New entrants may be slow to enter the market in this economy,
but it’s not stopping everyone. Consumers may see
some more competition later this year.
The Canadian AWS spectrum auction last summer raised $3.23 billion dollars, or $4 billion Canadian, and brought in a number of new entrants, prompting speculation that the Canadian wireless oligarchy of Bell, Telus and Rogers could be dethroned by new entrants.
And then the economy threw a wrench in the works.
Canada’s leading index, the Toronto Stock Exchange, began a downward spiral, losing more than half of its value since June. Credit froze, capital dried up and some of the new entrants that bought up spectrum fell silent about their plans.
One casualty was Shaw Communications. Canada’s second-largest cable and satellite television company said it would halt its buildout for 2009 after a dip in its fourth-quarter profit – despite the fact that it had already spent $153.16 million, or $189.5 million CAD, to buy18 licenses at auction.
“[Macroeconomic conditions] will slow the game down; it will take a little longer to obtain financing,” says Imari Love, telecom industry analyst with Morningstar, who does not own stock in the companies he covers. “It wouldn’t surprise me if the timeline gets pushed back to 2010, 2011.”
MUM’S THE WORD
He refers to the new entrants that have released few, if any, details about how they plan to use the spectrum they purchased: Bragg Communications, Novus Wireless, Celluworld, Sasktel, Rich Telecom and Manitoba Telecom Services. And although Data and Audio-Visual Enterprises (DAVE) Wireless appointed former Toronto Hydro Telecom president Dave Dobbin as president in November, the company has since fell silent about its plans for the future.
Combined with Shaw and DAVE Wireless, new entrants that have no immediate plans for their spectrum holdings own 58 licenses worth $472.27 million dollars, or $584.34 million CAD.
Love says it is but impossible to raise any non-investment grade debt in Canada, and to his knowledge only Telus, Rogers, Bell and Shaw are investment grade. “It will be different for the new, smaller players to get up and running … I think the competitive position of the major players is relatively safe for now,” he adds.
Still, don’t expect the Canadian wireless market to be entirely stagnant in the upcoming year. Though macroeconomic conditions have put a damper on the competitive landscape, new entrants that found angel investors should manage to put some pricing pressure on Canada’s big three. The new entrants’ primary targets are triumvirate discount brands Fido, Solo and Koodo.
PREPARING FOR LAUNCH
BMV Holdings, which bought up the G-Block spectrum, is on track to launch an all-you-can-eat, $40 per month, talk-and-text service by the third quarter of 2009. The G-Block spectrum covers almost 18 million residents in the Windsor to Quebec City corridor and was considered unattractive to other bidders because no existing handsets work on it, though Qualcomm and Avago manufacture chipsets that can efficiently manage the frequency.
The company declined to provide specific information but says it is currently in talks with handset manufacturers and doesn’t see a significant barrier to entry
“There’s nothing magical about it. It’s baseline 1X EV-DO technology,” says investor Salvatore Tirabassi.
The company tapped former Bell Mobility president, Alek Krstajic, as CEO and secured a private equity investment with pension giant OMERS Private Equity worth up to $40.45 million, or $50 million CAD.
New entrant cohort Globalive Communications says it intends to add competitively-priced wireless service its portfolio of wireline and Internet services. The telecommunications company says it is on track to launch a still-unnamed core brand and a discount service it has dubbed Yak, the same moniker it currently uses for its wireline segments.
Globalive is backed by Egyptian network operator Orascom Telecom and plans to launch the network nationwide from the end of 2009 into early 2010, with the exception of Quebec.
Quebecor Media has also shown its cards, reporting that subsidiary company Videotron is on track to roll out its own HSPA network in its home province of Quebec by late 2009.
Further complicating the competitive landscape, Bell and Telus are collaborating to overlay their respective CDMA and EV-DO networks with an HSPA network scheduled for completion in 2010. The upgrade will allow the duo to better compete with Rogers, which holds a competitive advantage. It has the only GSM network in Canada, raking in roaming revenue in addition to being the exclusive carrier of Apple’s iPhone.
ROOM TO GROW
With a meager 64 percent penetration rate, the Canadian market stands about two years behind the United States and has plenty of room to grow. Still, the market’s major players have taken preventative measures to fend off pending competition in their discount segments. Following Telus’ lead with its Koodo brand, Rogers and Bell have lowered their prices on discount brands and dropped those services’ system access fees.
The companies’ move to lower prices comes after a wave of consumer discontent on issues ranging from cell phone fees to throttling Internet speeds that swept Canada over the past year, leaving protests and class action lawsuits in its wake.
The Canadian Wireless Telecommunications Association (CWTA) states its country’s wireless subscribers enjoy prices that are below or close to average and “fare significantly better than their neighbors in the U.S. and Mexico in almost all usage categories.”
However, the CWTA’s claim is widely disputed by analysts, and it is generally accepted that the lack of competition caused by the oligarchy of Bell, Telus and Rogers is the main contributor to higher costs. According to a report by the Canadian Broadcasting Corporation, Canadian wireless segments are the most profitable in the world, with a 45.9 percent profit margin.
The Canadian spectrum auction was designed specifically to give new entrants a leg up on incumbent players. The government set aside 40 MHz of spectrum that could only be bid on by new entrants, with the rest of the spectrum open to both new entrants and incumbents. According to analyst calculations, bidders ended up paying over $1.50 per MHz/population while the U.S. price was closer to $1.20 MHz/population
The government also required incumbents to accommodate roaming for five years and allow the new entrants access to towers for mounting radios.