Consolidation wave continues in Ontario utelco market

The consolidation wave hitting Ontario's municipal telecom sector continued this month with an Oakville Hydro Corp. subsidiary's s acquisition of its neighbour, Milton Hydro. But don't expect the municipally owned utility telecom (utelco) to move into the residential market anytime soon - if ever.Milton joins the growing number of municipalities who are unloading non-core telecom network operations (NL, March 12, 2008). The past few months have seen Cogeco Cable Inc. acquire MaXess Networx, and Atria Networks purchase both Hamilton FibreWired and Telecom Ottawa.Blink Communications Inc.'s purchase of Milton Hydro earlier this month gives the company over 100 km of new fibre and up to five business clients in the coveted southern Ontario market.Blink COO and president, Troy Hare, says the acquisition provides Blink with extended reach into one of Ontario's fastest growing communities and complements its parent company's strategic goal of growing its business through diversification.Hare says his company has grown to almost four times its size since 2005, when it acquired the telecom assets of Mississauga's hydro utility. It now has over 1,100 km in its fibre optic network.Despite success in building out its fibre footprint through a program of focused acquisitions, Blink has no plans to move into the residential services market. "We've looked at things like residential and we thought this would just be too much of a distraction for us."Why some cities are cashing outIndustry analyst Iain Grant of The Seaboard Group lauds Blink's efforts to develop into a profitable niche player, but maintains the company's business strategy is akin to a "lemonade stand", when compared to other opportunities in the utelco market.In the late 1990s, he notes, a large number of Ontario-based utilities caught "gold rush" fever and aggressively moved into the telecom market with the intention of transforming themselves into significant competitors. The majority of these utility investments, which coincided with the break-up of Ontario Hydro, were ultimately destined for failure and eventual divestiture.According to Hare, "some of them weren't big enough to make it worthwhile in terms of profitability, so they just cashed out when the time was right."While a great deal of the failure of the original utelco play can be attributed to a crash in bandwidth prices, greater competition and the dot.com "nuclear winter" of 2001, Grant says many simply realized, "that looking after consumers is quite hard."While municipal providers like Oakville Hydro stayed in the game and kept its sights low, Cogeco and Atria developed far-reaching plans. "Cogeco is an interesting example of the new breed of owner looking to make investments that were becoming increasingly hard for companies like Toronto Hydro," says Grant.Grant suggests that Cogeco's purchase of Toronto Hydro in July came as a surprise to many in the telecom business. "I suspect the highest arched eyebrows were in fortress Rogers."For its part, Atria has attempted to assemble a regional consortium, acquiring the telecom operations of utilities in communities like Ottawa, Hamilton, Guelph, Kitchener, Waterloo, Barrie and Simcoe. The Atria model, notes Grant, was to control a large corridor in southern Ontario and eventually "give Bell Canada a huge run for their money" by pairing up with a national competitor like AllStream Enterprise Solutions.But, Grant maintains that Atria made a major strategic error when it significantly underbid for Toronto Hydro, and lost the "keystone" needed to transform itself into a credible regional and national player.Utelcos find their nicheDespite their less ambitious horizons, Grant says the telecom arms of municipal utility companies like Oakville Hydro have an important role to play in serving businesses, municipal government agencies and in attracting new investment to their communities."Diversity of communications infrastructures is one of those ingredients that many companies are looking for ... When you're looking at things like disaster recovery you want to make sure the communications infrastructure is not only competitive, but that you have discreet facilities."One of the greatest strengths of utelcos, he says, is that they have their own rights of way and do not share facilities with companies like Bell, Telus Corp. and Rogers Communications. This makes players like Blink attractive to companies looking for backup, recovery and business continuity services.The utelco's high capacity fibre infrastructure is also an asset. "We've got a big pipe," says Hare. "So what we try to do is develop and leverage services that take advantage of that."As wireless demand explodes in the coming years, Grant notes that backhaul services are going to become an enormous revenue generator for companies like Blink. Although it only has to fill up a portion of that fibre pipe to grow its profits, "it's never going to be the bonanza that it could be."

Consolidation wave continues in Ontario utelco market

News | August 12, 2008

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