ILEC News, Analysis
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Canadians have been blessed with some of the lowest telecom prices in the world due to a combination of competition and regulation. Since the long-distance market was deregulation in the mid-1990s, prices have continued to tumble. In the high-speed Internet business, prices have been below those paid by U.S. consumers, while local telephone prices have been controlled by federal regulations My prediction is consumer-friendly landscape will crumble in 2007 even there this is “competition” in most markets. Let’s take a look at each business.
- Local telephone: The federal government has finally decided to reduce regulation in the $10-billion market, which means incumbent carriers such as Bell and Telus will have the freedom to raise or lower prices without seeking regulatory permission. There have some suggestions, there could be a price war as carriers battle to win back consumers who have left for bundles from cablecos. Truth be told, the carriers aren’t crying much over many of these consumers, who are seen as fickle, demanding and far from lucrative spenders. So rather than lower prices, look for the carriers to raise local prices to boost revenue - and the cablecos to go with the flow. Bell COO George Cope doesn’t have the word “discount” in his vocabulary and, instead, will depend on better marketing. Meanwhile, the cablecos (other than Videotron) have been happy to sell no-frills telephone service at premium prices to pick off the low-hanging fruit.
- Wireless: It’s all about the ARPU, baby! Sure, Virgin is playing on the edges with an appealing pay-as-you-go package and Bell is trying to make some noise in the low-cost, pre-paid market with Solo but the wireless industry is all about higher prices and pushing more services such as mobile e-mail and video.
Why? In Canada, there really is no wireless competition. There are three large national carriers (Telus, Rogers and Bell) selling wireless service but the market is far from saturated so demand is still healthy, which means price doesn’t have to be used as a major tool yet. This means carriers can continue to focus on selling based on devices, features and services.
- High-speed Internet: Again, a market with little competition: in most market, you either get high-speed cable or DSL from your carrier. Like the wireless market, high-speed providers are looking for higher ARPU to drive revenue. It has seen prices climb, although service providers have tried to hide it by putting the focus on higher speeds so you download free music…er, surf the Web faster. Earlier this year, Rogers raised the cost of its Extreme service by 16% - and the silence from consumers was deafening. The reality is Canadians love their high-speed Internet and have begun to regard it as a utility rather than a competitive service.
- TV: What ever happened to IP-TV and the idea of competition for cablecos? Telus has rolled out IP-TV on a limited basis in Calgary, Vancouver and Edmonton, while Bell is still in “trial mode”. Meanwhile, the cablecos are happily raising prices while Bell’s ExpressVu service has adopted the same approach to boost revenue while the number of subscribers remains relatively flat. With high-definition TV on the horizon, look for your average cable or satellite bill to keep climbing.
As a consumer, I’d like to see better and more competition to keep prices low and innovation high. Of course, this approach doesn’t always make for good business so it may be more of a dream than reality. That said, it would be good to see a fourth wireless carrier - one that’s not afraid to be aggressive and disruptive (Virgin on steroids, perhaps?). I’d also like to see SkypeIn be available in Canada if the concerns over 911 service can be resolved. I have little optimism for high-speed Internet even since Bell and Rogers took control of Inukshuk, which provides WiMax-like service. As for TV, Bell and Telus have declared they are not going to compete on price to gain a market foothold so don’t look for any deals from them or promotional specials from cablecos.
Written by Mark Evans on December 28th, 2006 with no comments.
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In a decision that will dramatically change the $10-billion local phone market in Canada, the federal government has decided the VoIP market should be regulation-free. "Barriers to entry in this market are low; there is no reason to regulate it," Industry Minister Maxime Bernier said. "In a competitive sector, there is no reason to regulate some companies while others can offer the services they want at the prices they want."
So what does this decision mean? For one, incumbent carriers will be able to offer VoIP service at any price they want without having to seek approval regulatory approval. As a result, you can expect Bell Canada to become much more aggressive on pricing while ILECs such as Telus, Manitoba Tel and SaskTel will get into the VoIP market after sitting on the sideline until the regulatory uncertainty was resolved. This could mean bad news for Vonage and the cablecos, which have been able to roll out VoIP service without having to worry about competition from the ILECs.
Another key development is regulation of the traditional local phone market will likely disappear soon (expect in rural communities where there is little or no competition). After all, how can you deregulate VoIP and not deregulate traditional phone service? Depending on how aggressive the ILECs want to be to keep and win-back customers, it would not be surprising to see price wars for local phone service in many markets, particularly places such as Toronto and Montreal where the ILECs, cablecos and VoIP service providers are already going to head to head.
One wildcard is how ambitious the ILECs will become about VoIP given they could easily cannibalize their traditional phone businesses, particularly high-end customers who would gravitate to VoIP because of the features. If the ILECs do come out with guns ablazin' it may be bad news for the cablecos, who have been enjoying free ride with cable telephony, and the VoIP players such as Vonage who may find themselves on the outside looking in.
Tags: VoIP, Canada, CRTC
Written by Mark Evans on November 16th, 2006 with no comments.
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While the Net Neutrality has raged in the U.S., it's been quiet in Canada....until now. Yesterday, Videotron CEO Robert Depatie said the federal government should levy a "transmission tariff" on content providers so they can support the cost of building and maintaining networks. "If the movie studio were to mail a DVD . . . they would expect to pay postage or courier fees,” he told Canadian Press. "Why should they not expect a transmission tariff?". Depatie said he also concerned "Canada lags behind in pricing competitives and technology because the regulatory regime discriminates against new providers like Videotron". If there was ever a public shot across the bow of the federal government and telecom regulator, Depatie just delivered a one-two punch. In a sense, his move is a positive because it could compel the CRTC (Canada's telecom and media regulator) to finally get involved in the Net Neutrality issue/controversy. So far, the CRTC's standard response to inquiries about Net Neutrality is it won't act until it receives a complaint, which is hardly pro-active or forward-thinking. It is somewhat interesting to see a cableco push forward the Net Neutrality issue given it's the carriers who are losing customers and revenue as cablecos get deeper in the local telephone business. Then again, the cablecos are being forced to make large investments in their networks to stay competitive with increasingly-desperate carriers so the interest in external "help" is hardly a surprise. As for Depatie's contention the CRTC discrimminates against providers such as Videotron, that's just off-base given Canadian cablecos are barely regulated while carriers are still in regulatory shackles. I wonder my what my friend, Mark Goldberg, thinks about Depatie's comments.
Written by Mark Evans on November 2nd, 2006 with no comments.
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Wow!
In one fell swoop, the federal government has abruptly derailed plans by Telus Corp. and BCE Inc. to convert themselves into income trusts. "BCE and Telus will not be able to become income trusts and have the tax benefits that are currently available," Federal Finance Minister Jim Flaherty said after unveiling new rules aimed at puncturing the income trust phenomena. Obviously, the federal government finally got spooked by the growing number of companies looking to avoid paying income tax by converting themselves into income trusts but you've got to believe Telus CEO Darren Entwistle and BCE CEO Michael Sabia must feel betrayed because they were acting by the existing rules. The key question is whether the move is political or grounded in economic reality. Are the federal PCs worried more about winning the next election or are they truly concerned federal coffers are being depleted by the income trust scourge. Mark Goldberg has some thoughts about Flaherty's move, while highlighting that Rogers has seen its stock climb through the creation of higher shareholder value. Anyone want to bet how much Telus and BCE shares will plummet on Wednesday? If you thought Entwistle was unhappy before (according to the recent Report on Business magazine profile on him), you ain't seen nothing yet if Telus shares drop 10% to 20%.
One more key thought: Do you think Sabia killed (or to be even more blunt...f**ked) Entwistle's income trust party by unveiling his own income trust plans so soon after Telus did? If BCE hadn't finally jumped on the income trust bandwagon, maybe Flaherty would not have have felt so much pressure to get involved. But with the country's largest ILECs trying to walk away from paying income tax, Flaherty may have felt enough was enough. Truth be told, BCE was probably the straw the broken the income trust's back. I mean when Canada's telephone company moves to avoid paying $800-million in income tax, it's likely not going to go over well in Ottawa.
Update: The Globe & Mail's Eric Reguly has an interesting column, suggesting Flaherty made a bold move but could have committed political suicide.
Written by Mark Evans on November 1st, 2006 with no comments.
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Talk about letting the good times roll for the cable industry. Today, Rogers Communications posted better-than-expected third-quarter results that provide more evidence how the cablecos are thriving while many carriers are struggling to find any kind of growth. Rogers' operating profits jumped to $784-million, compared with estimates of $727-million, while wireless operating profits were $563-million, compared with UBS Securities' estimate of $511-million. For people looking for insight into the growth of cable telephony, Rogers added 106,000 customers, while losing 24,000 traditional circuit customers (part of Call-Net's operations). In terms of guidance for 2006 as a whole, Rogers is now looking for a $90-million bump in operating profits to $1.9-billion and 300,000 net cable telephone subscribers adds (a 50K bump from the second-quarter). Tags: cable, rogers, VoIP
Written by Mark Evans on November 1st, 2006 with no comments.
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The Report on Business magazine has an interesting profile on Telus CEO Darren Entwistle, which offers some insight into arguably Canada's most dynamic telecom executive. It includes the surprising contention the 44-year-old may have plans to walk away from telecom in four or five years to teach strategy and leadership at a U.K. university - as opposed to moving on to bigger and better things such as CEO of a U.S. RBOC. The only thing I would quibble about in the story is the claim Entwistle "blew some of his regained credibility with a doomed $1.1-billion bid for Microcell" in 2004. Everyone knew Entwistle wanted Microcell out of the wireless game because its discounting tactics were hurting the industry's operating margins. By making the bid, Entwistle put Microcell in play and Telus in a win-win position. If the bid succeeded, Telus would become an even bigger wireless player in a fast-growing market. If the bid failed (which happened when Ted Rogers made a $1.4-billion bid), the market would be consolidated and market conditions would improve. Entwistle didn't blow his credibility; he made a brilliant strategic move that didn't cost Telus a dime.
Written by Mark Evans on October 30th, 2006 with no comments.
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Here's a theory about the decision to blow up BCE and turn Bell Canada into an income trust. Perhaps the biggest strategic mistake made by BCE CEO Michael Sabia was not buying Microcell Telecommunications, the country's fourth-largest wireless carrier, when he had the chance a few years ago. Instead of acting aggressively and having to deal with the federal competition bureau, Sabia allowed Rogers to swoop in and acquire Microcell for $1.4-billion. Yes, Microcell used GSM while Bell Mobility was on CDMA but the other benefits (a larger exposure to the fast-growing wireless business, tax-loss carry-forwards, etc.) far outweighed any technology issues. Why BCE didn't move more quickly and/or aggressively is a huge mystery. After all, technology could not have been an issue given Telus, which also uses CDMA, had put Microcell in play by making the initial bid. Instead, BCE's failure to buy Microcell left it with just 20% of its revenue coming from wireless and that (along with a host of other issues) made BCE a low-growth entity. As a result, the move to an income trust became more of an option. Another spin on the Microcell story is Manitoba Telecom should have made a strong bid for the wireless carrier. Instead, Manitoba Tel decided to buy Allstream for $1.8-billion, which now shows all signs of being an expensive strategic mistake.
Written by Mark Evans on October 13th, 2006 with no comments.
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It's the end of an era in Canada's telecommunications industry as BCE Inc. is going to disappear - and be replaced by Bell Canada, which will be converted into an income trust. "BCE was a company that was conceived in a different time, for a different purpose - a purpose all about diversification," Bell Canada CEO Michael Sabia said. "But the strategy we have been pursuing over the last three or four years is not about diversification but about focus with Bell as the centrepiece of that focus." BCE's demise is the end of an interesting diversification strategy that saw the conglomerate invest in everything from real estate, gas pipelines (TransCanada Pipelines), financial services (Montreal Trust), computer services (CGI Inc.), publishing (Globe & Mail), television (CTV) and sports (Maple Leaf Sports & Entertainment). So now, BCE - er, Bell Canada Income Fund - is just going to be a telecommunications company...really!
As for the income trust, the question is whether this is the structure for telecom carriers in North America given their growth prospects are, at best, modest. Telus has already done it, Bell Canada spun off its rural assets into an income trust, Bell Canada is going to do it, and Manitoba Telecom Services may do it. From the outside looking in, it looks like a trend. The key issue for carriers who embrace an income trust structure is making sure they have enough cash left (after distributions to unit holders) to invest in innovative services and upgrade their networks at a time when they're facing intense competition from cablecos. In other words, can Bell still do what it needs to do after kicking out 85% of its profits to investors? I suspect innovation isn't front and centre for BCE as much as it wants to avoid paying income tax ($150-million in 2007 and $800-million in 2008), and the demands from Bay St. to breath some life into its dead in the water stock.
Update: For more thoughts, check out Telecom Trends and Canadian Observer, who points out the income trust will allow Bell Canada to avoid paying $800-million in taxes in 2008. Of course, Bell will also be distributing twice as much money to shareholders, who will be taxed on that money. The National Post has a front page story suggesting Bell's move will prompt the federal government to review the income trust program.
Written by Mark Evans on October 12th, 2006 with no comments.
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If you've got a PhD in mathematics, you may be able to figure out how Canada's telecom regulator, the CRTC, created its formula to collect money from the carriers for the deferral account. (It has something to do with consumers being over-charged for local telephone service in urban centres.) The bottom line is the account contains a whopping $652-million, most of which is supposed to be spent on expanding rural broadband. While everyone agrees it makes sense to bring broadband to rural communities, the $652-million question is how to do it. In February, the CRTC decided most of the money should be given to Bell Canada and Telus, who would, in turn, invest it in rural broadband networks. Others think the money should be given back to consumers. To be honest, rural broadband has never been a cut-and-dry issue in Canada. The idea is universally endorsed as good social and economic policy even though it can be a difficult ROI argument to make sometimes when you're talking about serving very small communities. At one point, Liberal MP Brian Tobin talked about spending $4-billion to roll out broadband to rural Canada but that was more politics than reality. Perhaps the most sensible route are the private-public partnership in Alberta (SuperNet) and B.C. (Network BC) where broadband networks being extended to hundreds of rural communities. A key part of SuperNet is its provides wholesale access to ISPs so competition is allowed to emerge to give consumers the luxury of choice. Perhaps it's time for rural communities in Ontario and Quebec to start demanding a SuperNet of their own. Update: This post is based on the Federal Court of Appeal's decision to give two consumer groups the opportunity to appeal the CRTC's decision. For thoughts on the court ruling, check out Mark Goldberg.
Written by Mark Evans on September 26th, 2006 with no comments.
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A highlight of yesterday's groundbreaking ceremony for the $250-million Telus Tower in downtown Toronto were the rather informal speaker introductions provided by Menkes Development senior vice-president Joe Nestic. After introducing Ontario Premier Dalton McGunity and Toronto Mayor David Miller, Nestic got around to Telus CEO Darren Entwistle. His intro went something like this: "Darren Entwistle: so handsome, so energetic, so enthusiastic, so powerful and such a nicely-cut suit". I think even Entwistle blushed.
Written by Mark Evans on September 15th, 2006 with no comments.
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Telus hasn't paid taxes since 2000 - the benefits of tax-loss carryforwards after it acquired Clearnet for $6.6-billion - and it has no plans to do so in the future after unveiling the details of an income trust conversion earlier today. So what does it mean for Telus? Not much, if anything, from a business perspective. It's one of those "eat your cake and have it too kind" of deals: it keeps more than enough cash to supports its growth strategy while not giving any cash to fine folks at Revenue Canada. In other words, it's a sweet piece of financing engineering that investors seem to love as Telus shares climbed more than $7, or 13.5% today. Of course, when a $20-billion (market cap) entity decides to do an income trust and not pay taxes, it may not go over well with the tax man, particularly if other large companies - say the banks - also decide to jump on the income trust band wagon. The spotlight is now on BCE Inc., which has been rumoured to be an income trust candidate. The downside is BCE's assets aren't as good or lucrative as Telus', and BCE already played an income trust card earlier this year when it farmed out 20% of its lines (mostly rural) to BCE Aliant Income Trust. Man, I'd would have loved to a fly on the fly of BCE CEO Michael Sabia this morning when he read the Telus news.
Written by Mark Evans on September 11th, 2006 with no comments.
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The Wall St. Journal has a story based on a Cable Labs report that suggests the cablecos may have to make aggressive investments in their systems to compete with Verizon's fiber-to-the-home node technology. Needless to say, it's a controversial report that has already been rebuffed by some cable executives as speculation because bandwidth (a.k.a. bigger, fatter pipes) has been the cable industry's trump card in recent years as the broadband wars have become increasingly fierce. As a result, many investors have placed their bets on the cablecos amid the belief they could simply "fatten" their networks while the carriers struggled to keep pace. If the Cable Labs report is accurate, this could change this investment thesis. Keep in mind, however, that Verizon is one of the more aggressive carriers when it comes to FTTN with plans to spend a staggering $20-billion. In Canada, the major ILECs, Telus and Bell, are betting on fiber-to-the-node, which is a less expensive strategy, so perhaps the cable thesis is still and alive well, which is good news for investors in Rogers, Shaw, Videotron and Cogeco. For more, check out IP Democracy's thorough recap, GigaOm and Nyquist Capital.
Written by Mark Evans on August 18th, 2006 with no comments.
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The New York Times has an enlightening story today looking at how Verizon plans to spend $20-billion to deliver fiber-optic connectivity to residential households. Why? Well, Verizon believes it has no choice if it wants to deliver the same kind of bandwidth-hungry services (high-definition television, video-on-demand, etc.) as cable rivals such as Comcast and Time-Warner. It's a huge investment and a strategic gamble but many carriers have no choice if they want to compete on a level playing field with their cable rivals, which have been happily signing up hundreds of thousands of new home phone customers from carriers in recent years. It is interesting that while Verizon aggressively pushes forward with fiber-to-the-home, Canadian carriers Bell Canada and Telus Corp. are betting on fiber-to-the-node This means they are pushing fiber close to households, and then hoping compression technology can give the big, fat pipe over the "last mile". Will this strategy pay off? Well, only time will tell but the strong growth of Canadian cablecos such as Rogers, Videotron and Shaw recently is a troubling development for Bell and Telus. One thing I do find fascinating about the carrier-cable battle is how the cable industry has used CableLabs to support its efforts. For those unfamiliar with CableLabs, it's a non-profit R&D consortium that develops innovative products and standards for its members. You would think the carriers would have - or should have - something similar to effectively fight back. Instead, the carriers rely on cash-strapped telecom equipment suppliers for new products and services, while arguably not spending nearly enough on their own R&D. For more on FTTH, check out Information Week, which writes about the technology's strong growth, albeit from a small base.
Written by Mark Evans on August 14th, 2006 with no comments.
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Apologies to anyone whose eyes glaze over when its comes to GSM vs. CDMA wireless technology but....I have an
investment feature in today's Financial Post looking at how some analysts believe CDMA carriers such as Canada's Bell Mobility and Telus Mobility will have no choice but to take the plunge and do a GSM overlay of their networks. Scotia Capital Markets analyst John Henderson, for example, thinks Bell will have to spend C$800-million over the next two years to adopt GSM - a move already being made/done by Brazil's Vivo and Australia's Telstra.
Written by Mark Evans on August 11th, 2006 with no comments.
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If you're interested in what a large telecom carrier looks like as an
income trust, check out my
investment feature on Bell Aliant in today's Financial Post. It's an entity with more than 10,000 employees, 3.5 million customers and an enterprise value of $10-billion. Bell Aliant could be a sign of things to come in the slow-growing carrier market in North America.
Written by Mark Evans on August 8th, 2006 with no comments.
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Amid the doom and gloom of the telecom landscape, the CRTC issued
a report yesterday Canada's telecom market grew 3.5% to C$34.5-billion last year while operating profits rose a healthy 8% to C$12.4-billion. That's that bad considering competition, particularly, within the enterprise market, is brutal. Most of growth came from the high-speed Internet and wireless markets where prices hikes can be passed along to consumers without too much of a hassle. Rogers, for example, is apparently going to introduce a $5 a month increase for its Extreme high-speed service soon, which would generate another $60 million a year in revenue.
Written by Mark Evans on July 28th, 2006 with no comments.
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Bell Canada plans to enter the comparison-shopping engine business next year with a service called Bell Agora. Bell has been looking at different technolgy platforms and talking with local online retailers (an easy assignment given there aren't that many of them, to be honest). Maybe Bell has come up with a way to make a shopping engine work that Google/
Froogle has failed to figure out. One of Canada's only shopping engines is Calgary-based
Shoptoit.com, which recently celebrated its first anniversary.
Written by Mark Evans on July 18th, 2006 with no comments.
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According to TeleGeography, VoIP's on a roll in the U.S. as the number of subscribers jumped 189% to 5.5 million by the end of the first quarter, compared with 1.9 million a year earlier. Telegraphy expects there will be 9.6 million customers by year-end and 23.7 million by 2010. Meanwhile, revenue is expected to climb to $2.6-billion in 2006 and $8.1-billion by 2010 compared with $1-billion in 2005. Telegeography does point out the $2.6-billion this year only accounts for 7% of total local and LD revenue in the U.S.
 So what does this data mean to Vonage, which has seen its stock drop 40% to $10.12 since its IPO debut? Likely nothing given the Vonage story is not about customer and revenue growth but profits. The big problem for Vonage is the cablecos are gaining more momentum with 57% of subscribers at the end of Q1 2006, up from 47% a year earlier. This means Vonage likely needs to maintain its aggressive marketing activity to remain competitive, which is not good news for anyone look for Vonage to make a profit or, at least, reduce its large losses.
 By the way, Vonage shares look like they will crack the $10 barrier (the wrong way, mind you!) pretty soon. It does raise the question about when Vonage becomes available as a takeover target. Its market cap is now $1.59 billion but what happens if the stock drops to $5 and Vonage can be picked up for $750 million? Does anyone go for it at that price?
Written by Mark Evans on June 15th, 2006 with no comments.
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