RUSSELL, Ontario (Reuters) - Canada's Conservative government said on Wednesday it would loosen curbs on foreign investment in the telecom sector, opting for a cautious approach that only allows non-Canadians to take control of carriers with a market share of 10 percent or less.
Canadian Prime Minister Stephen Harper has long hinted that he wants to lower barriers to foreign investment in the C$40 billion telecom sector to create more competition and provide a wider array of pricing options for consumers. Telecom services in Canada are among the most expensive in the world.
The move could effectively loosen the grip of Canada's Big Three carriers - BCE Inc's Bell Canada, Rogers Communications and Telus Corp - which now control 95 percent of the wireless market.
"This targeted action will remove a barrier to investment for the companies that need it the most," Industry Minister Christian Paradis said at a news conference. The government wanted to assure a fourth carrier offers services in every region of Canada, he said.
In a second step to liberalize the market, Paradis presented rules for a government auction of prized 700 MHz wireless spectrum that cap how much the Big Three will be able to buy. The auction of the low-frequency 700 MHz airwaves - which travels longer distances and penetrate walls more easily than other spectrum - will take place in early 2013.
The combined market share of recent entrants in the sector now hovers at about 4 percent, partly as the result of a provision in a 2008 auction that set aside spectrum for them.
Analysts said the shift may also signal a more open stance in general to foreign investment in other sectors.
"This doesn't just touch telecom," said Carmi Levi, an independent telecoms analyst, referring to the government's announcement on Wednesday. "It certainly sets a precedent for virtually every other sector in which the government has influence."
Ottawa's decision in late 2010 to block a takeover of Potash Corp by Anglo-Australian mining giant BHP Billiton damaged its image as a free market supporter. In that case, the government defended its decision by saying the company, the world's largest fertilizer maker, was a strategic resource.
Just this week, Ottawa hinted it would be open to a takeover of Viterra, Canada's largest grain handler, should Swiss-based Glencore or another foreign concern make a bid.
Investment Canada said existing investment rules will remain intact for the incumbents. They limit foreign ownership of a telecom company to 20 percent of voting shares and indirect control to 46.7 percent.
The spectrum auction is an opportunity for incumbents and newcomers to lay claim to valuable low-frequency airwaves in a race that could shake up Canada's telecom landscape for years to come.
"This is positive for the smaller players, especially the likes of Manitoba Telecom," said Greg MacDonald, an analyst at Maquarie. "I don't know whether this will result in a bid for Manitoba Telecom, but the stock when it opens tomorrow may factor in some of that speculation."
Even so, Wind Mobile, a relative newcomer to the industry, said it would boycott the spectrum auction because the rules would not make enough bandwidth available.
To help newcomers compete with the deep-pocketed incumbents, Ottawa will not allow any of the Big Three to win more than 25 percent of the most desirable parts of the spectrum.
The caps on the Big Three will apply to the 700 Mhz spectrum auction, to be held in the first half of 2013, as well as to a 2500 MHz spectrum auction to be held later.
There are five spectrum blocks in each of Canada's 14 regions, but only four are considered "prime," as more devices operate on those frequencies.
The Big Three can only obtain one of the four prime blocks apiece, essentially reserving 25 percent of the most desirable spectrum for smaller carriers. That means four or more carriers could obtain spectrum in both the 700 MHz and 2500 MHz bands.
The removal of foreign investment limits on these and other small companies will be extended even if their market share grows to more than 10 percent, as long as that growth is not the result of mergers or acquisitions.
The 2008 set-aside allowed three newcomers - Globalive's Wind Mobile, Public Mobile and Mobilicity, as well as regional cable operators such as Quebecor's Videotron and Shaw Communications - to bid on airwaves that were off limits to the biggest operators.
A Mobilicity executive hailed the decision, while representatives from Public, Bell, Rogers and Telus declined comment.
"It's good news for the Canadian wireless consumer, that's for sure," said Mobilicity's chief operating officer, Stewart Lyons.
The new entrants and Videotron have since launched service in some markets, while Shaw has dropped its wireless plans and is likely looking to sell its spectrum.
Ottawa will also set requirements for companies that win two or more blocks in the 700 MHz band to guarantee services to rural populations within a certain time frame.
The changes must be passed by Parliament, which is unlikely to be an obstacle as Harper's Conservatives hold a comfortable majority.
Additional reporting by Randall Palmer, Alastair Sharp, Euan Rocha and Allison Martell; Editing by Frank McGurty