Incumbents slash in wake of fed ruling

Some of Canada’s telecom providers have complained that a recent government decision is forcing them to take a knife to network upgrade plans to save money – but their representatives and other industry observers say enterprise clients won’t feel the sting of that blade.

“[Telcos] have to be cognizant of the enterprise customer,” said Lawrence Surtees, director of telecom research with IDC Canada Ltd. in Toronto. “Those are the more profitable accounts, by definition. I would think any discretionary (financial) reductions should be achieved in areas that don’t get much notice.”

Carriers are reducing their capital expenditures in light of a new set of regulations that could sap millions of dollars from some telcos’ coffers.

Last month the Canadian Radio-television Telecommunications Commission (CRTC) changed the rules around local phone service in Canada. The new rules spell savings for up-and-coming competitive local exchange carriers (CLECs) like AT&T Canada Inc. But they also spell lost revenues for incumbent local exchange carriers (ILECs) such as Bell Canada. According to the new regulations, CLECs get a 10 per cent reduction in the price they pay to access networks owned by ILECs.

The CRTC’s ruling – known as the “price cap” decision – is supposed to make life less costly for the CLECs, who have long complained that they pay too much money for these connections. If a CLEC wants to offer local voice service to end users, they must access the incumbent networks. CLECs do not have local loops of their own so they pay to use incumbent wires to transport customers’ phone calls.

The CRTC’s decision may represent a discount for the CLECs; it may well even help bring competition to the local voice market, just as planned. But for the ILECs the decision is bad news. Since the CLECs now pay less to access the incumbent networks, the incumbents face the prospect of lower revenues. For some carriers, that spells slashed capital expenditure budgets and fewer network improvements.

Consider the case of Manitoba’s MTS. The company in June said its baseline earnings before interest, taxes, depreciation and amortization (EBITDA) would be approximately $5 million less than expected, thanks in part to lost income from the CLECs.

MTS said it would reduce capital expenditures by 10 per cent, or $22 million, to help save money in the coming lean times.

According to Brad Woods, the firm’s director of investor relations, some of those savings would come out of network expansions and enhancements.

“One area we are deferring capital is in our next-generation infrastructure project and broadband expansion,” he said, explaining that the network upgrades – including new fibre-optic and electronic installations – would be on hold for the moment.

But MTS’s enterprise clients shouldn’t notice a difference, Woods said. “Customers aren’t going to be disappointed, or told that although we promised service X, that’s now on the backburner.”

Bob Hafner, Toronto-based vice-president of Gartner Inc., suggested that MTS is indicative of other carriers with lower capital expenditures on tap. Network build-outs might slow down, but enterprise clients will not be starved of the services they expect.

“It’s not that they won’t deliver new services; just how far-reaching they will be is more the question,” Hafner said. “IP VPN services, for example – [carriers are] not going to slow down the deployment of them, but are they going to go into secondary and tertiary markets as quickly? No.”

He added: “There are going to be a few pain points, but the majority of customers…won’t see the difference.”

The ILECs, however, will certainly see the difference. They face losing millions of dollars now that the CRTC has made its price cap decision. And the situation is compounded by another problem – ironically, a problem brought about by the very customers the telcos aim to please: enterprises’ low interest in data services.

MTS’s Woods said his company is seeing soft demand for such offerings. It seems that despite high hopes for this area of business, enterprise customers are not clamouring for advanced data offerings. “We are seeing some lower levels of demand than we had anticipated in our forecast,” Woods said.

The situation holds true for another telco. Bell Canada’s parent company likewise blamed the soft data market for its recent capital expenditure cuts. During a press conference, BCE Inc.’s president Michael Sabia said, “In the enterprise sector there’s a lot of caution with respect to the macro economic picture.” As a result, businesses aren’t buying enhanced data services, he said.

But Sabia also pointed an accusatory finger at the government’s new rules, saying the price cap decision would drain $250 million from Bell’s coffers this year and $1 billion over the next four years. As a result, the company plans to cut its capital expenses by $300 million, Sabia said.

So are the telcos slashing costs because of the government’s price cap decision? Or are they using the new regulatory regime as a scapegoat to make up for unrealistic expectations in the data services market?

Surtees from IDC Canada said he wondered about that himself. Consider the case of Telus Corp., which handed out “voluntary departure packages” to some 11,000 unionized employees in Alberta and B.C. soon after the Commission handed down its new rules.

Surtees said it’s a suspicious move. “It’s convenient to announce it and have it as a reaction to the price cap ruling when I don’t think it has much to do with the price cap decision. If your costs are out of whack and you’re bloated, you’re bloated. What do price caps have to do with that?”

Willie Grieve, Telus’ vice-president of government regulatory affairs, said the price cap change is simply the final straw. An earlier CRTC decision also helped eat away at Telus’ bank account: the “rebanding” decree altered the way in which telcos calculate their costs and ultimately affected the rates that they can charge. Grieve said that this, combined with increased competition and the Commission’s latest rules pose a big problem for the telco.

“We’re getting more competition,” Grieve said. “There are technological changes that have an effect on the workforce. You have this series of CRTC decisions, all of which have really had a significant impact on the company.”

So the CRTC is not all to blame for changes at Telus, he said. “The company still has to go through a process of streamlining for efficiency that it would have to go through anyway. How quickly we would need to do it is another question. If in the rebanding decision the CRTC had not cut the legs out from under the company…perhaps we’d be doing things differently.”

Grieve said Telus is considering capital expenditure cuts but added that they would not affect the company’s ability to serve enterprise clients.

“We need to maintain our service levels with our customers and we will certainly attempt to do so and meet the demand out there.”

Surtees said Telus’s customers might see a small change in service levels when the staffers go. But no matter the outcome of the payroll purge, he added that the company – and every other Canadian telco – would be smart to mind the enterprise. If business clients are ignored, carriers might “drive them into the open arms” of a competitor, he said.