The wireless wars

Don't let the smiling faces fool you: the new spectrum auction will be a hot contest.

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.

The incumbents, and some analysts, argue that penetration is the wrong metric to consider when measuring wireless adoption. “Canada’s usage per capita is the fifth highest in the OECD,” ahead of Britain, Germany and France, says analyst Henderson. He adds that the cost of Canada’s wireless services, as measured by ARPM (average revenue per minute), is high relative to the United States, but low when compared to the rest of the world. As a result, Henderson questions the viability of more competition, noting that Clearnet Communications and Microcell Telecommunications were swallowed up by Telus and RCI respectively after obtaining wireless licences in 1995. Melvyn Fuss, professor emeritus of economics at the University of Toronto, says that it’s useful to encourage competition in Canada’s wireless industry, but he wonders whether the country can sustain more than three domestic providers. “The danger of setting spectrum aside for new carriers is that you encourage inefficient players to enter the market,” says Fuss, who specializes in telecom economics. “A better answer is to open the Canadian market to international competition.” Under this second scenario, supported by the Competition Bureau of Canada, a combination of Telus and Bell might create a Canadian powerhouse big enough to take on U.S. telecom giants such as Verizon and AT&T.

Vidéotron CEO Dépatie doesn’t buy any of these arguments. Ironically, he likes to cite a study co-authored by Fuss that shows a 38% gap in wireless penetration — roughly the difference between Canada and leading G8 countries, such as Italy and the United Kingdom — is costing the country 1% of annual GDP. Over a period of five years, that works out to more than $50 billion in lost national income. (Because Fuss studied developing countries, the economic impact might be less in Canada than Dépatie suggests.) “I would be shocked if the federal government didn’t allow set-asides,” says Dépatie, who is perhaps the only telecommunications executive willing to hazard a prediction about the auction rules Industry Canada is expected to announce this fall. Perhaps it’s because he’s learned a thing or two about competition after stealing more than 500,000 telephone subscribers from Bell Canada since the launch of VoIP (voice-over-Internet protocol) services in 2005, and believes Ottawa wants to shake up the status quo as much as he does.

With cable companies around the world offering VoIP, and telephone companies offering IPTV (Internet-protocol television), telecom boundaries have been blurred forever, forcing cablecos and telcos who in previous decades tended their respective gardens into head-to-head competition. “Consumers want a one-stop shop,” says Dépatie, referring to Vidéotron’s need to round out its cable, voice and high-speed Internet bundle with wireless services. In the absence of its own network, Vidéotron has for the past year offered a cellular plan to customers under a deal signedwith Rogers Wireless, but it’s not too happy with the arrangement. “It’s not profitable in the long term,” says Dépatie, noting that as an MVNO (short for “mobile virtual network operator”), Vidéotron can’t unleash its biggest competitive threats: aggressive pricing and technology innovation. As well, it doesn’t allow Vidéotron to effectively promote its parent’s media assets, including TVA and Canoe Inc., Quebec’s top French-language broadcaster and Internet portal, respectively.

At the Telecom Summit, then–industry minister Maxime Bernier spoke in vague terms about making changes to Canada’s wireless landscape. (In August, Bernier was moved from Industry to foreign affairs as part of a large cabinet shuffle, replaced by Jim Prentice.) “We want to rely on market forces as much as possible,” said Bernier. It’s the kind of comment that could be interpreted by the incumbents as an implicit promise that set-asides will not be made available. Or it could be interpreted by have-nots as an indication that Industry Canada plans to level the playing field by giving new entrants a price break on licences, in the same way it extended incumbents favourable terms in earlier spectrum allocations.

Following Bernier’s speech, Dépatie, Péladeau and Ted Rogers gathered near the front of the stage for a brief tête-à-tête. What did the trio discuss? “We talked about Bernier’s speech and business in general,” laughs Dépatie. Then he adds: “Don’t forget we have a relationship with Ted Rogers. We’re not enemies.”

At least not yet. But if Vidéotron and MTS Allstream, which has ambitions of upgrading to a national carrier, succeed in gaining entry into the world of wireless communication early next year, RCI and the other incumbents had better fasten their seat belts. They could be in for the ride of their lives.