CRTC, spectrum auctions among major wireless issues for 2015: analysts

As the new year approaches, Canadian wireless carriers of all sizes await a CRTC decision on domestic roaming that could, in the words of one analyst, “disrupt” the industry with wide-ranging consequences for two upcoming spectrum auctions and beyond. The commission’s ruling follows a five-day hearing in the fall on wholesale wireless regulation, the culmination of process that began early last year. According to Barclays analyst Phillip Huang, the wholesale wireless decision could have a “very powerful” effect and “has the potential to disrupt the industry by strengthening smaller facilities-based players,” such as Wind Mobile, by allowing them to access the incumbents’ wireless networks at prices even lower than those available under the wholesale caps announced by the government last year. Huang said in a Dec. 8 research note that some financial analysts and experts had expected a decision by the end of 2014 because of the Jan. 30 application deadline for the AWS-3 and 2500 MHz spectrum auctions. “With the holidays rapidly approaching, hopes of a decision from the CRTC before the end of the year are diminishing,” he said. “We believe it may also be a reflection of the government’s perceived lower urgency for stricter wholesale regulation based on recent developments in the wireless industry.” The spectrum set-aside for new entrants in the upcoming AWS-3 auction, the CRTC’s ruling that ended exclusivity clauses in domestic roaming contracts and the recapitalization of Wind Mobile have all mitigated the need for supporting small wireless carriers through regulation, Huang said. In July, Industry Minister James Moore said 30 of the 50 MHz available in each region in the AWS-3 auction will be set aside for “operating new entrants,” or those with less than a 10 per cent national market share and less than 20 per cent market share in the region in which they are seeking spectrum. BCE Inc., Telus Corp. and Rogers Communications Inc. all criticized the set-aside in their submissions to Industry Canada on the upcoming auction, yet Huang said the apparent easing of the government’s concerns about wholesale roaming may make things easier for the three biggest wireless carriers. “Obviously, reduced risk of stricter wholesale regulation is significant positive for ,” he wrote. Huang said in his note that, while the government has been “generous in subsidizing new entrants’ acquisition of valuable spectrum through caps and set-asides,” it has been more hesitant to directly regulate wholesale roaming rates. In the United States, the FCC’s ongoing AWS-3 auction had seen bidding worth more than $44 billion US as of Dec. 17. On Thursday, Industry Minister James Moore said Canada's AWS-3 auction would begin March 5. “I think when Industry Canada first announced the AWS-3 auction, they thought it was kind of a throwaway,” Robert Yates, a telecom analyst with Lemay-Yates Associates Inc., said in phone interview. “Now that the U.S. has proved that it's got phenomenal value to it, that kind of ups the ante. The people who end up with that spectrum are clearly going to be in a better position a year from now than they would be today.” Despite the set-aside for new entrants, Yates said, Canada’s largest carriers will probably follow suit in spending billions for AWS-3 spectrum in this country. “The hardware providers and the people who make handsets will obviously follow suit to include AWS-3 in their equipment, which in turn puts pressure on Canadian carriers to have the same bands in order to support those handsets,” he said. 3Macs analyst Troy Crandall said the emergence of a fourth national wireless carrier, which the government has pushed for, in the next year hinges on Quebecor Inc. and what it does with the 700 MHz spectrum it purchased in Ontario, British Columbia and Alberta. He said that since the 700 MHz auction the company’s executives have faced questions from analysts about plans for national expansion that include an implicit challenge to “do it properly,” unlike the other new entrants. “We've all seen the mess that the other new entrants have gotten themselves into,” Crandall said in a phone interview. “The feeling is they had better be very fiscally responsible when they do decide to go ahead with this, they better do it in a financially prudent manner. And if they do it that way, I think investors might be able to help out on the bill and lend them the money.” The CRTC found in a July decision that exclusivity clauses included in domestic roaming contracts from Rogers, presumably including its contract with Wind, amounted to "unjust discrimination,” therefore allowing Wind to pursue deals with other carriers such as the one it struck in early December with an unidentified partner. Wind is on track to turn profitable next year, Huang said, noting that the company claimed to have added a record number of subscribers in the first two quarters of 2014 before it stopped reporting publicly following a buyout of majority owner VimpelCom Ltd. led by then-CEO Anthony Lacavera and a private equity group including Toronto-based West Face Capital. “We believe the biggest development that may have lowered the government’s urgency for greater regulatory support for the small wireless players is Wind’s capital injection in mid- September,” Huang said. Crandall said Wind’s recapitalization didn’t necessarily solve all of the company’s problems. “Whether you can say Wind is stronger financially, I think that's still questionable at this point,” he said. “But from an operational standpoint, it would appear it's a stronger competitor than it was a year ago.” One of the biggest obstacles new entrants face in 2015, according to Yates, is the power of the incumbent providers to bundle services together and offer discounts to their customers. “First, don't have the spectrum, and secondly they don't have the platforms to deliver television or other things,” he said. “I think you see the success of Videotron in Quebec as the counterpoint to that, they can do what Bell does by bundling TV, etc. For Wind to do that is another matter altogether. That's going to continue to marginalize the small carriers.” Gartner Inc. analyst Bill Menezes said the incumbent carriers are going to continue to defend their turf using their current tactics, working on making their own products more attractive and bundling services at a discount. “The smaller competitors haven't really be able to grab a compelling amount of market share from the bigger players so far,” he said in phone interview. “What would seem to disrupt the market would be the entry of another large player, depending on what regulators decide is appropriate.” Yet Menezes said the continuing questions around regulation, at least before the CRTC’s decision is known, mean large outside carriers such as Verizon Communications Inc. are still wary of making a formal entrance into the Canadian market. “What you really need to see is someone who’s approaching it on the same scale as the incumbents are, and bringing something different either in terms of pricing or plan structure,” he said. In May, Rogers CEO Guy Laurence detailed the Rogers 3.0 transformation plan meant to improve customer loyalty and overhaul its customer service. Emily Taylor, an analyst with IDC Canada, said efforts to improve customer service could sway the Canadians who, according to her company’s data, are dissatisfied with the current market offerings. “It's the perception of a monopoly in a lot of ways,” she said. “If there's a belief that there's only a limited amount of choice, consumers are going to speak to support more choice.” She pointed to Rogers’ plan, as well as others by Telus and Bell, as evidence that the carriers are aware of how their actions are perceived. “Over the last year, we've seen some great strides with respect to customer service,” she said. “The big three are really focusing on customer service right now and making that a priority. That's something that I think we're going to see more of into 2015.” When it comes to the complexities of wholesale regulation and wireless spectrum, she said, most Canadians don’t have much of an opinion. That leaves the incumbent carriers with an opportunity to address public concerns without regulation, she added. “Canadians really at the end of the day want the service to work and be available at a reasonable price,” she said. “That it’s reliable and doesn’t hurt their pocketbook, that’s the concern.” — With reporting by Peter Henderson at phenderson@thewirereport.ca and editing by Derek Abma at dabma@thewirereport.ca

CRTC, spectrum auctions among major wireless issues for 2015: analysts

News | December 18, 2014

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