Difficult times ahead for Canadian wireless sector, investors warn

The Canadian wireless industry is in for some tough times, according to two industry analysts. Speaking at Insight's 5th Canadian Telecommunications Forum conference in Ottawa this week, Dvia Ghose, of Genuity Capital Markets, and Jeff Fan, of UBS Securities Canada, said the incumbent mobile operators are going to suffer from lower revenue per user and profitability as a result of the wireless industry's changing dynamics.Both suggested that the elimination of the system access fee (SAF) on the Big Three's discount brands - Solo for Bell Mobility, Fido for Rogers Wireless and Koodo for Telus Mobility - as well as price competition from new entrants will negatively affect revenue growth for the next number of years. Some of the incumbent wireless players are already experiencing flat or slightly lower average revenue user (ARPU) rates.Ghose said that the impact on revenue won't be contained to the low-end of the market, pointing to the affect that a $200 iPhone is having on the smartphone pricing in Canada. "Apparently, if you want a PDA, life could not better today because the carriers are bending over backwards to subsidize them for you," he said.This situation was brought to bear when, as Ghose described it, "Rogers was forced to sell the 8G iPhone for $199.99." At that price, the subsidy is about $400 per unit."The problem is that the iPhone is so iconic that now it becomes very difficult sell any other PDA or smartphone above $200 and that's putting massive subsidy pressure on the whole industry. You've seen that not just at Rogers and not just at AT&T, Bell and Telus are now aggressively subsidizing smartphones," Ghose explained. "I think things will be even more interesting in 2010 when Telus and Bell launch their HSPA overlay and start getting the same devices as Rogers at the same time."The Genuity analyst points to the carriers' third quarter financial results as a sign of things to come for the Canadian wireless sector. Earnings before interest, tax, depreciation and amortization (EBITDA) was down 445 basis points (4.45%) year over year for the industry and wireless generated 2% of growth to the industry's EBITDA."I don't think this a one quarter phenomenon. I think this will go on for some time, not only because of the subsidy question initially, but on a going forward basis because of ARPU declines and going further because of new entrant competition which will put further pressure on margins," he said.Fan noted, however, that it's not all doom and gloom as has been promoted by some industry analysts. He pointed out during his presentation that the downward trend in per user revenue and profitability will continue over the next four years but recover by about 2015. The entry of new wireless players from the Advanced Wireless Services (AWS) spectrum auction will have a negative impact on ARPU in the short term, he said, but "because Canada still has a low penetration rate, we expect to see about 5.5% growth over the next 7 or 8 years."He also highlighted the fact that Canadians' wireless voice usage is still far below that of the US carriers, meaning there is significant room to grow on this front. Voice usage is between 400 and 500 minutes per month, while in the US, it's at about 850 minutes. "There is still usage growth. There is still price elasticity, meaning as price comes down, we're going to see greater usage, which helps support voice ARPU a little bit," Fan explained.

Difficult times ahead for Canadian wireless sector, investors warn

News | November 27, 2008

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