Verizon’s false promise

Market entry faces steep challenges.

Joe Castaldo 0
(Photo: Jeffrey D. Allred/Verizon)

(Photo: Jeffrey D. Allred/Verizon)

Judging by the ferocity of the big three telecom companies’ reaction to the prospect of Verizon Communications entering the Canadian wireless market, you’d think America’s biggest telecom was about to upend the Canadian industry. But that’s unlikely to happen. While all the focus lately has been on whether, and under what conditions, Verizon should be allowed into the country, few have taken the time to look at whether letting the American giant in would actually result in better prices for consumers. It turns out not only do few analysts see Verizon igniting a price war, some question whether it could compete at all.

Verizon CFO Francis Shammo said in July the company is looking at investing in Canada as an “exploratory exercise.” Verizon put in a $700-million offer for Wind Mobile and is also in talks to purchase Mobilicity. Both carriers launched after the federal government sought to bring more competition to the market in 2008, but have failed to gain traction.

BCE, Telus and Rogers Communications (owner of Canadian Business) are crying foul that Verizon should attempt to move into market space set aside for startups. While their CEOs all say they welcome competition, they’re demanding a “level playing field” whereby a Verizon-owned Wind or Mobilicity, or both, would not enjoy preferential access to new wireless spectrum to be auctioned off in January.

The federal government appears unswayed by such gripes. A statement appeared on Industry Minister James Moore’s website late last month reiterating the government’s commitment to bringing more competition to the market.

Even if its acquisition bids succeed, however, analysts doubt that Verizon will take the country by storm and start slashing prices. Canaccord Genuity analyst Dvai Ghose wrote in a recent report that investors, consumers and even government might be “naively assuming that Verizon is the savior for wireless competition.”

verizon-stats

The fact remains that in the U.S., Verizon is no discount carrier— it targets high-end consumers and the healthy profit margins that come with them. It will be reluctant to overspend in Canada, or to undercut the incumbents on price for fear of damaging its margins. “I don’t see them being really aggressive on price,” says Dave Heger, an analyst with Edward Jones in St. Louis.

Growth prospects in Canada are limited, too. The regions where the wireless penetration rate is low tend to be rural, not exactly lucrative markets for carriers. More than 90% of wireless subscribers in Canada are locked up in contracts by the Big Three, and though people love to complain about their carrier, parting ways isn’t so simple. The incumbents bundle wireless with Internet and television packages to retain customers. New entrants Wind and Mobilicity only offered wireless services, which is one reason why they struggled. Verizon will face the same challenge. “They’re going to face competition that is heavily integrated,” says Amit Kaminer, a researcher with the SeaBoard Group, a technology consultancy.

The opportunity for Verizon, experts say, is to target Canadians who travel frequently to the U.S. by offering better deals on roaming. That strategy, though, would be limited to consumers and business professionals in urban markets.

Some analysts struggle to see how entering the Canadian market will pay off for Verizon at all. “I question whether they can make it f nancially viable,” Heger says. “Is there enough of a market to be going after?” He points out that in other developed countries, having three dominant wireless players appears to be the norm. Even in the U.S., Verizon and AT&T Mobility form a virtual duopoly. Canada’s wireless oligopoly, for better or worse, may prove just as unshakable.

 

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