Competition among telecoms increased after Rogers took over Shaw Communication, but trend could be short-lived
Competition between Canada’s telecoms has intensified in the wake of Rogers Communications Inc.’s RCI-B-T -1.09%decrease takeover of Shaw Communications Inc., SJR-B-T +0.02%increase but some industry analysts predict that the trend could be short-lived.
Last week, Freedom Mobile – the wireless carrier recently acquired by Quebecor Inc.’s Videotron Ltd. subsidiary – introduced a new $50 wireless plan that comes with 40 gigabytes of data that can be used anywhere in Canada or the United States. Previously, the data for Freedom’s customers would be throttled when they were outside of Freedom’s network in Ontario, Alberta and British Columbia.
Meanwhile, Rogers and BCE Inc.’s Bell Canada BCE-T +0.67%increase have entered into what Bank of Nova Scotia analyst Maher Yaghi characterized as a “very public price war” on wireless and home internet bundles.
“Both companies have a cost advantage against Quebecor on the bundle, and they don’t seem to be afraid to use it … to the benefit of the consumer,” Mr. Yaghi wrote in a note to clients.
Rogers launched a suite of new cellphone plans in early May, with discounts available for customers who also purchase internet or television service from the company. Rogers wireless president Phil Hartling said the move aims to capitalize on Rogers’ much larger market for bundled services after its $20-billion acquisition of Shaw’s cable network in Western Canada.
“When we woke up the morning after Shaw was approved, we went from a company that had 4.5 million households that could buy all of our residential and wireless services to double that,” Mr. Hartling said in an interview this month.
Vancouver-based Telus Corp. now faces a deeper-pocketed rival in Western Canada, where it was eating considerably into Shaw’s internet market share. According to Toronto-Dominion Bank analyst Vince Valentini, Telus was capturing roughly 90 per cent of internet customers each year in the West. That may not be profitable for Telus now that it’s competing against Rogers, Mr. Valentini wrote in a research note.
“What we expect is that [Rogers is] going to obviously be very competitive; they bought the asset for a reason,” Telus chief financial officer Doug French said during TD’s annual telecom and media conference last week. Telus is not going to chase market share “at all costs,” Mr. French said.
However, the recent pricing moves by Rogers “might not be indicative of sustained aggression,” Mr. Valentini said. Rather, the company might be looking to appease regulators in the aftermath of its hotly contested takeover, or to signal to Quebecor that it needs to “tread carefully and balance profitability,” he wrote.
In order to win regulatory approval of their $20-billion deal, Rogers and Shaw sold Freedom to Quebecor for $2.85-billion. During the regulatory process, Quebecor was touted as the answer to Ottawa’s desire for a national fourth wireless carrier.
The launch of its new national wireless plan accords with Videotron’s promise to the federal government that Freedom would offer cellphone plans that were 20 per cent cheaper than those sold by the large wireless carriers on a specific benchmark date.
However, Edward Jones analyst Dave Heger said that while Quebecor appears to be “coming in with guns blazing,” questions remain as to how long the company will be able to maintain that competitive intensity.
“The same thing happened with Shaw initially and then over time it petered out,” Mr. Heger said, noting that Shaw was a larger company than Quebecor.
Quebecor’s ability to reduce prices will also be constrained by its need to spend heavily to upgrade its network, Mr. Heger said. The company promised the federal government, in a written undertaking with financial penalties attached, that it will make 5G wireless services available to 90 per cent of its customers within two years.
The company also needs to pay down the $2-billion of debt that it took on to finance the acquisition, Quebecor chief financial officer Hugues Simard told Mr. Valentini during last week’s conference.
The Montreal-based telecom faces a competitive disadvantage when it comes to bundling, Scotiabank’s Mr. Yaghi said in a note to clients.
For the past several months, Bell has been selling its 1.5-gigabit internet service for $60 a month – significantly less than the $122 it charges on a wholesale basis, Quebecor chief executive officer Pierre Karl Péladeau said during the company’s most recent quarterly earnings call.
Mr. Péladeau said Quebecor, which needs access to its competitors’ networks in order to be able to offer wireless and internet bundles outside of its Quebec cable footprint, cannot make money at those rates.
The Canadian Radio-television and Telecommunications Commission is in the midst of reviewing its framework for wholesale high-speed internet access.
“Without regulatory intervention by the CRTC … we think it will be hard for Quebecor to effectively compete within this pricing environment on the bundle while at the same time generate the strong margins that the company has been known to deliver,” Mr. Yaghi wrote.
John Lawford of the Public Interest Advocacy Centre, a consumer-advocacy group based out of Ottawa, said the market structure has essentially remained the same after the takeover, with three dominant players making up 90 per cent.
Freedom, meanwhile, continues to play the role of “little brother,” taking about 5 per cent of market share while offering slightly lower prices and slightly bigger data packages. If Quebecor competes too aggressively on prices, it risks retaliation from the larger telecoms in Quebec, said Mr. Lawford, the centre’s executive director.
“I don’t expect them to be doing the maverick thing, with deep discounts and trying to gain market share at the cost of destabilizing the market,” he said.
This article was first reported by Globe and Mail