New CRTC wholesale rules won’t change telco FTTH strategies: analysts

A day after the CRTC said it would mandate wholesale access to fibre-to-the-home (FTTH) networks by small ISPs, financial analysts said the move likely won’t have a significant impact on investments in FTTH networks by large telecoms. The CRTC’s new ‘disaggregated’ wholesale system, announced yesterday as part of the regulator’s decision on a review of the wholesale wireline regime, will include access to FTTH and will be implemented in Ontario and Quebec first. The CRTC expects it to be in place by late 2016, following two consultations. That means BCE Inc. will be the first to feel the impact of the decision, Barclays Capital analyst Phillip Huang said, noting that 90 per cent of Canadian wholesale ISPs are in Ontario and Quebec. Huang said he would be surprised if the pricing for the new system, which will be determined in the consultations, “is set at a level that would result in the telcos significantly altering their current” fibre strategy. The CRTC is not changing the wholesale pricing framework that is already in place, he added. RBC Dominion Securities analyst Drew McReynolds pointed out in a research note the new rules will affect telcos more than cablecos because the former have invested more in deploying FTTH and rely more on FTTH to remain competitive. While cable companies like Rogers Communications Inc., Cogeco Cable Inc. and Quebecor Inc. “are not immune to incremental transition costs and risks, this decision disproportionately impacts BCE given the company’s geographic footprint and unmatched scale of FTTH deployment,” he said. He noted that while Telus Corp., has invested as much into FTTH as its fellow telco Bell, it will not be affected as quickly given its operating territory is outside of Ontario and Quebec. Bell declined to comment and Telus did not respond Thursday. Cogeco spokeswoman Nancy Bouffard said in an email Thursday that Cogeco “will adapt its activities in accordance with the measures announced yesterday,” and said the company finds it “difficult to understand why the CRTC did not take such a pro-consumer stance in its May 2015 decision regarding the wholesale mobile wireless services in Canada as it did yesterday on its wholesale wireline announcement.” In that decision, the CRTC opted not to fully regulate access for mobile virtual network operators, as Cogeco had asked. When asked for comment, Rogers’ spokesman Kevin Spafford forwarded remarks made by Rogers CEO Guy Laurence during the company’s quarterly earnings call Thursday morning, who said the new rules will create a “more level playing field between cablecos and telcos.” Laurence added: “Assuming the CRTC gets the cost models right, we see little risk that the overall regime will hinder continued network investments by incumbent providers. Over time, it also seems that the decision will require re-sellers to invest more in infrastructure which is a fairer sharing of the required costs and is more consistent with a facilities-based competition model.” The decision was a “real surprise,” McReynolds said, since while mandated access to FTTH was “ultimately expected,” he didn’t expect it during the “very early stages FTTH deployment in Canada,” which at this point covers an estimated 22 per cent of Bell’s footprint and seven per cent of Telus’. The impact should be manageable, he said. McReynolds said that while “many investors are questioning whether accelerating the deployment of fibre is the optimal use of excess capital for the telcos,” and the CRTC’s earlier-than-expected decision “negatively impacts the visibility on FTTH deployment and the return on investment,” he does not expect the telcos to “materially modify near-term FTTH deployment plans” as a result the decision. At the same time, he added, “the ability to identify the most “economically optimal path forward” in order to maximize returns for investors has undoubtedly become more challenging.” Cannacord Genuity analyst Aravinda Galappatthige said that while mandated access to FTTH could slow down investment in FTTH networks, that slowdown is not likely to be material. “This is because is essential for the telcos to compete with their cable competitors. We also note that the CRTC has clearly indicated in their decision that the new model ‘would be predicated on wholesale rates that are compensatory and that provide a reasonable rate of return, resulting in profit on the associated investment’.” Galappatthige said he also questioned how much “this truly changes the game for the re-sellers.” That’s because the eventual rates have yet to be determined, and the disaggregated model complicates the small ISPs' business model, because they will, under the new system, have to either lease or build their own “middle mile” infrastructure. The current “aggregated” system allows small ISPs to lease all the facilities they need to provide Internet access to their customers without having to invest in their own infrastructure. “If the lease option is not adequately economic, they may have to build these facilities themselves, which we know could be extremely capex heavy,” he said. Greg MacDonald, telecommunications analyst with Macquarie Capital Markets said the decision could, over time, limit the pricing power of the incumbents. “Overall, we view this decision to be a negative for incumbents as it gives the larger resellers ability to maintain control of their costs and therefore continue to offer high-usage broadband products with a discount pricing strategy. We think the existence of strong resellers is of strategic importance to the regulator and government as a way of assuring retail price control,” he said. “That said, we do not expect any immediate price war as a result of the decision since the phase II costing mechanism for determining wholesale access is not changing. In that sense, the decision is not as bad as it could have been for incumbents.” He also said that incumbents won’t stop investing in networks because the market share of the wholesalers is still small, at eight per cent, and the “investments are needed to compete against the real threat, the other incumbent.” That echoed comments CRTC chairman Jean-Pierre Blais made during an interview with the Wire Report Wednesday, when he noted the regulator wasn’t persuaded the telcos would stop investing in FTTH because they need to do so to compete with their cable rivals. MacDonald said the CRTC’s decision means the “regulatory backdrop has now created an environment for new entrants to have a greater impact on the market just as it appears both wireline and wireless is maturing. Like , we think gains a greater ability to raise capital and expand its broadband offering as a result of this decision.” Small ISPs, including TekSavvy Solutions Inc., praised the CRTC’s decision yesterday, saying it would give them more flexibility and lower their costs. Scotia Capital analyst Jeff Fan called the decision “balanced” in a research note. “The CRTC maintains its ‘consumer friendly’ perception and the wholesale competitors earned some ‘wins,’ but ultimately, the current wholesale rate-setting methodology is unchanged.” While Bell and Telus will “not likely be too pleased” with the decision, he said, “all the CRTC has done is expand the regulation to all Internet services regardless of the technology. All cablecos’ Internet access is already regulated, which means this levels the regulation between the two types of ISPs.” He estimated that 70 to 90 per cent of homes serviced by Bell and Telus already fall under the CRTC’s current wholesale regime, which includes fibre-to-the-node networks. “Hence, we do not believe the expansion is that significant,” he said, noting that Bell’s FTTH footprint is largely in Atlantic Canada, which “currently has no wholesale competitor.” — With reporting by Anja Karadeglija at akarad@thewirereport.caand editing by Shruti Shekar at sshekar@thewirereport.ca.

New CRTC wholesale rules won’t change telco FTTH strategies: analysts

News | July 23, 2015

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