Some say Rogers vulnerable to ‘double cohort,’ others downplay issue

In June, wireless carriers face a higher-than-usual number of expiring contracts, as a result of the wireless code effectively banning the previously standard three-year agreements. But experts disagree on how this “double cohort” will translate into consequences for the wireless industry, which is still waiting on a court ruling to decide whether it will happen at all. The CRTC announced its wireless code in June 2013, and it came into force on Dec. 2 that year. Among other effects, the code allowed consumers to back out of wireless contracts of any term at no cost after two years as of June 3, 2015. An analysis The Wire Report conducted in 2013 found that such cancellations of three-year wireless contracts that would have been valid between June 2015 and June 2016 could lead to hundreds of millions of dollars in device subsidies that carriers will not be able to recoup. Whether that provision of the code will stand in June remains to be seen, though. Carriers have challenged the CRTC’s ability to impose it in a proceeding that wrapped up arguments in November and are now awaiting the Federal Court's decision. Greg MacDonald, an analyst with Macquarie Capital Markets, said in a phone interview that “the market is set up for a potentially more aggressive pricing dynamic this summer.” The smartphone industry is maturing, and companies have to improve their churn numbers in order to keep their normal subscriber growth, a situation in which Rogers Communications Inc. is especially vulnerable, he said. “With the inability to get their churn down, their subscriber counts are coming in very low,” he said. “If you introduce an exogenous effect such as, let’s say, Wind gets greater traction or Rogers decides that it wants to actually defend its turf a little bit more with greater pricing competition, if those things happen, the double cohort is a very interesting time.” He said that Rogers will “inevitably get more aggressive” if it can’t address its problems with churn through efforts to improve customer service. If those circumstances combine with Wind becoming more aggressive with its pricing plans, and “a possible relatively lucrative domestic wholesale roaming agreement that they could have in place by then, then this could be a very competitive time,” he added. Even if Wind doesn’t become a more serious competitor in the coming months, the double cohort will still have an effect on the industry because “there’s a bit of a stand-off between all these incumbent companies right now.” MacDonald added: “The question is: Is one carrier going to move and try to take advantage of the fact that so many customers are coming up for contract renewal?” he said. If Wind isn’t a factor, the likelihood of that scenario happening decreases, he said, but noted industry watchers shouldn’t “underestimate Wind,” which is now financially backed and will be bidding in the upcoming AWS-3 auction. “My view is they’re going to sell national data plans as soon as they have the ability to sell them,” he said, even if that means doing so before a national network is built. Scotia Capital analyst Jeff Fan also flagged Rogers’ vulnerability in a research note this week. He said that expectations the company would deliver stable wireless profits in the fourth quarter and through 2015 and have stable churn numbers in 2015 “seem optimistic in light of the double cohort impact.” Because Rogers has higher churn than its competitors and lower revenue growth and average revenue per customer (ARPU) growth, it has “less to insulate against the effect,” Fan wrote. While industry watchers have been aware of the double cohort effect for a while, they weren’t able to predict its precise impact until recently, he noted. Fan estimated that at the end of 2014, about 10 to 18 per cent of postpaid Rogers, BCE Inc. and Telus Corp. subscribers were still on three-year contracts. “If all these subscribers were to receive handset subsidies to migrate out of 3-year contracts, we estimate that would amount to approximately $800M to $1.5B of additional handset subsidies in 2015,” Fan said in the note. That number would be lower if customers “do not switch or upgrade and are content to stay off-contract on their current plans,” he added. He said Bell and Telus are expected to “fare better” than Rogers because their revenue growth is higher and churn is lower. Rogers spokeswoman Patricia Trott said in an email that the company has been “mitigating the possible effect of the double cohort,” by encouraging customers with expiring contracts to migrate to its Share Everything plans, and introducing features like its hockey streaming service and new roaming plans. She said customers upgrade when they want a new phone and not only when their contract expires. Trott added that the company has “had our FlexTab program in place for several years that lets customers upgrade anytime by just paying off the remainder of their subsidy” and that Rogers’ Fido brand has “always had two-year plans.” “As a result far less than 30 per cent of our customers to whom this applies are on three year contracts, with that number decreasing all the time, and so we don’t believe it’s a significant issue,” she said. Barclays analyst Phillip Huang also said competition in the wireless market will “intensify” in the next six months, as the double cohort leads to Canadian carriers vying to poach one another's customers in the months leading to June. “Although this double cohort impact has been widely discussed for some time, we believe its impact remains underestimated,” Huang wrote in a research note earlier this month. Others aren’t so convinced. Canaccord Genuity telecom analyst Dvai Ghose said in an email that the issue is “overblown.” “Carriers have had years to prepare for this and have actively been using the iPhone 6 to put customers on new contracts earlier than normal where appropriate. I do not see a dramatic impact on churn in mid to late 2015,” he said. “In addition, it is a very temporary issue,” Ghose added. Iain Grant, a telecom analyst with the SeaBoard Group, said in an email that the double cohort presents a marketing opportunity, in theory at least. “In practice, the companies with customers who have contracts that are up for renewal know who those customers are, where they live, what their usage patterns are, and what devices they have at what stage of the product evolution cycle,” he said, adding that those companies “have been wooing the potential defectors for months.” He added: “The companies who are waiting in their stores, their kiosks, their websites for a flood of tire-kickers looking for greener pastures may be disappointed.” Troy Crandall, a telecom analyst with 3Macs, said in a phone interview that the double cohort effect may lead to increased promotional activity by the companies, but he doesn’t expect it to have a significant effect on the industry one way or another. Because customers on three-year contracts generally renegotiate their contracts with wireless companies about four months before they expire, Crandall said he expects companies to start renegotiating affected three-year contracts in early February. As a result, there may be “a somewhat unusual period of promotion going on” in what is normally a quiet time for the industry, he said. Generally, most promotions by wireless companies start in August for the back-to-school period and continue through to the holiday period, but because of the double cohort, “what you might notice is a bit more promotion or marketing than you might have otherwise seen in, normally, this June timeframe.” “But I don’t see it as being anything negative or positive; it just means there will be more activity,” he added. — With reporting by Anja Karadeglija at akarad@thewirereport.ca and editing by Derek Abma at dabma@thewirereport.ca

Some say Rogers vulnerable to ‘double cohort,’ others downplay issue

News | January 28, 2015

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Some say Rogers vulnerable to ‘double cohort,’ others downplay issue

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