Business market growth elusive for some telecoms

Canadian telecommunications providers are looking to the business market to pick up the slack from the increasingly competitive consumer space, yet financial data from the incumbent service providers shows, in the opinion of one analyst, that competing in that low-margin segment is a challenge. Macquarie Capital Markets analyst Greg MacDonald said that entering the business market as a new competitor would be "very, very difficult" but that there could be opportunities in serving small businesses. "Your competitive advantage has to be either customer service, or unique product offerings, or probably both," he said in a phone interview. "By and large, enterprise business is a scale game. Your unit price is not high.” According to CRTC data, growth in revenues from providing telecommunications services to businesses has lagged behind growth on the consumer side. The regulator said in its most recent communications monitoring report that revenue for business Internet services grew by 3.4 per cent a year between 2009 and 2013, the most recent year for which statistics are available. In the same period, revenues from residential Internet access grew 8.5 per cent per year. The data also showed that business telephone revenues have declined by an average of 3.2 per cent a year since 2009, although they rose 1.2 per cent in 2013. “Enterprise performance is closely tied to the economy,” MacDonald said. “To the extent that you've had exposure in areas that are not Western Canada, the growth's been sluggish, since 2008 in particular.” Last May, Rogers Communications Inc. CEO Guy Laurence announced a corporate reorganization that divided the company into separate business and consumer-focused divisions. In November, the company poached Nitin Kawale from Cisco Systems Inc. to head its enterprise arm. MacDonald said the large-enterprise segment, which involves selling services to the biggest organizations in Canada, including the federal and provincial governments and the country's five largest banks, has traditionally been the domain of large telephone incumbents such as BCE Inc., Telus Corp. and Manitoba Telecommunications Services Inc.’s Allstream. While the customer service needs of small- and mid-sized businesses can be served by call centres, he said, larger clients need specialized and dedicated sales and service teams. Yet both the telcos and cable companies, such as Rogers, are looking outside their traditional business for growth, he said. “Now, the problem is all these industries are maturing,” he said. “The opportunity for expanding your addressable market is very important.” MacDonald said the profit margins from selling to the large enterprise market are often far lower than those from selling to consumers. "These guys have serious buying power, big budgets and are in as good a position as any globally in terms of the relationship between the telco and the corporate customer," he said. "It's a stable business, but it's a low, very low-growth business by definition.” Advances in technology such as voice-over-IP phone services have reduced costs, MacDonald said, though the strong negotiating power of large enterprise customers means those savings have reduced prices, not increased profits for the providers. Telecom companies are now offering products such as data centres and consulting services bundled with network access, and MacDonald said the shift is in part an attempt to "tread water" as the companies lose subscribers from their traditional wireline services, such as landline phones. Primus Telecommunications Canada Inc. is looking to grow its sales in the business market by focusing on small businesses, senior vice-president of marketing Brad Fisher said in a phone interview. “In our view, small business aren't adequately served and they tell us that they don't feel they're getting the necessary attention at the individual level,” he said. “The larger suppliers of communications services and data connectivity tend to focus above that range.” Fisher said the company is a nationwide service provider "with a rich set of services and capabilities," yet it remains small enough relative to the larger incumbents that they can relate to and meet the needs of smaller businesses. "We're reachable," he said. "That's where we're different. Our CEO will come out on sales calls to meet with customers. We have a real sweet spot where we're more nimble, more accessible than some of the incumbents, but we're big enough to be a trusted adviser, to be counted on as a national provider." On Tuesday, the company said it had expanded the availability of its voice-over IP telephone service for businesses to dozens of communities outside of the major cities, roughly quadrupling the size of its footprint to cover 80 per cent of the Canadian population. Fisher said the company also offers cloud-hosted phone systems, including call centres, to its business clients, as well as fibre connectivity and carrier ethernet in several urban centres such as Montreal, Toronto and Vancouver. Fisher said his company could avoid some of the challenges larger companies face because Primus is not invested in the older “legacy” services that are declining in popularity. "There's more upside for Primus because we don't have the same downdraft from legacy business customers disconnecting," he said. "We've got a different starting point. And because we're smaller, we're more able to respond to changes in technology. It gives us the ability to be a little more agile as the needs of small businesses change in terms of their connectivity and communications services.” David Kozicz, vice-president of business solutions marketing at Telus, said in a phone interview that his company also sees a “big opportunity” in the small- and mid-sized business market. “We can provide some of the new enabling technologies allow them to enjoy services that, until very recently, were only in the domain of large enterprises that could afford premise-based solutions,” he said. He admitted that the business market is not as simple as selling services to the average consumer. “We understand that it's a very dynamic ecosystem where things change rapidly,” he said. Kozicz pointed to the numerous predictions about the growth in data usage on the consumer side — a report from Cisco Systems Inc. released Wednesday said the amount of data transmitted on Canadian mobile networks would increase sevenfold between 2014 and 2019 — and said he expects to see similar growth on the business side. "As businesses move to more cloud-based services, they too will face the data tsunami and need have more bandwidth," he said. Cloud-based services such as storage, accounting and management tools are increasing demand for bandwidth, he said, while companies are increasingly using communications services such as video calling to collaborate on projects and interact with customers and suppliers. “Companies are buying software packages, whether it be from Microsoft Corp. or others, that work on a cloud basis and demand higher bandwidth and, notably, more reliable bandwidth,” he said, adding that Telus uses its wireless network as a “resilient backup” to the wireline network. Telus, Kozicz said, also provides its own “integrated end-to-end solution” for cloud storage and other business services, which include a “unified communications” solution provided in partnership with Cisco. Cloud services provide a new kind of flexibility for smaller businesses, he said. "They're buying them as they consume, what is appropriate for the amount they consume, rather than buying the gear themselves," he said. "We've done that, and we're offering the services to them through the cloud. And those come with the option of integrating it into our mobility service and Telus' wholly owned offerings." Kozicz also pointed to Telus' Internet of Things marketplace, launchedin December, as another way the company sells to businesses, for example by setting up a system for restaurant owners to monitor fridge temperatures in order to comply with health and food safety regulations. "It's all about using the network to simplify business practices for the small- and mid-sized organizations," he said. Telus does not list the performance of its business units in its public financial reports. Rogers’ business solutions, which includes the communications services it sells to “medium and large enterprises, governments and financial institutions,” made $382 million in revenue last year, according to the company’s financial filings. In its most recent financial report, the company said its business solutions revenue shrank one per cent in the quarter from a year earlier, although it was up two per cent for the whole year. The same division brought in $360 million in revenue in 2013, up from the $351 million it made in 2012 but down from the $405 million in revenue in 2011. Rogers said the decline between 2011 and 2012 was due to a switchover from legacy business services to higher margin services that it delivers over the Internet. Shaw Communications Inc. also reorganized its corporate structure in 2014 to emphasize its business operations, creating a business network services division on Sept. 1. Shaw said in its most recent quarterly report that revenue for the business network services division was up 6.7 per cent in the three-month period ending Nov. 30, compared to the same quarter in 2013. Revenue increased 2.1 per cent from the previous quarter and the company said it saw customer growth in both the small/medium- and large-enterprise markets. BCE Inc. saw its revenues from business services decline in the most recent quarter for which results are available. The company does not release detailed results for its business markets unit, yet said in its shareholder report for the quarter ending Sept. 30, 2014 that revenue from that unit saw a year-on-year decline because of reduced demand for traditional phone lines, competition in the marketplace and “lower sales of business service solutions and data products to large enterprise customers.” In its last annual report, released in March 2014, Bell said it was pursuing “heavy investment in data hosting, cloud computing, and other leading-edge business communications services,” and that it provides communications services to 96 of Canada’s top 100 largest companies. In the report, Bell said the shift to Internet protocol-based delivery of all types of business communications services is an opportunity for telecom providers. “The development of IP-based platforms, which provide combined IP voice, data and video solutions, creates potential cost efficiencies that compensate, in part, for reduced margins resulting from the continuing shift from legacy to IP-based services,” the company said. “The evolution of IT has created significant opportunities for Bell Business Markets, such as cloud services and data hosting, that can have greater business impact than traditional telecommunications services.” — With reporting by Peter Henderson at phenderson@thewirereport.ca and editing by Derek Abma at dabma@thewirereport.ca

Business market growth elusive for some telecoms

News | February 3, 2015

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