Telecom industry better than worse and worse than great: LYA study

Here’s a conundrum for you: If, as the Montreal consultant firm Lemay-Yates Associates Inc. (LYA) says, businesses increasingly turn to CLECs for low-cost, high-performance phone service, why have so few managed to survive the last few years?

The answer, according to LYA’s report “Canadian Telecom Markets 2001,” lies with the victims themselves: CLECS put each other out of business.

“There was a lot of entry (to the market) at the same time, and the price decreases (for their services) have hurt quite a bit,” said Johanne Lemay, LYA’s co-president. “They’re left with very little margin.”

Competition wasn’t the only factor in the demise of some telecom newcomers. The investment fallout of 2000, which saw stock jockeys sober up and pull back on everything tech-related, didn’t help either. Many a CLEC fell from hyped heights into ripped safety nets when the capital cash flow quit.

Lemay said that some blame rests with the CRTC, which regulated CLECs out of the market. The government’s moves were “counter to what the objective was, to introduce and have sustainable competition. You have some regulatory issues…that were introduced by the CRTC which turned out to be maybe more favourable to the incumbents.”

When it deregulated the local telephone industry in the late ’90s, the CRTC squeezed contribution charges from CLECs. These charges were supposed to help pay for the below-cost phone service incumbent carriers were providing in rural and remote areas, but Lemay said the per-minute charge was tough on competitors.

“Mind you, there’s been a lot of change over the last year and there’s more to come,” Lemay said. “But sometimes it’s too little too late, certainly for some of these carriers.”

Recently the CRTC reconsidered its contribution charge and opted to take a percentage of each competitor’s revenue instead. It’s easier on CLECs than the per-minute plan was, but it’s still an issue, Lemay said.

The CRTC also gets heat for its handling of price caps. The regulator put a ceiling on prices for business customers, where competition would have kept prices low anyway, Lemay said. She figures the status quo here won’t last much longer as the CRTC recognizes the error of its ways.

Indeed, not all is lost, according to Lemay. “We see continued and sustained growth” in the telecom industry, she said. The numbers suggest that the industry as a whole is “a little impacted by the current recession, but not that much.”

LYA said telecom meant $35 billion to Canada’s economy in 2001 and the industry should grow nine per cent each year to 2006. Revenues for ISPs grew 30 per cent during the first half of this year over last, and revenues for mobile carriers increased 15 per cent.

However, when it comes to revenue-per-unit (RPU), mobile carriers merely hold their own these days. That is, carriers saw only a minor drop in RPU.

“It’s a lot better than before,” Lemay said. “For a few years we had a 10 per cent per-year decrease. This trend (of decreasing RPU) is close to a stop. That’s a positive for the industry.”

LYA compiled its report from second-quarter 2001 numbers – that’s pre-Sept. 11. “A lot of things have changed since the end of June, 2001,” Lemay said, and the consultants don’t have an analysis of the second half of 2001 yet.

Still, despite appearances to the contrary, the industry was healthy during the first half of the year. For example, like mobile carriers, long-distance service providers saw an improvement in erstwhile faltering fortunes.

“It’s not that we’re not seeing any decrease in long-distance (prices), we’re seeing a slowdown in the decrease,” Lemay said. “And that’s also a positive sign… Long distance prices per minute have been in freefall for the last few years. That’s what has been hurting a lot of the new entrants.”

LYA sought input from companies across the country, to gain a better understanding of how disparate areas operate, but the report noted little dissimilarity. Lemay said that despite geographical and supposed cultural differences between east and west, the telecommunications landscape stands homogeneous.

As for the CLECs, at least one has paved an alternate route to success. Lemay said Montreal-based Microcell Telecommunications Inc., which operates the Fido mobile phone network, has garnered a following among students and young, often-moving urbanites for whom landline service is impractical.

Still, businesses prefer landline service for reliability, Lemay said. Wireless carriers must prove their coverage is capable of handling the demands of business before enterprises consider going mobile.