Bullet-point Brief: The outlook for telcos

The Conference Board of Canada recently released its report on the state of telecom in Canada, Canadian Industrial Outlook Spring 2008: Canada’s Telcommunications Industry. Study author Michael Burt, associate director of Industrial Outlook, picked out the high notes in an interview with Network World Canada.

* Healthy, but …: “The message is, the industry overall is experiencing healthy growth,” Burt said. Healthy, perhaps, but modest, with sales rising 2.4 per cent in 2007 and another 2.6 per cent forecast for this year. The industry is “strongly profitable,” he said, but … well, there are a few buts.

* Changing channels: There are many changes in the market, especially in terms of market share among the various channels for delivery. Mobile phone subscriber numbers are growing at more than eight per cent per year, whereas fixed lines – at least, voice-grade equivalent fixed lines – peaked in 2001 and continue to fall at three to four per cent per year. “By that measure, (mobile phone subscriptions) actually did pass (fixed lines) in 2007,” Burt said. And voice over IP and cable telephony offerings are also eroding the wireline market. The average annual wireline spend per year has fallen by more than $100 since 2003.

* Smart money: “We’re seeing an increase in the share of smart phones (among mobile phone subscribers,” he said. And the services these phones consume – e-mail, Internet and other data services, text messaging – are where the money’s at for the industry. “What’s motivating growth in the industry is the increasing demand for these premium services,” Burt said.

* Labour and productivity: A tight labour market, with unemployment hovering around a 33-year-low, means higher wages. On the one hand, for a service industry, telecom spends a relatively low proportion on wages – it’s capital-expense-intensive, Burt says. On the other hand, the information and culture industries sector has the lowest unemployment of all, and has been falling faster. The decline in IT program enrolment since 2001 won’t help, either. Telecom companies have been able to counter this to an extent by squeezing more productivity out of workers – there was a surge in productivity over the first few years of the century, and output per worker in 2007 (almost $160,000 GDP) was double what it was in 1999 – but that won’t been sustainable. “There’s no guarantee they can continue to do that,” Burt said.

* Competitive pressure: The AWS spectrum auction – which virtually guarantees there will be a new entry on the wireless scene – is putting a damper on price forecasts. “It’s part of the reason we have a pretty weak outlook on rice,” Burt said. “We have pricing as basically flat.”

* Loonie losing ground: Telcos won’t be benefiting from the strong Canadian dollar. With telecom equipment priced in U.S. dollars, the loonie’s strength has been a boon for telcos, but it will weaken modestly this year, neutralizing that advantage, Burt said.

* The quick picture, financially: Revenues should grow 3.1 per cent in 2008, and an average of 3.3 per cent from 2009 through 2012. Costs will rise faster at 3.4 per cent in 2008, and 3.6 per cent over the next three years, as rising wages, a falling dollar and higher interest rates take their toll. With pressure on margins from increased competition, rising costs and practically no price appreciation, expects profits to grow by no more than 1.5 per cent over the next five years.

* The Big 3: No surprises among the top telcos in revenue, with BCE Inc. ($20.3 billion), Rogers Communications Inc. ($10.1 billion) and Telus Corp. ($9.1 billion) leading the pack.

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