INDUSTRIES CONSOLIDATE. All industries. That’s the natural growth path. The big get bigger. If you doubt that, check the retail, mining, automotive, heck, any sector. Shareholders decide to divest, or need to divest and sell to the highest bidder. Sometimes they go bust. That’s our global economy.
So at this point, we have to accept the fact that unless we are going to slap some mighty regulations on wireless, all but nationalize the networks and force-feed Canadians many carriers (all of whom would then be undercapitalized weaklings), our market is not going to develop any more telecom companies. It’s too expensive for investors. The challenges, as we have seen, are far too great.
(This is part II of a commentary piece on the Canadian wireless industry we began on Tuesday. Click here to read part I)
Even if we completely opened up the borders to foreign investment with no restrictions, and the Vodaphones, Verizons and VimpelComs of the world wanted to really attack our small market, they would BUY one of the big three, not build from the start. That’s been tried. It’s not working. When or if Wind and Mobilicity do put a merger together, as has been constantly speculated, raise your hand if you think that merged entity will soon enough be owned by Rogers, Bell or Telus anyway, once the rules governing to whom they can sell their AWS spectrum expire in 2014. Hmmm. I see everyone’s hands…
Since we all like market comparisons, here are a few things worth noting when it comes to wireless in Canada versus the rest of the world. The 30th-largest global cell company, by number of customers, is Turkcell. It has nearly twice as many wireless customers (64.8 million at the end of 2011, the company’s most recently published annual report) in the nine countries it operates than there are Canadian citizens. It has over 35 million subs in Turkey alone. Remember, they are the 30th-largest global company. Canada is a tiny market on a global telecom scale, with three entrenched companies serving a protected market spread over the second-largest land mass in the world. Viewed through those metrics, Canada is not an attractive place to invest risk capital since far more growth is going to come from other developing regions with huge populations.
That’s the prevailing wisdom, anyway. However, 2011 revenue at Turkcell shows a company earning $5.3 billion in revenue from its then-64.8 million subs. In Canada Telus, for example, posted $10.4 billion in revenue in 2011, which included $5.4 billion just from its 7.3 million wireless customers. That means Telus earned as much revenue from a subscriber base 11% the size of Turkcell. So, while we’re not a big market, with Telus earning about $740 a year in average revenue per user in 2011 vs. $82 in ARPU at Turkcell, Canada surely is a far richer market, quite worthy of investment.
Finally, when you look at other western markets, we are already in the sweet spot when it comes to the number of carriers. In the U.S. there are really only two strong, national brands in AT&T and Verizon, with Sprint and T-Mobile struggling. Sprint and T-Mobile customer numbers don’t even add up to half of the approximately 215 million subscriber accounts reported by Verizon and AT&T. Overseas, in the U.K. there are three strong ones (EE, a Deutsche Telecom/France Telecom JV which pushes the T-Mobile and Orange brands; O2, owned by Spain’s Telefonica; and Vodaphone) and a much smaller fourth operator. In France, Orange and SFR control about 70% of the mobile market with third place Bouyges Group holding less than half the number of subs as either of the big two. In Australia, Telstra, Optus and Vodaphone control just about 100% of the mobile phone market there.
In Turkey there are three, where the two smaller competitors combined, Vodaphone and Avea, have fewer customers than Turkcell. And those three companies control 100% of the market.
What does all this mean? It means that despite the half-measures the federal government attempted back in 2008, we’re just about all we’re ever going to be on the wireless front in Canada. The CRTC is bang-on in pursuing a wireless code of conduct for Canadians (that hearing begins Monday and we will provide extensive coverage) because when three companies serving a market that is so vital to all of us – and where growth will soon flatten out – there needs to be some guidelines on how to treat customers properly, to provide them with clear contract language, easier choices and far fewer surprises.
But no code, no new auction – assuming Industry Canada does get moving on the 700 MHz auction so it really happens this year – is going to help the wireless companies that launched in 2009-10 more than the liberalization of the foreign investment rules would have, back in 2007. (An iPhone which works on AWS spectrum would surely have helped, too, but that’s not forthcoming either. That means those who want the coolest smart phone there is, can not also be customers of Wind, Mobilicity, Videotron or EastLink, when they launch. That hurts. A 2012 survey by Solutions Research Group said 46% of Canadians reported their next smart phone purchase would be an iPhone, meaning half the market isn`t even an option for the those companies.)
Do I wish there were as many choices in where I can get a smartphone as where I can get a pear? Sure. But running a wireless net and ensuring the connectivity and productivity of millions of Canadians is far more expensive, labour intensive and complex than growing a pear tree or setting up a fruit stand. That complexity and cost has meant the players are naturally few in wireless, while in the pear business, there are dozens, if not hundreds, of places where I can get a ripe Bartlett. That means as competitive as the wireless business is, the market discipline on a product like a pear is much harsher. There are no pear contracts. No store access fees. No penalties for switching pear providers and metrics like ARPU and margins are way lower.
So, to make sure it’s fair, to make sure Canadians (many of whom are angry) feel treated right by their wireless provider, the Commission will hammer out a code of conduct for us all starting Monday. The circumstances of overall economy, the wireless business in general and the federal government’s unwillingness to open the borders to foreign money until it was too late all set the scene for this hearing. The Commission is tasked with setting the market discipline for wireless.
