Canada’s wireless telecommunications sector is undergoing some massive changes as the Big Three — Verdun, Que.-based BCE Inc., Toronto-based Rogers Communications Inc. and Vancouver-based Telus Corp. — are now seeing their formerly complete control of the market threatened by a variety of new competitors. Although no one knows for certain what the sector will look like once the dust settles, analysts say, the three stalwarts still have plenty of room for growth.

Before 2009, investing in one of Canada’s three telecom giants was a sure bet. But due to consumer complaints about high prices for wireless services, Industry Canada has opened the door to more competitors. Wind Mobile, a subsidiary of Toronto-based Globalive Wireless Management Corp.; Vaughan, Ont.-based Mobilicity; and Toronto-based Public Mobile Inc. all have launched within the past nine months. Cable companies Vidéotron Ltd. of Montreal and Calgary-based Shaw Communications Inc. have also announced plans to enter the wireless space.

The main focus of these new entrants is the urban market, as 70% of Canada’s population lives in cities, says Peter Rhamey, a telecommunications analyst with Toronto-based BMO Nesbitt Burns Inc.: “They target the medium to low-end users in urban centres and keep things simple with flat-rate pricing.”

Also, he adds, unlike at their Big Three counterparts, users of these new services can’t go over their allotted, paid-up usage.

Although many analysts believe the smaller startups do not have the capital it takes to compete with the Big Three and their large, national networks, a niggling sentiment exists that the wireless sector in the long term could end up paralleling the biblical tale of David and Goliath. Thus far, the giants have reacted aggressively to the new entrants and are defending their territory well. Both Rogers and BCE have launched their own discount “flanker” brands — Chatr and Solo, respectively — to compete with these smaller operators. Much like their competitors, Chatr and Solo offer plans that include unlimited calling and text messaging. Says Rhamey: “They launched these flanker brands in order to price [themselves] into the new entrants’ market.”

Also, BCE and Telus recently partnered to upgrade their networks to “evolved high-speed packet access” (a.k.a. HSPA+ or 3G+) technology, which is a newer version of the global system for mobile communications standard. Prior to the upgrade, Rogers was the only wireless supplier in Canada with a GSM network, which allowed it to gain access to the hottest products, such as Apple Inc.’s iPhone.

On a GSM system, phones use separate chips known as “subscriber identity module” cards to connect to a carrier’s network. In contrast, under a “code division multiple access” network — the type that Bell and Telus had employed exclusively prior to the upgrade — the phone itself connects to the network, which had limited customers in terms of the choice of the cellular device they could purchase and made the transfer of data from old phones to new ones technically difficult.

The upgrade to HSPA+ now allows Bell and Telus customers to switch phones more easily. The upgrade also sets up both companies to be able to change to a “long-term evolution” (4G) wireless network that will be better equipped to handle video calling and other services reliant on high-speed data transfer.

With the Big Three stepping up their efforts in the past year, their competitors have yet to make the big splash everyone thought they would, says Jonathan Allen, an analyst with Toronto-based Royal Bank of Canada’s capital markets division: “There was a lot of uncertainty in the past nine months about how they would do, and new competition has not had the Armageddon impact [on the Big Three] that investors were worried about.”

Now that Telus and Bell have caught up to Rogers in network technology, all three are well positioned to capitalize on the growing demand for data services, such as multimedia messaging services, video streaming and web surfing.

Data transfer, charged per megabyte, currently makes up 25% of the wireless telecom industry’s overall revenue. But within five years, this will increase to 50%, says Jeffrey Fan, a telecom research analyst with Toronto-based Scotia Capital Inc. : “With more consumers buying iPhones and BlackBerrys, data revenue has an unlimited upside.”
@page_break@Currently, about 25% of Canadian wireless subscribers have smartphones. Within five years, Fan predicts, the adoption of smartphones will reach 100% market share. Thus, data usage — and the revenue it generates — will also rise, he says: “At some point, every consumer will generate a form of data revenue.”

Although the Big Three’s competitors could drive down data-transfer prices by offering unlimited plans, as they have with voice-based plans, Fan says that’s unlikely: “With unlimited, you limit how much revenue you get from each subscriber. And with the increase in traffic, the carrier has to invest and spend money to keep up with the unlimited capacity of the network. The cost of it would really take away growth.”

In addition to data-transfer fees, carriers are also counting on greater adoption rates from current land line users, as cellphone penetration in Canada is at 69%. In recent years, many homeowners have opted to exchange their land lines for cellphones — about 8% of all wireless subscribers in 2009 were homeowners who used their cellphones rather than land lines, Fan says. And by the end of 2015, he adds, one-third of homes in Canada will be wireless only.

Eventually, analysts expect the competitive landscape in Canada’s wireless telecom industry to mimic the pattern seen in the U.S., says Rhamey, in which 90% of the market is dominated by few big players, with several smaller discount carriers occupying the remaining 10%. The reality is that larger carriers have a competitive advantage because they offer more coverage and have stronger networks.

Of Canada’s Big Three, Rogers is the largest player, with 37% of Canada’s 23.4 million wireless subscribers. BCE has 30% market share and Telus has 29%, according to the Toronto-based Canadian Wireless Telecommunications Association. Since Wind Mobile’s December 2009 launch, it has gained 93,882 subscribers, or 0.4%, of the market. Manitoba Telecom Services Inc. and SaskTel Telecommunications currently hold the remaining market share. Other new entrants have yet to make inroads.

Rogers has had the best performance of the Big Three during the first six months of 2010. Rogers’ wireless unit brought in $3.4 billion of the company’s $5.9 billion in revenue in the six months ended June 30, up from $3.2 billion of the $5.6 billion in total revenue during the same period in 2009.

The net income for all of Rogers’ operations for the period was $831 million, a dramatic improvement from the $683 million it earned during the same period a year earlier. An increase in data-transfer revenue was the main source of the increased income in the wireless business, as customers used more email, text messaging and web-browsing services on their smartphones.

BCE saw its operating revenue increase to $8.9 billion in the six months ended June 30 from $8.6 billion in the same period a year prior. BCE’s wireless business generated about $2.4 billion, or 28%, of the pie, an increase from the 24% of revenue it generated during the same period a year prior. BCE’s net income was $1.3 billion, up considerably from $788 million in 2009.

Telus saw its revenue rise to $4.8 billion in the six months ended June 30 from $4.7 billion in the same period in 2009, with 50% of that revenue coming from its wireless segment. Telus’s net income stayed virtually flat, dropping to $564 million from $566 million year-over-year. However, data-transfer revenue improved greatly, to $273 million in the second quarter from $57 in Q2 2009. This was mainly driven by increased sales of smartphones and data plans.

In the long run, Rogers’ leading share in the market will be eroded now that BCE and Telus have their new joint network. Industry consolidation is also a likely event, says Allen: “Between Bell and Telus, there is a big overlap in wireless and enterprise business. The companies could probably streamline and eliminate 10%-15% of costs in the areas of wireless sales and distributions and network management.”

Besides investing in the Big Three, your clients can also play the industry through investing in cable companies, such as Vidéotron, that are just entering the wireless market. With an existing customer base to work with and customer service centres already established, these players are set up for success.

“[They] will be able to sustain a better growth rate compared with the incumbents,” says Allen, “at 5%-10% over the next five years.” IE