“EVERYBODY’S STARTING TO realize that this market isn’t what we thought it was going to be,” said Alek Krstajic, president and CEO of upstart Canadian wireless company Public Mobile.
The wireless business is a very tough game. It’s extremely costly to build out, quite difficult to convince customers to switch service providers, incumbent carriers have been ruthless and access to spectrum, especially the good stuff, looks to be a problem. Those reasons and a few others make it appear like a round of consolidation among the three new independent wireless providers is close at hand, likely before the 700 MHz wireless spectrum auction scheduled for 2013.
The three leaders of Public, Wind Mobile and Mobilicity each spoke at the Scotiabank Global Banking and Markets 2013 Telecom and Cable Conference in Toronto on Tuesday and left no doubt the only questions surrounding consolidation is when it will happen (and that the answer is: pretty darn soon), and who will lead it.
Wind’s CEO Tony Lacavera, normally an ebullient sort, was downright gloomy about the prospects of the business, in light of the 700 MHz auction rules Industry Canada released back in April. Dividing up the prime bands available into four chunks, it’s almost as though the government wants the three new players to become one. This particular spectrum is prized spectrum as it covers great distances and easily penetrates buildings.
“Our view is that the government did an unfortunate thing by dividing up those prime bands into four. We do not have sufficient spectrum to roll out LTE with comparable speeds to the incumbents, so we are now at a definitive structural disadvantage, and this is a major concern,” Lacavera said. He and the company had been very vocal about the need for the government to set aside 20 MHz of spectrum for new players, but it instead Industry Canada capped the amount of spectrum any one company can purchase.
“The government has to acknowledge the problem that there’s a clear spectrum allocation problem in this country, and the solution of the 700 doesn’t move the needle in the right direction,” he added, noting that 90% of the spectrum already allocated is already in the hands of incumbent providers.
Lacavera noted that Wind’s business is moving in the right direction and building momentum, with over 510,000 customers at the end of the third quarter of 2012 (but that is far off the 1.5 million-customers the company wanted to have by this point in time), but the CEO’s usual bravado where he’d say Wind would be a consolidator and that his financial backer, the giant global telecom company Vimpelcom, was firmly committed to Canada was missing when he spoke Tuesday.
“Obviously, (Vimpelcom) are very sophisticated investors, and they can see that we have a structural disadvantage, long term, to the incumbents,” Lacavera explained when asked by Scotiabank analyst Jeff Fan. “With the reality that we just do not today, and cannot, clearly acquire sufficient spectrum to roll out LTE, and the government just made decisions that are further solidifying that disadvantage… I think that from our perspective as a management team, our challenge is to convince them that there is a path, there is a solution long-term for the spectrum question, and that’s where we’re focused today.”
The other key aspect to this is timing. Next year (2013) is the final year which the incumbents must keep their hands off of Wind, Public or Mobilicity. Industry Canada dictated that set aside spectrum purchased in the 2008 auction by those newcomers could not be sold to an incumbent for five years, although they could sell to each other. However, with the auction coming up next year, there will be another five-year moratorium on shifting the spectrum licenses acquired in the 700 auction from one company to another.
In stating that Public will definitely be in on bidding in the next auction, Krstajic added: “The question is really who else shows up to bid. I think if you have a track record to be able to raise the money to bid, then you will. If you don’t have the balance sheet to support it, then maybe you won’t, or if you’re looking to get out of the business… I think if people are looking to sell – if their patience has run out, regardless of their capacity, then you probably won’t bid on 700 because if you do, that five-year moratorium for selling starts again… So it’s brilliant that the regulator will have the auction take place just before the last five-year moratorium expires.”
Mobilicity president Stewart Lyons said his company, too, wants new spectrum in the next auction. The only question is will he be bidding alone, or together in a new consolidated company, or through some other sharing arrangement. “There's four blocks of spectrum. One block will be bought by a new entrant (the other three presumably by Bell, Rogers and Telus), and you've heard Alek say that he'll be there. We'll be there. Uncertain if Wind will be there… but we could find ourselves being one of two or maybe the only player. So the question is, do we do it ourselves or do we let somebody else in?” asked Lyons.
“Clearly, if you look at what Bell and Telus have been able to accomplish together on the network side (the two companies shared their network upgrade and share its operation), it makes a lot more sense to do this kind of stuff as a group. (Consolidation) doesn't have to happen prior to the auction, but it certainly makes it a hell of a lot cheaper and a hell of lot more efficient to do that.”
As it stands right now, Mobilicity and Public look more likely to lead any consolidation, especially given the rumblings and musings about Wind Canada’s future under Vimpelcom – and the leader of Wind Canada’s dire view of the business and its spectrum-challenged future. Without more 700 MHz spectrum, he believes relying on its current AWS spectrum just isn’t going to cut it in the future data-centric, mobile video world.
“I think that all strategic (investors) would be doing exactly what our shareholders are doing, which is assess the spectrum path– assess the competitive landscape on whether it’s possible to compete – I personally don’t believe that it is – without a true LTE foundation via sufficient spectrum,” said Lacavera.
“There’s going to be just this incredible demand for speed looking forward. We can see the growth in data consumption… which is a positive from our perspective in an environment where we have sufficient capacity via a sufficient spectrum to compete,” he continued. “But I don’t think that we can put a proposition in front of Canadian consumers or businesses that will be compelling if we say ‘well it’s 20% cheaper, but it’s also 20% percent slower.’ I just don’t think that that’s a viable alternative business proposition.”
Lyons is a little more bullish about what the networks will be able to do, even with a less-than-optimal amount of 700 spectrum because technology is always on the march. “Would we rather have had 20 MHz of spectrum set aside for new entrants, regardless of the mechanics of the auction? Yeah, of course we would've because you can get to some higher speeds more quickly in LTE at 20 than you can at 10,” said the Mobilicity president. “Launching 10 MHz in 700, combined with AWS, which is the same combination that Verizon has, for example and it's probably the same blocks, is a good thing.”
Besides, he continued, “people told me a few years ago you couldn't get above 14.4 (Mbps) in 3G speeds. Now, you're at 21 or even 42. Technology changes very quickly. I bet the speeds we’ll be able to launch LTE on 10 MHz two years from now will be 50 Mbps and above, where today, they're saying you can do 25 max. The technology moves so fast in this industry.”
In the end, consolidation will happen because it must and always does. (and don’t forget about the likes of Videotron or Shaw Communications or even EastLink as potential consolidation players, too). There just isn’t room for more than four national wireless carriers in Canada, most agree. And with just four prime blocks of spectrum to be on auction in 2013, observers think the federal government is on that same page, too.
“I think (consolidation) does happen, at some point, because everybody’s starting to realize that this market isn’t what we thought it was going to be. If it doesn’t happen, then the question will be what does the government want? If the new entrants either disappear, or a couple of them disappear and only one is left and that one is constrained with spectrum and what it can do, then I think you have a situation where the incumbents win yet again,” said Krstajic. “If, on the other hand, you brought these three together, you have a situation where today, we have in excess of a million subscribers…
“Do I believe that we have a good balance sheet and a good track record to be able to do that? Yeah, I do; but I actually believe what’s more important is that the assets come together. The key is you’ve got to check your ego at the door. I believe that the time is coming to do that.”
But what of outsiders coming into the market? With the lid off of foreign investment for companies with less than 10% market share in Canada, would American investors, or others, try to move north, despite the trials and tribulations of the new three? Unlikely, says Krstajic. “Why would you buy anybody in Canada right now? Isn’t the right play,” he explained. “You need to have a path to more spectrum. If I was a U.S. incumbent looking to maybe expand into Canada, I might go and buy 700 MHz, and then I’d do a beauty contest and decide which of the new entrants do I want to buy… or I’d paint a picture that said just wait a year or so and hopefully, there’s a consolidation, and then come and chat.”
