Study warns Canadian telcos that Americans are coming

American bandwidth barons such as Qwest Communications and Level 3 Communications bringing their massive fibre networks into Canada will force the country’s telcos to expand their offerings beyond the realm of transport, according to a study by Toronto’s Convergence Consulting Group.

Bram Eiley, president of Convergence Consulting, explained how the telephone system will become commoditized.

“The telephone system works like this: either you have long strings or you have short strings or you have both. A long string goes from Toronto to Vancouver, a short string goes from me to some central office in Toronto,” Eiley said.

“The amount of long-string capacity in this country is huge and there’s going to be more of it. Then when the Americans come, there’s going to be even more of it. The short-string capacity is not as high but it’s building,” he added.

“We’re really commenting more on the long-haul aspect. It’s become commoditized and it’s reflected in the voice market and within three to five years it’ll be reflected in the data market. So if you’re running a (telco) company like this, you have to start thinking (about) what else you can do because it’s not enough to just be a transport player any more.”

Eiley said the problem stems from various companies putting down much more fibre than can be used at the moment. Furthermore, he said the new fibre utilizes Dense Wavelength Division Multiplexing (DWDM), which gives a great deal more throughput and thus makes even more bandwidth available.

“Even with bandwidth demand growing at 100 per cent per annum and Internet usage growing at 300 per cent per annum, there’s no way it’s going to catch up to the amount of capacity for three or four years, and even that would be pretty radical. It’s going to be a long time before it impacts capacity.

“In the long run, yeah, it’ll catch up. Eventually, one day, there will be enough demand. This is going to help create the on-line evolution because prices will be low enough that people can start doing things. So I’m not saying these people are crazy for [putting down so much fibre]. They’re not,” he said.

Where Eiley warns it might hurt is for those companies that have nothing to offer other than transport. But he said Bell Canada and its parent BCE Inc. are still the current force to be reckoned with and they will probably be fine.

Iain Grant, managing director of the Yankee Group in Canada in Brockville, Ont., said not only will BCE do fine against any U.S. penetration into the market, but it is actually ahead of the U.S. competition. He said the recent sale of part of Bell Canada to Ameritech is part of its forward-looking strategy.

“BCE, our foremost communications company, has recently sold some equity in what they think is yesterday’s company, Bell Canada, such that they can take the money from selling that to the Americans and invest it in what they think is further up the 21st century food chain.

“BCE is getting into a much broader communications fabric than any of the American companies. Nexxia is part of it, but so is BCE satellite services such as ExpressVu. There are a number of things going on the in the BCE family which are above and beyond transmission…I believe they’ve said they’re going to get into content in one way, shape, or form,” Grant said.

Last month, The Globe and Mail quoted Convergence Consulting’s Eiley as saying that telcos will begin to sell “cars and books.” In an interview with Network World Canada, Eiley clarified this statement by saying he believes telcos will have to get into merchandising to supplement the low-growth transport market.

“They have to do something else, because of all the reasons I’m mentioning, competition, technology, new entrants, is really being gutted. They’re going to have to look at on-line properties or systems integration. To some extent, Bell is already doing that,” he said in the interview.

Grant said BCE and Bell’s diversification already has them ahead of the game.

“We see Bell getting more into the content business as well. I don’t see them selling books and cars, but they might be selling Web site and/or programming. In that case, our Canadian companies are far ahead of their U.S. brethren,” Grant said.

Grant added that companies such as Sprint Canada have established themselves well here and will not likely be threatened by U.S. companies coming north. He said Sprint Canada being 23 per cent U.S.-owned isn’t a bad thing.

“It’s certainly not bad for Canadian owners to have more people bidding for their properties. The price goes up. Canadian shareholders should be happy to have less and less restriction on who can own facilities. We historically have had a cap on ownership for nationalistic reasons. If we only had one major network across the country, it really should be ours,” but competition can come from anywhere, Grant said.