GATINEAU – While Shaw Communications continues to evaluate technologies for its plan to launch a wireless service in Western Canada, Scotia Capital Equity Research re-entered the debate by suggesting in a report published last week Shaw should not restrict its wireless solution to 4G/LTE but also consider cable Wi-Fi.
Scotia Capital (among others) had earlier speculated that Shaw team up with Rogers Communications to build a national LTE network.
“We think negotiations may still be ongoing, but we would like to point out another potential option for Shaw, one which we believe could turn out to be just as effective as the 4G/LTE alliance with Rogers but with less capital investment. It is cable Wi-Fi, a proven strategy deployed by many cablecos in the U.S. but in a much more significant fashion by Cablevision. This is still a nascent concept, in Canada but we believe it could get more popular,” says Jeff Fan of Scotia Capital in its most recent Converging Networks report.
By offering a broad Wi-Fi service, “cablecos instantly extend the customers’ service beyond the home. Customers would think of the cablecos brand as more than an in-home service,” adds Fan. This also enables cablecos to offer a portable Internet solution focused on data for customers that are already smartphone to tablet users.
A Wi-Fi solution would also reduce churn rates argues Fan. “Many telcos are doing it, but cablecos can improve the coverage above what the wireless companies currently offer. A presentation by Motorola in the U.S. suggests a 10% reduction in churn on roll out of cable Wi-Fi.”
Wi-Fi access points require backhaul access, which cablecos already have, points out Fan, electrical power (cable nodes currently provide), rights of way (on their own networks), and access through relationship with their own small/medium business customers. “The Wi-Fi initiative would have synergies for cablecos entering the small/medium business segment by putting in Wi-Fi access points at their small/medium customers’ premises.”
In addition Fan says a Wi-Fi solution would reduce Shaw’s capex, opex, and future spectrum outlay.
“Based on Cablevision’s Optimum Wi-Fi deployment, the total capital cost was approximately $300 million, which translated to approximately $70 per home passed, or $100 per basic subscriber. Applying these metrics to Shaw would result in a cost of roughly $230 million to $270 million, which is 20% to 35% below our current projected wireless capex of $350 million from 2012-2015 for a standalone cellular network. Shaw has already spent $170 million to date (F2010 and F2011), of which we believe some can be applied to the Wi-Fi project.”
Cablevision’s experience showed that there were limited operating costs associated with the network after the Wi-Fi access points are deployed writes Fan.
“According to Motorola, the network is very scalable as one server can manage tens of thousands of access points. Without the start-up losses associated with a 3G/4G wireless deployment (handset subsidies, call center, retail distribution, etc), we estimate Shaw would save another $100 million in operating cost from 2012 to 2015.”
Regarding spectrum, Fan believes the use of unlicensed spectrum would “remove the need (or burden) to acquire future spectrum, for instance, in the 700MHz auction, which we believe could easily cost Shaw another several hundred million dollars given the expected heated competition for a small quantity of licenses available.”
Fan writes that the Wi-Fi service also fulfills the wireless product gap versus its western competitors Telus and MTS.
“In our view, Shaw’s wireless strategy is about protecting its customer base from Telus’ quad-play bundle, and we believe this achieves that objective by giving its subscribers access to broadband and content outside the home. A survey conducted by In-Stat recently found that over 80% of respondents had some level of willingness to switch from their current broadband provider to one that combines both home and on the-go service.”
Since early 2009, Cablevision’s rate of basic TV subscriber decline and the current broadband penetration rates are better than those of Time Warner Cable and Comcast writes Fan. Cablevision has 500,000 users on its Optimum Wi-Fi service, which represents penetration rate of 17% of its broadband subscribers.
Fan also claims that the speed of the Wi-Fi service is “much faster than 3G or even 4G services which we believe would help provide superior user experience.”
He points out that the lack of voice has not been an issue for Cablevision. By offering cable Wi-Fi to mobiles, customers can take care of the voice portion on their own with Skype, for example.
“Similar to Cablevision, Shaw’s plan, in our view, is not to emulate a wireless carrier like the incumbents or the new entrants (e.g., Videotron).”
He contends that Shaw is a broadband service provider that offers TV, Internet, and phone inside the home, with wireless/mobility as an option for customers that want broadband or TV content outside the home.
“The wireless service is data centric rather than voice centric. From that perspective, the traditional measure of wireless penetration (based on population) is irrelevant. The meaningful measure is smartphone and tablet/data device penetration, which we estimate are still around 30% (smartphone).
Fan writes that based on industry trends, Scotia Capital maintains voice will eventually become just another application on the data network.
“So customers would still get a voice service but it would be through their data pipe as an application on their smartphone. And if they don’t have the app, they can fall back on the cellular service.”
As far as concerns regarding the limited range of Wi-Fi, Fan notes anecdotal evidence that a large majority of heavy data usage comes through Wi-Fi instead of cellular, typically in nomadic or stationary situations.
“Cable Wi-Fi network build focuses in areas where people congregate and the lack of ubiquity become less of an issue because most users do not require significant data use while mobile. This is becoming even more pervasive as penetration of data devices such as tablets and smartphones continues to grow.”
Another advantage of a Wi-Fi solution is that it would not require a partnership.
“Shaw would have end-to-end control over the network as it would leverage its own backhaul to carry the Wi-Fi traffic. Furthermore, this strategy would not require an alliance with Rogers and would alleviate the future burden of operating a cellular network, including next-generation upgrades, spectrum auctions, etc.” writes Fan.
Fan contends that Shaw wireless would have a minimal impact on Telus and MTS wireless.
“We do not believe cable Wi-Fi is a replacement of 3G/4G wireless services but an attractive complement to 3G/4G wireless and fixed broadband. We believe Shaw never really saw wireless as a weapon to attack Telus or MTS, and the economics of 3G/4G wireless support that view. It has been a defensive move from day one, in our view,” he wrote.
“Even if Shaw had pursued a Rogers partnership, that move would not have had much impact on Telus or MTS given the push would have been on 4G/LTE with limited coverage in the near term. So we believe the idea that Shaw would use wireless as a potential weapon to discipline Telus or MTS seems misplaced, and we don’t have to look far to see the evidence supporting this.”
For example, he says that Videotron’s wireless service has not stopped BCE from being aggressive on Bell TV, Internet, or home phone winbacks.
“Cablecos’ wireless initiatives are very capital intensive and even Videotron, which historically has been perceived as an aggressive operator, could not use price to differentiate. If Shaw wants to discipline Telus or MTS, it could easily do it with traditional landline voice services, particularly in the business market where it has a small market share. Voice has low incremental cost and it is also Telus’ and MTS’ most profitable service.”
Fan argues that a Shaw Wi-Fi service would make Shaw’s broadband service even more attractive compared with Telus with higher speed both in the home and outside the home.
He maintains however that a Rogers and Shaw alliance on LTE is still not necessarily dead.
“In our view, as Shaw builds out its Wi-Fi, it will become a valuable offload for any cellular wireless operator such as Rogers. By tightening up the relationship, Rogers could leverage Shaw’s brand and have Shaw re-sell wireless to gain share in wireless in the West, in particular Alberta and B.C. Of course the economics of that arrangement would be different (likely more favourable for Shaw in our view) compared with an arrangement that would be struck today before Shaw brings the Wi-Fi to the table.”
