Communications companies well-positioned to weather possible economic storm

Canadian telco and media companies are well-positioned to weather a potential double dip in the American economy thanks to firm consumer attitudes about telecom services and interest in new technologies, industry insiders say. Their assurances come amidst significant volatility on stock markets around the globe as investors reflect concerns about a struggling U.S. economy and destabilized European banking system. In an appearance before the House of Commons finance committee last Friday, Bank of Canada governor Mark Carney acknowledged that the Canadian economy stalled during the last quarter but that the bank expects growth to accelerate in the second half of the year. Carney said the bank also expects European and the U.S. economies to continue showing growth. In interviews with The Wire Report, insiders pointed to Canadian consumers’ high demand for new products like smartphones and tablets as a good sign for a telecom industry that should continue to see new or increased subscriptions and usage. “These are underlying factors in matters of telecom traffic ... that are running counter-current to the basic economic circumstances,” Bernard Courtois, president and CEO of the Information Technology Association of Canada (ITAC), said. Quarterly earnings reports from several major Canadian telcos show that increased demand for wireless services this year were driven by subscribers moving to smartphones in record numbers. BCE Inc., Rogers Communications Inc. and Telus Corp. all reported growth in data revenues in the first half of 2011, with Bell reporting that smartphone activations represented more than half of all postpaid activations during that time. If the smartphone revolution dies down, other technologies will continue to entice Canadian consumers to telecom services, regardless of the greater global economic picture, Courtois said. “ buzz may wear out a bit, but it’s a sector that surprises you with innovations that people feel they have to go and try out,” he said. “It’s going to be about where the developments come out and when. If there’s new stuff that comes out, people are going to want to try it, and that will run counter to the economy.” Many consumers now view their basic telecom services as indispensable, insiders said. “It’s one of those things where Internet services—and telecom services in general—are almost a staple,” Tom Copeland, chair of the Canadian Association of Internet Providers (CAIP), said in an interview. “ like bread and butter and eggs and milk: people have to have them.” Telus spokesman Jim Johannsson agreed. “During a recession, consumers who are under financial pressure will reduce discretionary spending, but their telecom services are beginning to be more important to them than other discretionary spending,” Johannsson said. “Telecom is becoming less discretionary and is becoming more of a necessity, so folks are becoming less inclined to reduce their spending in that area.” The broadcast sector may have more to lose than telecom if faced with another recession. In the U.S., cable and satellite distributors reported significant customer losses in the second quarter of calendar year 2011—a phenomenon many have tied to the slumping American economy and the emergence of cheaper, over-the-top services like Netflix as as alternatives. John Lawford, counsel with the Public Interest Advocacy Centre (PIAC), in Ottawa, said unreliable Internet connections for streaming and content catalogues that pale in comparison to those offered in the U.S. may be enough to prevent some consumers from making the move to over-the-top services exclusively. “This Netflix stuff, I still see it as being complementary ,” Lawford said. “I just don’t think there’s a lot of room for people to wipe out their present broadcast services, but who knows what’s going to happen if everything goes to hell.” Telecom revenues from the enterprise market could also drop off if a prolonged recession hit Canada and led to the corporate belt-tightening or even the closure of businesses, Wind Mobile chairman and CEO, Anthony Lacavera, said in an interview. “If you get into another recession, when you get to the back part of that, you’re going to see the impacts,” Lacavera said. “At that point, businesses will outright downsize, reduce usage, and put in more strict expense policies, so wireless calls will go down.” In an effort to reduce expenditures, businesses could also start to download the costs of cellphones onto employees, Roberta Fox, head of telecom consulting firm Fox Group Consulting, said. But it is difficult for business customers to do away with services, she said. “For the most part, if they have the services, they need them to run their businesses.” A good sign for the telecom sector is its resilience during the 2008-09 recession. Although other sectors reported heavy losses, telcos typically saw only minor drops in their operating revenues. Telus, for example, reported a 0.5 per cent drop in operating revenues in 2009 but rebounded with growth of nearly 1.8 per cent the following year. A report commissioned by U.K. firm Ovum Consulting, commissioned by the CWTA and released in April, found that Canada’s wireless industry contributed approximately $41.2 billion to the Canadian economy in 2009, including $17.2 billion in direct GDP contributions through sales of goods and services. The report also noted the sector's $2.95 billion in capital expenditures throughout 2009, a 60 per cent increase over the previous year. “We’ve had a big recession which did have an impact on the telecom sector, but we didn’t see any major failures of a telecom enterprise in Canada because of that,” Johanne Lemay, co-president of media and telecom consultancy Lemay-Yates Associates, said in an interview. If businesses and consumers pull back on their telecom services, the telcos will find a way to lure them back, she said. “When consumers start tightening their belts in terms of expenditures, usually telecom carriers tend to enhance their offerings or reduce their prices or provide better deals.” nkyonka@thewirereport.ca

Communications companies well-positioned to weather possible economic storm

Broadcast | August 22, 2011

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