Wireless sector facing ‘transition year’ in 2014

Carriers still finding their way under the CRTC’s wireless code will face the rollout of 700 MHz spectrum, potential new-entrant consolidation and the recalibration of domestic roaming rates in 2014, in what is poised to be a year of change, challenges and opportunities for the industry, analysts said. “We expect 2014 to be a transition year for wireless,” RBC Dominion Securities analyst Drew McReynolds said in a note to clients in late December. He said in a phone interview that the coming year will bring carriers lots to adjust to, including continuing market adjustments caused by the CRTC’s new wireless code, which caps contract lengths at two years, as opposed to the three-year contracts that had become the industry norm. “You’ll see wireless plans being tweaked as we go forward, and all with the goal of getting to the other end while kind of maintaining the economics for the carriers,” he said. McReynolds said those tweaks will not necessarily result in wireless subscribers paying more on their monthly bills, as the subsidies carriers provide to consumers who buy new handsets will also be subject to some adjustment. He added that growth in smartphone adoption is expected to slow in 2014, which means service providers will focus on converting the roughly 20 per cent of postpaid wireless subscribers who aren’t yet using smartphones. “We know probably the remaining subscribers that don’t have smartphones, they’re probably not going to be the ones buying big iPhones or the big Samsung handsets,” he said. “They’re probably going to be buying more lower- mid-end market handsets.” McReynolds said he expects carriers to continue increasing the subsidies they provide to subscribers who purchase those devices, though he added that those subsidies will grow at a slower pace than in recent years. “They’ll adjust the plans, they’ll adjust the handset subsidies accordingly, all with the goal of still making sure the lifetime cash-flow from the subscriber still makes sense,” he said. Roaming rates will also be readjusted throughout 2014, McReynolds predicted, pointing to Industry Minister James Moore’s Dec. 18 announcement that the government will amend the Telecommunications Act to cap domestic roaming fees carriers charge their competitors to what they charge their own retail customers. The CRTC’s wireless code, which came into effect Dec. 2, will also affect the revenues carriers receive from subscribers who roam on foreign providers’ networks when travelling, by capping extra monthly data costs at $100 per month, McReynolds said. He noted that several carriers have also reduced in recent months the roaming rates they charge to their subscribers. “A lot of these carriers are just trying to bring down U.S. and international roaming rates where they can, I think all for the goal of trying to provide a little bit more visibility for their customers when they’re travelling abroad so that they don’t shut off the phone because they’re fearful of a big bill at the end of it,” McReynolds said. He said market dynamics are likely to change because a fourth strong player will emerge to challenge incumbents Telus Corp., Rogers Communications Inc. and BCE Inc. in Ontario, Alberta and British Columbia. He expects that company to be Wind Mobile, or whatever it might become if Amsterdam-based, majority owner VimpelCom Ltd. sells it like it has suggested it wants to. McReynolds said both the January auction for 700 MHz, which Wind is signed up to take part in, and the company’s stated interest in purchasing Mobilicity, a new entrant in bankruptcy protection, should provide clarity around Wind’s longevity in the Canadian market. “All of this will play out in the next six months, so we’ll be standing here in a year’s time having a better picture, better visibility on how it all plays out, which has been a very fluid situation for the last six months,” he said. “(Wind) may be acquired by somebody else, but Wind will be that fourth player.” McReynolds said he doubts Verizon Communications Inc., or any other big international players, will make moves into Canada in 2014. “It always just boils down to: Is there enough in the Canadian market to justify an entry into Canada? … I think from a timing perspective, it probably makes sense, at least from Verizon’s and AT&T’s perspective, to kind of let things cool off.” He noted that AT&T has never indicated an interest in Canada’s wireless market, and it was only in September that Verizon ruled out coming to Canada. Greg MacDonald, an analyst with Macquarie Capital, said in a phone interview that it’s “extremely short-sighted to believe that Verizon spent as much time and put as much effort into the due-diligence process to assume that they have all of a sudden concluded they will never come into this market again.” He noted that Verizon, even after publicly denying an interest in Canada, registered to lobby the Canadian government and has since had contact with Canadian officials. “Anyone who thinks that Verizon is done with Canada I think is being a little naive,” he said. “I think it’s highly reasonable that you’ll hear more of Verizon in the next year.” MacDonald said when you consider that Wind’s majority owner, VimpelCom, has stated it wants a “clean exit” from Canada, it seems that the main purpose of Wind buying more spectrum and trying to purchase Mobilicity is to “bolster the value of the asset that they own so they can sell it.” Verizon could be the buyer in such a scenario, he added. Wind CEO Anthony Lacavera said in a phone interview before the holidays he expects his company to strengthen its hold as the fourth carrier in Ontario, Alberta and British Columbia, adding that the government’s policy to bolster competition seems to be working. “There is a fourth carrier in every region,” he said, noting Quebecor Inc.’s Videotron offers services in Quebec, Bragg Communications Inc.’s Eastlink does so in the Atlantic provinces, SaskTel is in Saskatchewan and Manitoba Telecom Services Inc. operates in Manitoba. “Despite all the skeptics out there, I think the government’s policy has come together.” Lacavera said he would not comment on Mobilicity, or the upcoming 700 MHz auction, due to the rules around that process. He said the wireless code that took effect late last year “forces the big guys to behave a lot more like Wind. We’ve been operating effectively under that code of conduct since inception. We’ve never had contracts. We’ve never charged overage fees. There’s never been any kind of penalty to get out of a Wind subscription.” As for what ownership structure will be in place at Wind going forward, Lacavera told The Wire Report in early December: “I think, definitively, Wind is going to exist long term. The only question is who owns it. …. It may not be called Wind. It may be called something else, ultimately, but it will exist.” The three incumbent wireless providers did not respond to a request for comments for this article. Tim Casey, an analyst with BMO Capital Markets, said in research note just before the holidays that the incumbents would spend about $450 million each per prime national block in the 700 MHz auction, with Rogers likely to spend another $100 million on less premium blocks and Telus another $450 million. In comparison, Rogers spent $999.4 million, Telus $879.9 million and Bell $740.9 million on new spectrum in 2008’s AWS auction in 2008, which lasted about eight weeks and raised $4.25 billion for the government. “Given that no large, well-capitalized foreign carrier will be bidding (read Verizon), it would seem to us that auction bidding tension and, by implication, capital allocation should be rational and disciplined,” Casey said in the note. MacDonald said regulatory issues will play a major role in 2014. On the topic of domestic roaming rates, he speculated that the government could go a step further at the conclusion of the CRTC’s consultation into the matter and perhaps introduce a tariff system for roaming, “which may or likely will be lower than the retail rates.” McReynolds said the war of words between the incumbent wireless companies and the government — which has come to a head with the incumbents’ campaign against perceived government efforts to attract Verizon to Canada, and government ads targeting the cost and quality of wireless service in Canada — should cool down later next year or, at least, the year after that. “I think the regulators do understand that there is a lot of investment that the incumbents put into the ground … so I don’t think they want to tamper with the big formula,” McReynolds said. “But will they look for ways to demonstrate to the everyday Canadian that they’re just trying to make a little bit more friendlier for customers? I think you will see that all through 2014. And as we get to the end of 2014, and maybe into 2015, I think things begin to quiet down a little bit. “But the government can then come out and say, ‘Here’s what we’ve done. It’s not game changing, necessarily, but here’s what we’ve done.’ And then the incumbents can say, ‘OK, we’re still managing through this. It’s not perfect, but we can live with it.’ ” Eamon Hoey, a telecom consultant with Hoey Associates, said the government will continue to fight the big wireless carriers to get a better deal for consumers, because it’s politically wise to do so. Areas the government could still get involved with, Hoey said, include international roaming rates on voice calls and how much people pay for local service. “The government of Canada, meaning the Conservative government, sees opportunity here,” Hoey said. “They see opportunity for votes. Somebody’s going to go to a voting booth and say, ‘You know, it’s the Conservatives that helped me on my cellular charges.’ ” — With reporting by Derek Abma at dabma@thewirereport.ca and editing by Nicholas Kyonka at nkoyonka@thewirereport.ca and Anja Karadeglija at akarad@thewirereport.ca

Wireless sector facing ‘transition year’ in 2014

News | 01/06/2014 6:58 pm EST

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