Blank slate in wireless tech an opportunity: Cogeco’s Audet

Cogeco Inc.'s renewed interest in entering the wireless market is partly driven by the opportunity to jump directly into building an entirely new type of cellular network, said CEO Louis Audet. “At this point in time, the opportunity exists to start with a blank sheet of paper and leapfrog existing legacy network topology and build directly using the technologies of the future,” he said in a Thursday call with analysts. He explained that future 5G mobile networks will rely on smaller cell equipment located close to users which “can generally be mounted on cable facilities and … easily be fed by existing fibre-dense networks” without adding significant costs. Audet also pointed to the “growing frustration” by the public over the pricing of wireless services in Canada as another trend behind the Montreal-based telecom’s interest in offering wireless services within its current footprint. “This is being echoed at the government and regulatory levels. Thus, it is likely that a more favourable regulatory environment will come to be,” he said. Audet added the most likely model for Cogeco to do this is a hybrid one, which “will consist of segments relying on the model, whether negotiated or imposed, as well as some segments where we may be a facilities-based operator.” Canaccord Genuity analyst Aravinda Galappatthige said in June Shaw Communications Inc. could be a potential partner for Cogeco under a hybrid set-up. Audet said the company is interested in providing traditional wireless services like data and voice, and “inexpensively” exploring new offerings like smart city and driverless car infrastructure, and supporting the Internet of Things (IoT). Audet’s comments come as the company has made a number of moves — including buying spectrum and hiring a lobbyist with experience in the wireless industry — indicating it’s preparing to enter the wireless market. It’s currently the only Canadian publicly traded telecom not to have done so. However, that doesn’t mean it’s the top priority for the company. Audet said the wireless market will actually be third in line when it comes to allocations of capital, with spending on acquiring cable networks in the United States and on maintaining and enhancing service on existing cable networks taking precedence. Spending on wireless will involve acquiring “low-cost spectrum where it is useable by us and makes sense,” he said, noting that when it comes to the upcoming 600 MHz spectrum auction, “we will evaluate the opportunity of participating and we will only consider doing so through a partnership, whether with a current operator or otherwise.” Audet said he couldn’t go into too many specifics about what kind of additional spectrum it might need or whether the 2300 MHz and 2500 MHz it bought in recent months might be sufficient, saying that it’s too early to “get into the precise nature of components.” He added the company would “not spend much capital, but we will slowly, using the best of our abilities and using brainpower, try to come to something that works for shareholders and for customers that is reasonable,” he said. Barclays analyst Phillip Huang said in a Friday note that he applauds Cogeco’s move to explore wireless, but there are challenges associated with becoming a fifth wireless player in its territory. Cogeco would be competing not only with the Big Three wireless players but with the “the thriving 4th players” of Quebecor Inc.’s Videotron in Quebec and Shaw Communications Inc.’s Freedom Mobile in Ontario, he said. Huang noted Cogeco is smaller than those companies, and operates in less dense markets, which makes building infrastructure, especially small cells, more difficult. It also lacks spectrum and has other priorities when it comes to spending capital. That means Cogeco would “need a partner with significant scale, capital and expertise to help shoulder the formidable task of building a network.” Huang said he doesn’t currently see “sufficiently compelling reasons for either Shaw or Videotron to dilute their wireless growth opportunity and partner with on even modestly favorable terms.” Given Cogeco’s intent to prioritize spending in the U.S., and its comments about reasonable capital expenditures, Huang speculated that Cogeco “may be posturing ahead of the 600 MHz auction as part of its tactics to negotiate an MVNO arrangement” with Shaw or Quebecor. “We note that no facilities-based player in the industry’s history has been able to avoid years of big investments,” he added. “However, almost every player had underestimated the required capex at some point during their learning curve.” Desjardins Capital analyst Maher Yaghi also pointed out in a Monday note that the areas where Cogeco operates already have four players, and where "pricing pressure is already starting to put a damper on overall prices." He added that coming in "as the fifth player is likely to leave little room to make a profit; however, some benefit could come on the cable side, with potentially lower churn if the company is able to convince its own cable customers to bundle wireless." Audet made the comments as Cogeco reported its third-quarter financial results. Revenue was $668.9 million in the three months ending May 31, up 11.6 per cent from a year earlier, driven by increases in its communications, or telecom services, segment. Profit, however, was down 14.6 per cent over that time, to $70.1 million, which Cogeco said was due to “increases in depreciation and amortization and financial expense.” The communications segment reported a 12.7 per cent increase in revenues to $637.1 million, which it said was due to the January acquisition of Metrocast and broadband rate increases. The company also added 8,061 internet customers in the U.S. and Canada combined, ending the quarter with 787,007 Canadian internet customers and 420,255 U.S. customers. That’s fewer than the 11,167 it added in the same quarter last year. TV customer losses held mostly steady, at 10,049 compared to the 9,977 Cogeco shed in the same quarter last year. It ended the quarter with 699,554 Canadian TV customers and 320,298 in the U.S. For both segments, it said the lower numbers were due to factors including lower marketing and sales initiatives, which occured at the same as a new customer management system was being implemented, as well as competitive offers and “higher churn following the end of higher promotional activity in Canada.” It ended the quarter with 2.8 million customers, 1.9 million in Canada and 881,668 in the U.S. That’s up from a year earlier, when the figure was 2.5 million total, with 1.93 of those Canadian and 609,529 in the United States. — With reporting by Anja Karadeglija at akarad@thewirereport.ca and editing by Bryson Masse at bmasse@thewirereport.ca

Blank slate in wireless tech an opportunity: Cogeco’s Audet

News | July 12, 2018

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Blank slate in wireless tech an opportunity: Cogeco’s Audet

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