Debating the State of Canadian Wireless Competition: The Present Isn't So Friendly
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Thursday March 21, 2013
Last week, I posted what I thought was a lengthy post on the state of Canadian wireless competition (and followed that with a condensed version in a column). This week, Telus' Craig McTaggart showed what a long post actually looks like as he issued a 42 page response to my post as well as recent posts by Peter Nowak (here and here) and Open Media. While I won't address everything in McTaggart's post - Nowak responds here and Open Media can address the issues focused on their writing if they wish - a few responses are in order.
McTaggart is clearly
passionate about these issues, going so far as to suggest that claims
that Canada's wireless market is uncompetitive is an "insult to TELUS'
team members." Yet while he decries the use of older data, confusion of
different issues, and cherry picking some statistics, he proceeds to do
exactly that in his response. In fact, the oldest data I've seen in the
myriad of recent posts on these issues can be found in McTaggart's
response as he relies 2005 data to argue that Canadians use their
wireless devices more than most people in the world (page 16).
My post began by arguing that Canada is the most carrier-friendly market in the world as the carriers extract higher revenues from their users than any other country as measured by ARPU, average revenue per user (Peter Nowak extended that analysis in his post). McTaggart says this is simply a function of Canadians using their wireless services more than other countries and therefore generating higher revenues. Yet the best evidence he can muster for that claim is a Comscore report that talks about Internet video (but not wireless access), data from 2005 on Canadian voice usage of wireless, and a Cisco report that lumps North America together.
The reality is that the Bank of America Merrill Lynch Global Wireless Matrix indicates that Canadian smartphone penetration is below the developed world average as measured by smartphones per capita. There is little to suggest that Canadians are the biggest users of wireless data. In fact, OFCOM, the British regulator, reported in December 2012 that the UK was the leading country in mobile traffic volume per connection and that France and China are the fastest growing countries (Figure 6.3). Despite the UK's leadership in mobile use, its ARPU is $29.11, less than half of Canada's world leading $60.79.
Moreover, McTaggart's effort to minimize the importance of ARPU runs contrary to each quarterly call from company executives. At the most recent Telus quarterly call in February, ARPU was referenced 22 times. That is typical for all the carriers, who are judged by business analysts based on their ability to maintain or grow revenue per user. That creates a significant disincentive to reduce pricing and - as further discussed below - without sufficient competitive discipline to reduce pricing, leads to world leading ARPU.
2. Canada's High Wireless Prices
My post cited data from the CRTC and FCC to support the claim that Canadians face higher wireless prices than those found in peer countries. McTaggart doesn't dispute the figures, but argues that Canadian carrier costs are higher given our geography and so therefore higher costs should be expected. Yet it is not clear that Canadian costs are higher. McTaggart provides a chart on wireless revenue per km, in which Israel is the global leader and Canada ranks among the lowest revenue earners. However, the Bank of America Merrill Lynch Global Wireless Matrix indicates that Israeli wireless companies have far higher capital expenditures on a per capita basis than the Canadian carriers, despite the much smaller geographic footprint. In 2011 (the latest year of actual data), the three Canadian incumbents capex was 2.3 billion or about $66 per person. By comparison, the three Israeli carriers spent 1.05 billion or about $141 per person.
In fact, both Telus and Bell regularly tout how low their costs are given the shared network the two companies built. In 2011, their combined capital expenditure was less than Rogers, showing the value of splitting the costs. But their customers don't seem to benefit from those greatly reduced expenditures. In February, Telus CEO Darren Entwistle told business analysts:
To have a network sharing partnership that allows us to invest very effectively in coverage, reliability, cell densification, deployment of new technologies to address the data and consumption appetites of our clients - that's a big differentiating factor for us to make sure that we stay ahead of the curve on technology but we do it on a very client-friendly and very cost-efficient fashion.
That's a big benefit for the company, but there is not the price differentiation one might otherwise expect from a market where two competitors have sharply lower network costs. Indeed, in February Bell executive Wade Oosterman told analysts that not only does Bell have "a fairly significant cost advantage due to our network sharing agreement" but that he sees the prospect of increasing wireless data prices as "there should be some pricing power there to come." Later in the same call, Oosterman notes that the move to LTE provides another cost advantage stating that "LTE is a lower cost infrastructure, lower cost to operate and carry traffic than alternatives." Despite the cost advantages, Oosterman boasts that the company does not need to reduce prices.
In recent months, all three incumbent carriers have focused on the shift to smartphones and prospect of 100% smartphone usage in the years ahead. The message is clear: we can grow revenues from within as our customer base shifts to more expensive data plans. That is good for shareholders, but reduces the need to entice consumers away from other providers, which ultimately results in a market that looks uncompetitive to Canadians seeking better pricing.
3. 911 Carrier Fees
My post noted that carriers charge 75 cents per month for E-911 service that carries a tariff of ten cents. That is true for both Rogers and Bell, but I mistakenly included Telus in that group. McTaggart is right. 17 million Canadian subscribers pay an additional 75 cents per month for E-911, not 24 million.
4. High Roaming Fees
My post cited the 2011 OECD study that found that Canadian roaming fees are among the highest in the world. McTaggart says the report is no longer accurate with respect to Telus, since it has since reduced its roaming fees. In fact, McTaggart says Telus seeks the lowest rates it can get and passes the saving on to its customers. But that isn't exactly what Telus executives tell analysts during the quarterly earnings calls. Over the past few calls, higher data roaming revenues have been consistently referenced by executives as one of the reasons for increased wireless earnings (this includes both customers roaming outside the country and non-Canadians roaming in Canada). For example, in the Q1 call held on May 9, 2012, analysts specifically asked about increased roaming revenue. Robert McFarlane, Telus' EVP and CFO responded:
What is changing, as you know, is the international roaming revenues for us as a result of the HSPA network build. And sometimes we kind of -- oh, yes, we built that a few years ago, so that's in the past. What we have to remember is that it enabled us for the first time to enjoy participation in non-US international roaming in a meaningful way. It wasn't instantaneous with respect to whole market, because it was with respect to people had HSPA handsets as opposed to GSM, and GSM was the dominant side of the base. So as time has marched on, more and more of the traveling base has HSPA phones, whether they're our clients going overseas, or whether they are oversea clients coming here. So there is a built-in inflator in volume, if you will, that is a multi-year dynamic that we are really only in year two of, so to speak. So I think that's a positive contributor -- it is a positive contributor to our ARPU growth year-over-year, and it would expected to be so on a go-forward basis.
Roaming revenues have continued to grow, with Telus citing it again during its most recent quarterly report in February.
5. System Access/Government Regulatory Fees
McTaggart doesn't claim error here - there is no disputing that Rogers charges a government regulatory recovery fee - only that Telus does not. As I argued in my post, these costs would be a cost of doing business in just about any other sector, but for Rogers it is a chance to charge for spectrum licensing, CRTC contributions, and local number portability. Other carriers (including Telus) have dropped the system access fee, but maintain an assortment of other fees for device setup, unlocking, and rate plan changes.
6. Smartphone Adoption
I raised the smartphone adoption issue in response to the unfounded Scotia Capital claim that three-year contracts may be responsible for high smartphone penetration. I noted that other countries are ahead of Canada in smartphone adoption and have banned three year contracts. McTaggart says he will let Scotia Capital defend its claim.
7. Unlocking Phones
McTaggart distances himself from Bell's claim that companies such as Apple might not sell immediately into the Canadian market if there was a mandatory unlocking requirement, though he argues that Canadian carriers have relatively weak bargaining power in negotiations with device manufacturers. He does note that Telus' fee is $35 rather than the $75 charged by Bell. That's obviously a better price, though it is worth asking why a consumer should be forced to pay anything to remove a lock they didn't want in the first place, particularly once their phone is not subsidized.
8. Wireless Speeds
My post noted that recent data from Akamai still indicates that Canadian mobile data speeds are far slower than many peer countries. McTaggart trashes the Akamai data, calling it wrong, meaningless, and suggesting that even the company distanced itself from the Canadian numbers. But if you read the full quote from Akamai, you find that they stood by the report:
I believe that the listed mobile carrier would be considered one of the incumbents, and it appears that they do offer LTE service as well...Having said that, the observed speeds do look surprisingly low, especially compared to the US carriers (But they are relatively in line with the speeds we've seen for that provider in the other 2013 reports).
It is a surprise to see Canada ranked that poorly, but that doesn't mean that data is meaningless, particularly since many users are not on the faster LTE networks. In fact, the 2012 OFCOM study shows LTE revenues (as of the end 2011) with Canadian revenues and subscribers little more than a rounding error. That may pick up over time, but pointing to LTE speeds today means little when most Canadians face slower speeds.
9. Canada's Lower Wireless Penetration Rates
My post notes that Canadians may love their cellphones, but there are far fewer subscribers in Canada on per capita basis than in other countries. McTaggart dismisses this criticism, pointing to differences in the European market and arguing that the difference with the U.S. can be attributed to wireline penetration and a six year delay in launching wireless services. Yet the Bank of America Merrill Lynch Wireless Matrix says that South Korea has the same wireline penetration, but wireless penetration of 106.7% compared to Canada's 78.2% (and South Korea started wireless services at the same time as Canada).
Moreover, the U.S. comparison is still relevant, with 107.6% wireless penetration in a market that shares many of the same characteristics as Canada (and claims that the wireless industry, now in Canada for nearly 20 years, is still behind due to a late entry seems fanciful). McTaggart maintains that smartphone penetration is the more telling figure, but given that Canadian wireless penetration ranks below every country in the Wireless Matrix with the exception of India, Pakistan, and Bangladesh, it is hard to see why (as noted above, the Wireless Matrix also reports that Canada is below the developed world average in smartphone adoption).
10. Spectrum Inefficiency
McTaggart response does not dispute the issue of Canadian spectrum inefficiency, only that Telus should not be included in the list of the inefficient. He notes that Telus has less spectrum than Bell or Rogers, implying that the hoarding problem may be real issue with their competitors.
Jim R said:
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Thursday March 21, 2013