New entrants will eat into wireless markets: Report

Rogers Communications, Bell Canada and Telus are well-funded, well-entrenched incumbents in the wireless market. However, after crunching the numbers, an industry analyst has no doubt the major new winners of spectrum in the recent AWS auction will significantly – and lucratively for some – eat into their market share.

“This is game-changing,” Bram Eiley, a principal at Convergence Consulting Group of Toronto said Wednesday of the impending debut of more wireless competition.

Convergence concluded that of the new entrants, cablecos Shaw Communications of Calgary and Montreal’s Videotron, will be able to take good advantage of being able to sell to their cable customers in Western Canada and Quebec respectively, while Toronto’s Globalive Wireless, a division of long-distance dial-around provider Globalive, will be able to leverage its parent’s customers for sales.

Although the new entrants won’t likely be selling services until mid-2009 at the earliest, the consulting firm believes that by the end 2015 they will have 8.2 million subscribers, or 24 per cent of Canadian wireless market thanks to aggressive pricing.

It believes the new entrants will borrow the model of U.S. carrier MetroPCS, which has no contract unlimited talk plans with rates that rise based on extra features, such as voicemail or Web access.

There was also more bad news for Bell and Telus: The increased competition will accelerate their loss of wireline subscribers to wireless phones. The analysts forecast 50 per cent of the incumbents’ residential telephone wireline loss in 2014 will come from wireless substitution, up from 10 per cent this year.

The report did not attempt to examine the penetration of the new entrants among businesses buying wireless.

Of that 24 per cent market share, Globalive, Shaw and Videotron will each have seven per cent, Convergence predicts. And while some newcomers have mused about going into the pre-paid market, Convergence foresees that approximately three quarters of new entrant subscribers will be consumers with postpaid plans. Currently they make up 53 per cent of all Canadian wireless subscribers, and that will rise to 60 per cent by 2015.

Basically, Eiley said, his company figures the same percentage of cableco customers that moved from incumbent phone companies to cable voice over IP service will do the same for wireless.

The report also has good news for Shaw, Videotron and east-coast based Eastlink cable, owned by Bragg Communications, but bad news for Globalive Wireless. Excluding the hundreds of millions shelled out for their licences, Videotron will be EBITDA positive (that is, earnings before interest, taxes, depreciation and amortization, which is a measure of operating revenue minus expenses) in its second year, Shaw in its third year, EastLink cable in its third year, and Globalive in its fourth year of operations. The cablecos will have positive free cash flow in the third year of operations, and Globalive will be positive in its fifth year.

Convergence also believes that in their sixth year of operation, Videotron and Shaw will have positive cumulative pre-tax free cash flow; EastLink will be there in year seven.

But the report also suggests that Globalive – which doesn’t have the ability to bundle Internet, voice over IP and video products with wireless the way the cablecos do – will have a longer way to go to get out of the red than the three cablecos. Globalive will have sustained cumulative pre-tax operating free cash flow losses of approximately $1 billion by the end of its sixth year, the report says.

Globalive chief Anthony Lacavera said he hadn’t read the report and couldn’t comment on it.

It is the bundling ability, the report says, that not only gives the new wireless cablecos their strength in their home areas, but also shows the weaknesses in the incumbents. For while Rogers, Bell and Telus sell their wireless offerings nationally, their landlines limit their bundling capabilities geographically. Rogers doesn’t have cable in the West, Bell doesn’t have landlines west of the Ontario border and Telus doesn’t have landlines east of Saskatchewan.

Which is why Convergence estimates that by the end of 2015 Videotron will capture 30 per cent of the Quebec market, Shaw 23 per cent of the Alberta/B.C. market and 14.5 per cent of the Manitoba/Saskatchewan market, and EastLink19 per cent of the Atlantic market.

On the other hand Globalive Wireless, which says it will try to be a national presence, will have its biggest penetration in Ontario with 12 per cent of the market, where it will face both Rogers and Bell and their ability to offer bundles. Globalive will have less than 10 per cent share in other parts of the country, the report says.

Another new entrant, Data and Audio-Visual Entertainment (DAVE), led by satellite radio mogul John Bitove, has no telecommunications offerings and would hold five per cent of the Ontario market by the end of the survey period.

In short, Alberta,B.C. and Quebec will see the most market impact from new entrants, while Ontario will see the least. For all this, Rogers will still be Canada’s largest consumer postpaid wireless company at the end of 2015, the report adds, followed by Bell and Telus.

In its model the consulting firm did not try to make any assumptions of the newcomers merging, co-operating or trading licences, which could change its predictions.

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