Rogers Communications Inc. closed a deal to buy Cityfone for $26-million in July, 2010, and Denise Reid, wife of co-founder Mark Reid subsequently applied to set aside a separation agreement the parties signed in 2008 that placed the value of Cityfone at just $2.9-million, arguing, among other things, that there was a lack of disclosure.Fred Lum/The Globe and Mail
While new entrant carriers who build their own networks face steep hurdles competing with Canada's dominant cellular providers, a recent divorce ruling shows the market for wholesale wireless services can be just as challenging.
Unlike home Internet services, which the Canadian Radio-television and Telecommunications Commission opened to wholesale competition in the 1990s, incumbent wireless providers are under no obligation to rent network access to competitors that don't have networks of their own.
The regulator held a public hearing on wholesale wireless services in the fall – a ruling is expected within weeks – and much of the focus was on the rates national carriers charge players with smaller networks, such as Wind Mobile, Eastlink Wireless or Videotron Ltd., when their customers roam outside their coverage areas. Such access is mandatory and, last year, the federal government imposed temporary caps on the rates mobile operators can charge their competitors.
However, the commission also heard from a number of players in favour of mandated access for "mobile virtual network operators," or MVNOs, which do not own spectrum, the airwaves used to connect cellphones to mobile networks.
MVNO business models can be as simple as branded resellers, which buy service from an established carrier and simply market and bill customers for the service under their own brand name, typically at a discounted price. More complex are "full MVNOs," which operate their own core networks, as well as other network elements, and do their own billing, customer care, marketing and retail distribution. These companies buy access only to the carriers' spectrum and cell towers.
But absent rules mandating wholesale access, operating a wireless resale business can be an uphill battle as a court ruling from British Columbia shows. The case emerged out of the divorce of Mark Reid, who co-founded the MVNO Cityfone Telecommunications Inc. in 1998, and his wife Denise, who was not involved in the company, which was a branded reseller.
Rogers Communications Inc. closed a deal to buy Cityfone for $26-million in July, 2010, and Ms. Reid subsequently applied to set aside a separation agreement the parties signed in 2008 that placed the value of Cityfone at just $2.9-million, arguing, among other things, that there was a lack of disclosure.
The application failed, but after a trial that included testimony from Wind Mobile founder Anthony Lacavera and Telus Corp. vice-president of corporate development Stephen Lewis, the September, 2014, ruling from B.C. Supreme Court Justice Elliott Myers paints a picture of the challenges the business faced.
"Because MVNOs do not operate their own networks, they are, to a certain extent, at the mercy of the operators who own the mobile infrastructure, with whom they must contract for service," Justice Myers wrote, adding: "As anyone who owns a mobile phone in Canada will know, the number of operators is limited."
Justice Myers wrote that a five-year contract with Rogers, which provided the wireless service Cityfone sold under its own discount brand was a "concern" for Cityfone. The company was restricted to using Rogers-approved marketing channels or partners and the contract gave Rogers a right of first refusal for the sale of Cityfone.
"Rogers' pre-approval of marketing channels was of concern to Cityfone because it was in many ways a competitor of Rogers and would obviously disclose information to Rogers in the approval process," Justice Myers wrote. "The dependence on Rogers also limited the devices and services Cityfone could offer."
Mr. Reid and another Cityfone shareholder met with Mr. Lacavera in November, 2007, a few months after a PricewaterhouseCoopers report valued the company at $2.9-million. At the time, Mr. Lacavera's company Globalive Communications Corp. operated a long-distance reseller Yak Communications and he testified he viewed the discussions as no more serious than meeting a "fellow little guy."
Mr. Lacavera told the court that while he was interested in the wireless business, he concluded there was no point discussing a potential purchase of Cityfone because of the agreement the company had with Rogers.
However, the judge noted that, by 2010, the outlook for a sale of Cityfone improved, in part because the Rogers agreement was nearing its end (it would expire in September, 2011).
In April, 2010, Telus provided a letter of interest to acquire Cityfone for between $20-million and $22-million, but Rogers had the right of first refusal and beat that offer, ultimately acquiring the company in July.
When Cityfone launched in 1998, it did so through an agreement with Microcell Telecommunications Inc., a facilities-based new entrant that operated the Fido brand. Rogers later bought Microcell and assumed the relationship with Cityfone.
When the Competition Bureau approved the Microcell sale to Rogers in 2004, it noted that, while barriers to entry for facilities-based players were "very high," they were lower for resellers and expressed hope the resale market would have a positive, albeit limited, impact on competition.
A 2001 Cityfone business plan entered as evidence in the Reid divorce case shows the company struggled to meet expectations: It projected 100,000 subscribers by 2013 but Cityfone had just 42,000 customers by 2010.
At the CRTC hearing last fall, executives from Cogeco Cable Inc., which supports a mandated MVNO model, argued Canada lacks a "proliferation of independent MVNOs," noting that major brands such as Fido, Virgin Mobile, Koodoo and Chatr, are divisions of the incumbents, which also own or control other commercial brands such as Cityfone and PC Mobile.
"The Canadian wholesale market remains virtually non-existent for market entry and expansion by MVNOs and there is very little reason to believe that this situation will change any time soon in the absence of the commission's intervention," said Nathalie Dorval, Cogeco's vice-president of regulatory affairs.
Rogers executives countered that mandating network access for MVNOs would reduce the incumbents' incentive to invest in infrastructure and would even threaten the business model of the new entrant carriers, which would run counter to the government's policy of encouraging facilities-based competition.