Challenges facing the Canadian wireless industry: a Q&A Part II

Canada’s national mobile wireless operators face a number of challenges over the next few years. In the previous issue of Report on Wireless the heads of the operators talked about a number of issues including average revenue per user and churn (RoW, July 22/03). In the second installment of this question and answer, the CEOs of Microcell Telecommunications Inc., Bell Mobility, Telus Mobility and Rogers Wireless Inc. talk candidly about the evolution of the competitive landscape, regulatory issues and 3G. The order of the answers reflect the order in which the interviews were conducted. Questions and answers have been edited for clarity and length, and in some cases combined due to space limitations. RoW: The larger national wireless operators are targeting higher-value customers, while the smaller one is looking at the mass market. How do you see the competitive landscape evolving over the next few years? André Tremblay, Microcell: We have been positioning our product in a distinct way and I believe they were looking at us as not too heavy a threat in the beginning. But if we look at what they’ve been doing, they’ve been adjusting to us in a big way. They probably had in mind that it was not possible for us to attract the 20%-25% market share we did in the past. I think they were all expecting us to die. It didn’t happen and I don’t believe it will. We want to have 20% market share and we will do what we need to do to get there. We will do it economically and with common sense. Michael Neuman, Bell Mobility: Just to be clear, the similarities that exist between the larger players - Rogers, Telus and ourselves - are very real. We had the highest post-paid mix and around mid-last year we took steps to ensure that it went even higher so that we got into the 80/20 range in post-paid/pre-paid mix. Rogers and Telus, I think, saw the wisdom in that and followed so that one quarter to two quarters later they started to have a similar mix and the investment community responded very well to that change in their strategies. Having said that, it’s interesting that Microcell, which historically prides itself on being the youth brand, has in its post-receivership mode gone toe-to-toe for the same market as Rogers, Telus and Bell. My view is when you don’t have the network, you don’t have the capital and you don’t have the cash flow, you have to pick a different strategy. I would urge anyone in that situation to read a book called The Art of War. It very clearly says that if you are disadvantaged in any very important factor in the battle, then you don’t go toe-to-toe with a superior enemy. This is a big fundamental business mistake. George Cope, Telus Mobility: From our perspective, we target every possible person in the country that might use a wireless phone. We target the mass market, the middle business market and the corporate market with very different programs and different products. Some of our competitors tend to focus more in just one of those segments. Our goal is to get a leading share of revenue growth and cash flow growth in the industry. It doesn’t matter how many players are in the industry - that will continue to be our focus. Nadir Mohamed, Rogers Wireless: I don’t want to sound coy, but we’ve looked at our approach to the market and obviously we will respond to the market as it changes. But I think fundamentally the path that we’ve picked is one of profitable growth focusing on higher-value segments and a greater emphasis on the customer experience. The way I look at is you always want to win in the segments that you’re going after. In a competitive market, you know you’re not going to get every customer. In a dream world your competitor gets the customers you’re not targeting. I talk internally about staying the course. The better we do, the better positioned we are. RoW: Is a four-player wireless market viable in Canada and why? AT: I think we have never been as strong as we are right now because we only have 20% of the debt load we had in the past. We still have the network in place and we still have almost all of our customer base. What we are going to do is build on all those strengths and continue to be the leader in customer value. We are the alternative to those three guys that more or less have the same strategy, same evolution, same legacy. We are going to be pushing the envelope towards customer value, customer behaviour - protecting at the same time the economics of what we do. We believe that we now have the liquidity and the flexibility to deliver our business case, we need some time to go back to normal. I see us going down the road of what we’ve been doing in the past, leading the show in terms of packaging, very solid branding and very aggressive marketing. MN: I think as we go forward, it’s very clear - and with the near demise of Microcell it became more brutally clear - it’s now obvious to most industry watchers four facilities-based carriers is just a little too much for this marketplace inasmuch as the industry has not achieved any kind of return on investment yet. Even two out of the three major players, here I speak of Rogers and Telus, are not cash positive or profitable yet. After 18 years or so that suggests to me that there’s oversupply. I just don’t think that bodes well for four players. You’re going to continue to see resale arrangements and lots of price competition even if there were three players, but I don’t know if there’s room for a fourth player long term. GC: Industry Canada put in place a model that they thought would be successful going forward and they’ve allowed the market to determine that. So whether or not there’ll end up being four players or three players, they’re clearly, at least it seems to us, allowing the market to determine that, which is what they should be doing. NM: I have been on the record several occasions in the past as saying that three is better than four. All the metrics in the business show that three is better than four. And each of the three main players would say the same. The market conditions are such that a three-player market is better than four. Certainly, we have seen that Microcell has struggled. RoW: The CRTC and Industry Canada have recently proposed changes to the regulatory environment under which Canadian wireless carriers operate. Can you comment on any of those changes, and if you were to give the government, Industry Canada and the CRTC, a grade, A for good and F for bad, what grade would you give them? AT: I won’t comment on giving the government a grade. As for the telephone inspectors, I think that if you want to establish and maintain competition, it’s a whole mentality. How can you have real and sustainable competition, if you have one guy, which is totally integrated from A to Z, if everybody else is buying from him somewhere in the chain? You look at what the department did under Industry minister Manley in the original PCS licensing and we would like them to expand on it because I do believe that we could have more capital in Canada. The networks capex across costs, I believe, is running at a very high rate. I salute the network sharing deal between Telus and Bell. If they can do it, we should be able to do it with Rogers as well. We believe it would be much better if we were able to find ways to share on the capex infrastructure to compete more on the retail side. I’m not going to repeat our views on the licensing fee process because they are all public documents. We believe it is totally unfair especially for us because we’re the company seeing its fees increase the most. So the formula is wrong somewhere. MN: I’m going to plead the fifth. It’s too narrow a categorization against such a broad mandate that they both have, which would cause me to generalize too much. I can’t imagine getting it down to one letter. The government has been looking at their options with respect to fees, but it’s important to note the wireless industry is taxed, if you will, from a myriad of locations in government. If we add up not just Industry Canada fees, but all the monies that go from this direction to them, it comes to a lot more to than just the fees. We made this point very strenuously in meetings with the department that they have to be extremely careful not put its hands in the industry’s pocket because the industry is a major contributor to the Canadian economy and we don’t want to do anything to disrupt that. The other thing I think is crucial is the current licence structure is a complicated one and we think it ought to be simpler. We think there ought to be a harmonization of fees, but most definitely not an increase in fees. GC: It’s a loaded question because there are different roles within both. In terms of the CRTC, our industry is in essence forborne. So we have very little involvement with the CRTC. We do now make contribution payments. My own opinion is that what was missed there was we also make system licence payments, so it was really a double tax on the industry. I fundamentally believe that should not have happened because you had already a method in which the industry was paying the government. On Industry Canada’s side, we’ve always found them quite progressive and aware of what was required to make the industry successful. I mean they did not follow the U.S. model and issue six licences. They developed a made-in-Canada solution. The one issue obviously for Canadian carriers is we certainly pay a fair amount of money to the Canadian government to be a carrier. I would think we should in terms of spectrum because it’s a Canadian asset. The issue for us always is to make sure that, because the industry paid $1.5 billion for its licences a few years ago, plus it pays significant annual fees, people don’t view it as a place to grab revenue. NM: I don’t give grades because then they grade us and we won’t like it. Given the financial situation we’ve all been in, it would be a great thing if we could get a break going forward. Having said that, credit to both the CRTC and Industry Canada, I think fundamentally we’ve got a market that’s developed in a way that’s great for the customer. It’s been competitive and compared to many markets this has actually evolved in a healthy way. Costs are an issue because we need to get a more stable financial environment for the players. I think there are some bigger issues that the commission needs to address. One obviously from a Rogers-wide perspective is the notion of bundling where fundamentally we think that the incumbent phone companies shouldn’t be in a position to bundle monopoly services, like local, with their competitive services. We’re concerned about the threat to the wireless industry of phone companies essentially bundling in and using local to win in the wireless business. RoW: Earlier this year, the CRTC released the amount of fees it collects from the telecom industry. Do you think it would be a good idea for Industry Canada to do the same? AT: I think the answer is yes. But at the same time, I’m somehow indifferent and I’ll tell you why. I’ve been working closely with this department for a while and if they report the fees and if they report the financing of their activities, I think it would only be fair as well for them to report what they do. And I can tell you one thing, it is an extremely effective department. MN: I think it would be a good idea… If it were more "transparent," it would confirm that we’re big contributors financially. We pay our way and it would enable us to demonstrate that by international standards we’re there and then some. GC: I would have assumed that it is available. I don’t think it’s been an enormous secret from our part in terms of the amount of money the department is generating. If you turn it into an annuity that they’re getting off of the four carriers, it’s a phenomenal value for Canadians. I’m not opposing that at all because the spectrum is an asset we have the privilege of using. NM: We talked about it at a forum just recently. We talked about that whole issue of fees and gave some numbers. What’s an intriguing idea is if they don’t want to we can certainly do it. It would be a great idea to not only publish it but to reduce it. That’s the better idea. RoW: Are there any key elements that need to be addressed before the industry starts to seriously look at 3G? If so, what are they? AT: I think for 3G in Canada, we need to be synchronized with the U.S. - that’s important. I believe what happened in the industry in the last couple of years is going to be a blessing for 3G because I think manufacturers are more realistic about the capabilities of operators right now. Everybody is going to look at 3G as potential and so forth, but I do believe it’s going to put a lot of sanity around the 3G pricing and 3G licensing. MN: Virtually all of the industry has just finished making massive investments in network upgrades to provide for higher-speed throughput. The revenues flowing from data are still in their infancy. In my view, the industry needs to digest what it’s already done. If you’re an investor in the industry I think you’d be happy to hear that because the industry should be demonstrating a return on these investments before it goes on to make additional investments unless it can categorically prove that those additional investments could enable it to get an even faster return or give it some competitive advantage. GC: I think you’ll see a lot of different things come out of all the different companies as we begin to understand where the government intends to go. Certainly from our perspective, we are just now deploying, as are our competitors, 3G services with a 1X network with the spectrum that was just purchased two years ago in Canada that all carriers still have to use up themselves and get returns on the current investments in 3G that we’ve done. As demand for data services grows, as it will, the requirement for more speed will grow and that is when the carriers will make the investment. NM: I think it’s a ways off and frankly from a planning horizon, we’re not seeing that in the next little while. If you go back to customer requirements, as an industry we’ve got to be firmly looking at the customer first as opposed to what can the network do, and then looking for applications, which too often we’re guilty of. From a customer point of view, there isn’t this swell of demand for high-bandwidth multimedia mobile applications. It doesn’t make sense to go out and spend hundreds of millions of dollars to meet that "demand." It’s not the time to start saying ‘let’s start investing in 3G tomorrow.’ Our path should be to get our focus on things that matter from a customer point of view for the next couple of years and I don’t think 3G factors into that time frame. RoW: Any comments to add on the foreign ownership debate, which concluded earlier this year with the House of Commons Standing Committee on Industry, Science and Technology recommending a complete elimination of the rules? AT: I think the case is clear for at least the infrastructure that there is no gain for Canada to maintain those rules. Nobody can have the logic saying that Canada should maintain the status quo. At least the case is clear. The rest is a political question. I hope we can expect something within a year or two - hopefully as short as possible. It’s not an urgent matter as far as we’re concerned right now. We don’t have access to markets right now anyway. But we will have access to markets at some point in the future and when it happens, we hope this issue is going to be settled. MN: Our position is that we are in favour of the removal of foreign ownership limits as long as it’s done in an orderly manner and that the transition is smooth. Clearly, the rules have to be harmonious across industries that to some degree are going to compete with each other. To do it for instance with the cable industry, but not the telecommunications industry or vice versa, would in our view be wrong. Yet it’s not uncommon to hear some espouse the view that cable is different than telecom, but increasingly as you well know these industries are all in each others’ traditional marketplaces - cable selling local access and cable in high-speed Internet. And then vice versa, telecommunications companies in satellite TV. So it has to be harmonious and it has to be a smooth transition that doesn’t advantage or disadvantage one industry over the other in terms of access to capital. GC: Our position has been the government has to move prudently in assessing that impact in terms of when it goes forward. I think the real caution is to make sure whatever is done has to create an equal playing field. You can’t have a situation where some companies have access to capital in a different way than other companies. Concepts of some restrictions on some entities and not others are the sorts of things that in my view would not be the right thing and structure for the industry. It’ll be interesting to see and we’ll watch with interest as this evolves in the government. NM: Nothing beyond what’s on the public record. The next issue of Report on Wireless will feature the third and final part of our Q&A. In the final installment, the CEOs will provide their thoughts on the future of wireless data services and the impact of Wi-Fi on their businesses.

Challenges facing the Canadian wireless industry: a Q&A Part II

News | July 31, 2003

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