Talk of a fourth national telecom player—one who might compete with incumbents Rogers, Bell, and TELUS—increased in volume this week, but if a challenger wants to succeed, it will need consolidation, clever marketing, and a whole lot of capital, according to analysts.
In the past several years, the biggest issue faced by companies like WIND, Mobilicity, and Public Mobile has been their inability to rise above their own market. The smaller players have spent most of their time competing against each other in the “low-cost segment” of the market, which has barely made a dent in the business of the incumbents, said Macquarie Securities advisor Greg MacDonald.
“In the low-cost segment… consumers are extremely cost-conscious. They’ll move for five bucks,” creating a constant churn in the market, he added.
The first order of business, then, should be consolidation. And there’s already been a few hints of that happening in the future.
Earlier this week, WIND Mobile CEO Anthony Lacavera announced he is interested in opening merger talks with troubled telecom company and fellow small player Mobilicity, after the federal government rejected an application from major player TELUS to acquire Mobilicity’s spectrum licenses.
Lacavera’s announcement was followed by the news Thursday that Thomvest Seed Capital Inc., operated by Toronto business magnate Peter Thomson, had acquired Public Mobile, sharing the venture with New York-based private equity firm Cartesian Capital. Along with his older brother David, Peter Thomson is the heir to Thomson family fortune which has a controlling interest in Thomson Reuters and the Globe and Mail.
A new boost in capital will be just what Public Mobile needs to improve its services.
When they emerged, the small players put their focus on voice and texting services, just as the popularity of smartphones exploded onto the market and consumers began demanding data services. Supporting certain devices is still a problem for the spectrum of some providers, like WIND, but the problem can be rectified, said MacDonald, when the government holds its next spectrum auction in January 2014.
The smaller companies will need significant capital to bid properly, though.
“You need scale, because you need spectrum more than you’ve ever needed it, given the profile of customers. They’re downloading a lot more data,” said MacDonald.
If a fourth player does emerge, it will also need a “pretty good investment in marketing and sales efforts, to have a full-court press marketing campaign,” said Edward Jones analyst Dave Heger.
Heger noted that a fourth new player could still go for the “budget-minded part of the market,” since pre-paid services remain an area of growth in Canada. But there still need to be tie-ins with smartphones, he added, and creativity in the types of plans that are offered. The ability for a fourth competitor to differentiate itself from the incumbents will be one of its greatest challenges.
One thing that might help in this respect is to have a better service experience for customers than the big players offer, said Heger, pointing out that American provider Sprint made this a major priority and subsequently improved its financial performance.
Heger also recommends a regional approach to expansion into Canada’s telecom market. Rather than go national from the very beginning, a fourth competitor should look for areas that aren’t already well-served by a successful regional fourth competitor. Saskatchewan’s SaskTel, and Manitoba Telecom Services (MTS), have pretty good holds in their respective regions, said Heger. Ontario, B.C., and Alberta would be good places for a fourth national competitor to start.
Whether or not Thomvest’s increased involvement in Public Mobile will really help create a fourth provider has been a point of speculation this week.
As Scotiabank analyst Jeff Fan pointed out in a note, more spectrum, particularly at the 700MHz level, isn’t a guarantee for anyone looking to be the fourth big telecom player. Additionally, the involvement of Peter Thomson shouldn’t mislead investors into thinking that his family’s investment vehicle is behind Public Mobile, or retracting from its BCE stake.
“Thomvest is not Woodbridge,” Fan wrote.
“Thomvest was already a Public Mobile equity investor and simply bought out other equity investors who wanted to exit.”
Most significantly, (and further to the opinions of MacDonald and Heger), this move sets Public Mobile up nicely for consolidation with other small players, said Fan.
Canada might finally be getting the fourth national carrier that Industry Minister Christian Paradis wants. But “overall it’s still going to be a challenge,” Heger said.
“In my mind, if these new entrants are going to have a fighting chance, they likely need to merge together [for] the amount of economic capital that’s needed.”
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