Outlook 2008 (9 sectors to watch): Telecom

The next year is shaping up to be the dawn of a new era in Canadian communications.

The next year is shaping up to be the dawn of a new era in Canadian communications. The $51.7-billion takeover of BCE by private-equity investors is expected to be finalized before April. And a wireless spectrum auction set for May 27 will allow for at least one new mobile telecom competitor to enter the market.

Both events promise to shake up the industry. Telecom players reaped billions in profits in 2005 and 2006, with more forecasted in 2007, thanks to margins higher than 10%. Overall, growth in consumer spending on communication services has slowed dramatically over the past two years as people eliminate second phone lines, but spending growth is still forecast to average 3.3% between 2007 and 2011. That strength results from the popularity of broadband Internet packages, and from some of the highest prices for wireless services in the industrialized world.

But these good times won’t likely last. The Conference Board of Canada predicts profits will shrink by 5.6% in 2008, and average just 1.6% from 2007 through 2011.

Those forecasts don’t account for new competitors in wireless, and there will almost surely be one by 2009 — Industry Minister Jim Prentice made sure of that by setting aside 40 MHz of the 105 MHz spectrum auction exclusively for new entrants. Cable company Vidéotron, a division of Quebecor that to this point has resold Rogers Wireless service in Quebec, quickly announced its intentions to participate, as have other smaller privately owned players like Bassett Media Group and Yak Communications, an international long-distance reseller. As of mid-December, Manitoba Telecom Services was still seeking a financial partner for bidding, and even Shaw Cable is reportedly considering its options. Industry Canada has also mandated that new entrants will have rights to roam on incumbents’ networks, and share their wireless towers.

Among the incumbents, Rogers is in the best position for the auction, having acquired spectrum along with Microcell. But it will almost certainly face a new competitor that uses the same network technology and can therefore attract similar mobile phones as Rogers and reap lucrative roaming charges from foreign travellers — two of Rogers’ key advantages over Telus and BCE.

The first wave of local landline deregulation this year gave those two telcos more freedom on pricing and bundling, but cable competitors will likely continue to gain market share. BCE, soon to be controlled by the Ontario Teachers’ Pension Plan, will face hard choices about how to restructure for better capital efficiency under an estimated $44-billion mountain of debt. That challenge will partly fall to George Cope, now president and chief operating officer of Bell Canada, as he succeeds CEO Michael Sabia when the privatization deal closes.

But the action will be in wireless, and it’s no different south of the border. BCE and Telus will closely watch what kind of success No. 2 U.S. carrier Verizon has with its plan to open up its network to a broader range of cellphones and wireless features (Telus and Bell operate the same kind of network as Verizon). And everyone will watch Google, now that it has committed to bidding in a wireless spectrum auction. Any waves it causes in the U.S. will one day cross the border.