Is Canada Ready For The Next Mci?

Canada's long-distance market opens--and entrepreneurs are pouncing

Canada's June 12 decision to permit competition in long-distance telephone service would seem to be a gold mine for AT&T, MCI, and Sprint. After all, the opening comes at a time when the U.S.-Canada Free Trade Agreement is phasing out most barriers between the world's two largest trading partners. And Canadian business is desperate for the superior services and cheaper rates offered in the U.S.

But American carriers won't be the big winners in this market opening, at least in the early going. That's because the Canadians are hoping to reap the benefits of U.S.-style competition without inviting Americans all the way into their $6 billion long-distance market.

STEEP RATES. Canadian-owned Unitel Communications Inc. is the most ambitious competitor. The upstart already brings in more than $400 million annually, primarily from offering private data networks to business. It now plans to spend $2 billion to enter the voice market and expand its fiber-based national network. Unitel's chairman, E.S. (Ted) Rogers, has said he's out to end the "Soviet-style communications monopolism" of the Canadian phone companies.

For the moment, Rogers will mainly have to worry about Canadian rivals. The reason: Canadian regulators and lawmakers fear that rapidly opening their borders to U.S. carriers could wipe out their domestic players. Linda C. Gervais, a spokeswoman for Bell Canada, which is unaffiliated with America's Baby Bells or American Telephone & Telegraph Co., notes that AT&T alone could carry virtually all of Canada's long-distance traffic on its existing spare capacity. So the Canadians want to get into fighting trim. Says Gervais: "It's only a question of time before [U.S. competition] increases, and that has always been our preoccupation."

Canadian businesses, meanwhile, are preoccupied with their long-distance phone bills, which subsidize cheap local service. Peak rates for long-distance phone calls are around 60% higher in Canada (table), and the discrepancy is even greater for specialized services, which when available can cost up to five times as much north of the border. High long-distance costs forced the Royal Bank of Canada to defer the introduction of a service allowing customers to call up electronic pictures of checks at banking terminals.

Recognizing that Canadian businesses need cheaper phone service to compete globally, Ottawa gave the green light to companies proposing to compete in long-distance service against the monopoly controlled by Bell Canada and the provincial phone companies. But Canadian officials want to go only so far. To keep Canada for the Canadians, Parliament is considering legislation that would in effect limit foreigners to a 20% stake in any Canadian phone company except those with preexisting foreign ownership. Some Canadian businesses are lobbying against the bill. "This is an industry that needs capital," says Monty Richardson, executive director of the Communications Competition Coalition, an alliance of Canadian corporations.

LOCAL GIANTS. That capital, though, will have to come from within Canada's borders. A few small U.S. companies are reselling long-distance service bought wholesale from Bell Canada and others, but the Big Three U.S. carriers haven't pressed Ottawa for greater access. MCI Communications Corp. says it has no interest in jeopardizing ties with the Canadian carriers with which it trades huge volumes of cross-border calls. And AT&T offers high-speed data transmission and other advanced services only across the border, not between points inside Canada. In the longer term, though, analysts say the big U.S. carriers may choose to build a larger presence in Canada. AT&T, which is building networks in Europe and Asia that compete with national carriers, declines to comment on its plans for northward expansion.

If the Big Three take off to the Great White North, they may have two local giants to contend with. Unitel has the financial muscle to make a serious run: It is 60%-owned by Canadian Pacific Ltd., the second-biggest conglomerate in Canada after BCE Inc., Bell Canada's parent. The remaining 40% is held by Rogers Communications Inc., a sprawling cable-TV and cellular empire Ted Rogers controls.

The fight is already heating up. On June 16, Bell Canada Chairman Jean Monty vowed the company would "fight like hell" in the new environment. To which Unitel CEO George E. Harvey responds: "If we can't move faster than them, we don't deserve to be in the business." However the battle turns out, U.S.-style competition in long distance--with or without Americans--is bound to sharpen Canada's competitive edge.

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