Incumbent cellcos to experience little impact from new entrant

With an announcement on the spectrum auction rules likely coming from Industry Canada minister Jim Prentice in the next couple of weeks, financial analysts are predicting the potential impact of new competitors on Canada's wireless sector. A new report from Genuity Capital Markets, obtained by Report on Wireless, suggests the impact of new entry, regional or national, on the wireless market will be minimal. While UBS Securities Canada concludes in its report that regional players such as Videotron ltee and Shaw Communications Inc. could be successful, while national expansion from MTS Allstream Inc. doesn't make sense financially because the return wouldn't outweigh the cost. Genuity points to a number of reasons why any new entry stemming from next year's Advanced Wireless Services (AWS) spectrum auction won't be too disruptive on incumbents, including the not-so stellar track record of new entrants worldwide, the lack of success for telecom joint ventures, potential coverage problems in rural areas as well as a void in the distribution chain. The investment house contends that new entry in general doesn't have too great of an impact on incumbents, highlighting experiences in Canada with Clearnet Communications and Microcell Telecommunications as well as Hutchison's entry in the UK and Italy. Genuity notes that Clearnet had only 9% of the market when it was acquired in 2000 by Telus Mobility and Microcell, after eight years of operation, had a 9% market share when it was purchased by Rogers Communications Inc. A joint venture in Canadian wireless context could decrease the financial risks to each partner, but there are still some deficiencies to a business venture among Shaw, Videotron and MTS Allstream, according to Genuity. The investment firm notes that none of these firms count Ontario as home territory. Genuity also suggests that new entrants will have difficulties matching the incumbents' rural coverage because the spectrum up for grabs is better suited for urban areas.But for any wireless operation to be successful, distribution is critical. Genuity indicates that this is where Videotron, Shaw and MTS could have some difficulty. While MTS is well-established in its home territory of Manitoba, it will have challenges expanding beyond that market. Equally, Videotron and Shaw have considerable experience, and success, in selling pay TV, Internet and fixed voice, but "none of these segments require the extensive sales and distribution channels associated with wireless," reads Genuity's report. "Many of the best wireless distribution channels in Canada have already been secured by the wireless incumbents. For example, many of the most efficient dealer networks have been tied up with exclusivity contracts by the incumbent operators," continues Genuity. "A powerful distribution channel like The Source has an exclusive distribution agreement with Rogers Wireless. Mass retailers like Wal-Mart already carry shelves full of incumbent wireless products suggesting that a new entrant would have to fight hard for shelf space." At a high level, UBS Canada concludes that competitive entry will serve to accelerate penetration gains in the country, but at the expense of lower average revenue per user (ARPU) and higher churn. ARPU will decrease because of more aggressively priced services from the new entrants and this increased competitive activity will cause a jump in customer turn over. This will in turn raise customer acquisition costs because incumbents will have to spend more to acquire the same number of customers. Specifically, Shaw and Videotron, according to UBS Canada, have a better shot at being successful in the wireless arena. "This is largely driven by the market opportunities in their respective regions, the capital spending required, combined with their brands, the ability to offer multiple services and their existing network infrastructures," reads the report. MTS' potential in an expanded wireless offering is sketchy, says UBS. The relatively small market opportunity compared the huge costs involved in building out a national network doesn't present a solid financial business case. Rules determine impactFinancial predictions depend, however, on the rules set by the department. It is widely expected that Minister Prentice will release the rules in the next couple of weeks in time to hold the auction early next year. If there is a set aside of spectrum or mandated roaming and tower sharing the impact on incumbents could be much more acute. If, on the other hand, there is an open auction for new entrant, costs will increase dramatically potentially raising questions about the viability of a new entrant business case.

Incumbent cellcos to experience little impact from new entrant

News | October 15, 2007

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