Rogers and Shaw rocked the Canadian news landscape on Monday, with the announcement of a deal being agreed to that would see Rogers buy Shaw for a whopping $26 Billion.  This deal, if approved, will have a significant impact on the Canadian Telecommunications landscape…. Or will it?  There’s a lot to this deal, and a lot to unpack here.

Who are the players?

Rogers is a huge company, and owns both media assets like TV and Radio, as well as Internet services, Cable TV, home phone, and wireless service.  Rogers wireless service operates nationally, but the remainder of its telecom services operate primarily in eastern Canada

Shaw as it stands today is purely a telecom company.  It currently operates home internet, Cable TV, and home phone services in Western Canada and parts of Northwestern Ontario, and operates the Freedom Mobile and Shaw Mobile wireless services in Alberta, BC, and Ontario, with roaming agreements so its wireless phones work outside of its network in the rest of the country.  Shaw bought then WIND Mobile in 2016 before rebranding it to Freedom Mobile.  Freedom Mobile remains a distant 4th place in Canada’s wireless market.  Shaw used to have TV and Radio assets but those were moved into the Corus Entertainment umbrella a couple years ago and are not part of this deal.

Now, I think there are two basic parts to this deal.  To keep things simple, I’m going to talk about the Cable TV, home internet, and home phone in one bucket, generally referring to home internet because that’s the biggest and most important piece there.  The other is the wireless service, and that deserves it’s own attention.

Should We Even Care About the Home Internet Portion?

This is a very interesting question.  Because while this is one large company buying another, in reality in the home internet space these companies actually do not really compete at all.  Canada’s telecom companies have largely kept themselves in geographic regions.  Shaw and Telus have traditionally provided Cable and internet services in the west, and Bell and Rogers have traditionally provided that service in the east.  Bell has uprooted that a bit with its purchase of MTS in Manitoba a couple years ago, but the companies still largely operate in independent geographic regions.

Because of that, I actually don’t see this being a huge hurdle to this deal.  Rogers is buying a company that doesn’t compete with it in home internet service, and it could be spun that this actually allows Rogers to create the first true national home internet network in the country, with customers from coast to coast to coast.  As strange as this sounds, for the home internet and cable TV portion of the deal, there probably will be very few regulatory questions.

This Deal is About Wireless, and 5G.

Where this deal really matters is in the wireless space.  And that’s also where it will face the most scrutiny.  Two consecutive federal governments, Liberal and Conservative, have actively campaigned on creating more competition in the wireless space, and have literally stacked the deck in an attempt to get a 4th national wireless carrier to compete with Bell, Telus, and Rogers.    If Rogers is allowed to buy Shaw in its entirety, that will eliminate the Shaw owned Freedom Mobile, as well as Shaw’s own Shaw Mobile brand from the market.  That will be a very tough sell to the CRTC and the Competition Bureau.

If the priority of the Canadian Government is still to have a strong 4th mobile provider, one that operates nationally, then that is completely at odds with this deal.  Rogers and Shaw are betting that a promise to invest $2.5 Billion in the 5G rollout, not increase prices for 3 years, and create 3,000 new jobs will be enough.

Now, I don’t know of any corporate merger that actually ended with a net creation of jobs.  While Rogers and Shaw don’t have a lot of overlap in the areas they serve, there are still thousands of jobs that would be redundant between the two companies.  The promise to not raise prices for 3 years only means that prices will go up in 3 years plus a day.  And that investment in 5G technology was going to occur anyway.  It may occur faster, and Rogers access to the Freedom Mobile wireless spectrum might allow it to provide better 5G coverage in some areas, but realistically that investment was already going to happen.

The Regulatory Fight

This is going to be a massive uphill battle for Rogers and Shaw.  I frankly cannot see the deal being allowed to proceed in its current form.  Successive governments have spent a decade trying to create competition in the wireless space and this would eliminate that work in an instant.  I could see the government requiring Rogers to divest Freedom Mobile and Shaw Mobile in order for the deal to go through, but considering that the wireless service is likely the biggest part of the deal to Rogers, I can’t see that being palatable to them.

So what are the options?  Canada doesn’t have a functional Mobile Virtual Network Operator (MVNO) market in the wireless space.  An MVNO is a company that essentially leases space on the cellular network of another company, and provides service through that.  There are several medium sized MVNO’s in the United States, for example.  The CRTC and the competition bureau could force Rogers into a regulatory framework that would see MVNO’s allowed to operate on their network, or they could force Freedom Mobile to operate as an independent company from Rogers.

The Wireless Landscape

Even with the government stacking the desk for a 4th operator, it is clear that it is a hard market.  Had Shaw not purchased WIND Mobile, it is likely that company wouldn’t have survived.  Shaw even divested the TV and Radio arm to Corus Entertainment to fund the purchase of WIND.  And even with the capital that the 4th largest telecom company in the country to invest, Freedom Mobile today remains a distant 4th place in the mobile market.  Freedom still only operates in certain cities in the country.  The cost of building out a wireless network is proving to be so immense that it is very difficult for a new entrant to gain much ground.  It is likely that is what Rogers and Shaw will argue.  The companies will likely say that the money that Shaw would need to invest to further build out Freedom Mobile would be better invested in strengthening the Rogers Wireless network, and that the investment in a 4th wireless provider doesn’t make sense in Canada.  How convincing that argument ends up being will likely decide if this deal lives or dies.

Realistically, I think that as long as the government doesn’t completely shoot down the deal in its entirety, there will be some kind of sale that occurs.  However, I just can’t see the deal going ahead as is.  I can see Rogers being forced to make significant concessions to the wireless networks as part of this deal, to the point that Rogers may want to abandon it all together.  There has been so much political capital invested by the Government of Canada for too many years to just let this happen.  The deal is currently expected to close in early 2022, pending regulatory approval.  That regulatory approval could be extended if there is an election in 2021 as is widely predicted, so it is likely that we will be talking about this deal for well over a year before all is said and done.  I don’t know what the endgame is here, and I certainly wouldn’t put money on any outcome, but I’ll be watching it very closely.