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Before wrapping up the final session at the Telecom Summit held this June in Toronto, the moderator stole a trick from Jerry Springer. The topic under discussion: whether Canada’s mobile wireless services are really competitive, or whether the Big Three incumbents are milking the industry for maximum profit at the expense of consumers.
It’s the kind of firecracker debate attendees have come to expect of this annual conference — part schmooze-fest, part WWE SmackDown — that gives power brokers from the telecommunications industry a rare opportunity to grab face time with one another and exchange views. “How many people support this side?” asked the moderator, pointing to a clutch of executives from Bell Canada, Rogers Communications Inc. (owner of Canadian Business) and Telus Corp., who were seated at one end of a stage illuminated by coloured lights.
Ted Rogers, the 74-year-old CEO of RCI, who was sitting front-row centre wearing a red T-shirt whose back read “Fewest Dropped Calls, Clearest Reception,” joined the polite applause that followed. Then the moderator pointed to the opposite end of the stage, at executives from Vidéotron Ltd., MTS Allstream Inc. and Toronto Hydro Telecom, and posed the same question. The hall erupted in applause, joined by Pierre Karl Péladeau, the 45-year-old president and CEO of Montreal’s Quebecor Inc. — a company that has been shaking up the telecom landscape since its cable subsidiary, Vidéotron, began doing battle with Bell Canada for Quebec’s telephone subscribers.
Now Péladeau is ready to take on both Bell and RCI in a bid to turn the province’s wireless business on its head — and in the process win some serious market share. His vigorous applause was a sign he can’t wait to get started.
It may only have been a straw poll, but this talk-show moment speaks volumes about the scrappy state of Canada’s wireless industry — and of public opinion toward the status quo. Battle lines have been drawn between the Big Three incumbents, who collectively serve 96% of wireless subscribers, and a band of smaller telecom companies led by Vidéotron, Winnipeg-based MTS Allstream and Calgary’s Shaw Communications Inc. The latter want a piece of what is perhaps the most lucrative wireless market in the world — and they want it now. “The window of opportunity is based on attracting new people to wireless services, not taking customers away from the competition,” says Robert Dépatie, president and CEO of Montreal’s Vidéotron. “If we don’t have our own wireless network by 2010, we’ll have missed the boat.”
That sense of urgency is born of the fact that, at $12.8 billion, wireless communications comprise the biggest and fastest-growing slice of Canada’s $42-billion telecom sector. Analysts predict it will get much bigger as mobile voice, data, music and video are paired with broadband connections and municipal WiMax networks (high-speed broadband zones that blanket cities). The result could be a business and entertainment revolution comparable to the invention of the Gutenberg press. “Wireless is where most of the growth and innovation are happening,” says analyst John Henderson of Scotia Capital Inc. in Toronto. “A big part of the story is enabling a mobile workforce.” Says Douglas Evashkow, president of data services startup Niagara Networks: “The market for mobile data in this country right now is nothing compared to what it’s going to be. Over the next 10 years, the industry is going to generate at least $200 billion in revenue.”
In anticipation of advanced wireless services coming down the pike, Industry Canada plans to auction in early 2008 a big chunk of spectrum that was previously used for point-to-point microwave communication by utilities and government agencies. “It’s the greatest poker game in the world,” says Evashkow, whose Toronto-based company is organizing a bid with the help of private capital.
A number of big questions, however, loom over the government’s first major wireless auction since 2001: Will there be spectrum set-asides for newcomers? Will roaming and tower-sharing rights be mandated? And will regional licences — like the one Vidéotron wants for Quebec — be granted?
The Big Three are vehemently opposed to any spectrum set-asides, and to mandated rights that would make it easier for new entrants to build market share on the back of their networks. They cite the billions of dollars invested in infrastructure to justify their position. “It would be wrong to subsidize new entrants to the detriment of taxpayers,” says Mirko Bibic, chief of regulatory affairs in Bell Canada’s Ottawa office. “We’re not opposed to negotiating commercial arrangements for roaming, but we object to mandated roaming.”
On the other side of the Great Wireless Divide, the have-nots point out that Ottawa gave Bell, Rogers and Telus spectrum in 1984 and 1995 for only a nominal licensing fee. As a result, they argue, set-asides are necessary to level a lopsided playing field. The outsiders also worry that incumbents will use the $3.5 billion in free cash flow generated by their wireless operations to win the bidding for new licences. “The incumbents might decide to purchase spectrum just to remove a competitive threat,” says Chris Peirce, chief regulatory officer at MTS Allstream, Manitoba’s telephone company. Evashkow concurs: “The name of the game is keeping licences out of the hands of potential competitors. Not one incumbent has told the government they will use new spectrum immediately. Instead, they say it’s part of their long-term plan.”
The wireless have-nots in this country make a compelling case for more competition. Consider that Telus, based in Burnaby, B.C., joined the acquisition frenzy surrounding archrival BCE Inc., parent of Bell Canada, in June, and then abruptly dropped out a week later, complaining about the clumsiness of the process. If the bid had been successful, however, an outsized “Belus” would have emerged to lord over Canada’s telecom landscape. Since Telus dropped out, Ontario Teachers’ Pension Plan and its U.S. private-equity backers have negotiated a $35-billion friendly takeover of Canada’s biggest communications company — which was put into play by its biggest shareholder, Teachers’, after the pension fund pulled the plug earlier this year on BCE’s poor stock performance. “CEO Michael Sabia is doing a pretty good job, but he’s slow to implement change,” says Evashkow, a veteran watcher of the telecom industry. Analyst Iain Grant, managing director of research firm SeaBoard Group, gives BCE’s combative boss much lower marks. “Everything Sabia touches turns to lead,” he says, “while everything Telus CEO Darren Entwistle touches turns to gold.” Rumours that Telus would return to the table with a takeover bid for BCE were dashed in August when Entwistle officially bowed out, in part due to regulatory uncertainty surrounding such a move.
There may no longer be any danger the three main incumbents will be whittled down to two before year-end, but another troubling sign looms over Canada’s telecom industry. The country’s mobile penetration sits at 58%, dramatically below the 100% or more (some subscribers own more than one cellphone) reported by countries such as Britain, Sweden, Italy and the Czech Republic. “We’re a Third World country,” says Grant, who notes that penetration of wireless mobile services in Canada is comparable to Tunisia, Gabon and Grenada.
Grant characterizes Canada’s penetration rate as a national disgrace, but the question is: Why are we lagging so far behind our peers? Telecom carriers who want a serious shot at competing with the incumbents blame a cozy climate of oligopoly for keeping prices and profit margins artificially high, turning off many potential subscribers. For example, a study released earlier this year by the SeaBoard Group found average cellphone users in Canada pay 33% more for their wireless plans than their U.S. counterparts do, while heavy users pay 1.5 times as much. (A key reason is that domestic incumbents have not introduced unlimited-minutes voice plans.) Meanwhile, wireless EBITDA (earnings before interest, taxes, depreciation and amortization) to revenue is 45%, compared with 37% in France, 35% in the United States and 28% in Britain.
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