could still benefit from government legislation.

Recently, in another of the government's wavelength auctions, Quebecor acquired prime blocks in provinces across the country, rather than just in Quebec. Also, the company has announced plans to potentially take over the floundering Mobilicity and Wind Mobile, while Telus can't under current law. If the government accepts this move, which seems possible considering its "level playing field" mentality, Quebecor will gain even more precious spectrum.

The final piece of the puzzle would be the government's adjustment of domestic roaming rates. If this were to happen, Quebecor's users could piggyback on the immense networks of Rogers, Telus, and Bell without exorbitant fees. Again, a move like this from the government, considering its current sentiment, is a definite possibility. It also doesn't hurt that Quebecor's new Chairman of the Board is former Prime Minister Brian Mulroney.

The "Big Three" No More?
In light of developing government action within the telecom industry, investors should be wary of the prospects of these three large-cap giants moving forward. Market share is being forcibly ripped away, and newcomers are being given special treatment. So, while this wouldn't spell the end for any of them, an investment in any could prove costly. 

It appears that the Canadian government will stop at nothing to bring new competition, thus lowering cell phone rates. Quebecor now has the perfect opportunity, with enough government support, to join the ranks of Telus, Bell, and Rogers. This government support shouldn't be underestimated. Quebecor should be watched closely, especially toward the end of the year when roaming rates could be adjusted.

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Erik MacLennan has no position in any stocks mentioned. The Motley Fool recommends Rogers Communications (USA). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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