New competition has finally struck the country's biggest wireless provider and is unlikely to stop there, as a wave of upstarts reshapes the Canadian telecom market.
Rogers Communications upgraded and activated a record number of smart phone customers in the third quarter, but reported a steep and surprising drop in profit of 24 per cent - from $485-million to $370-million, below analysts' estimates. The results, which held several negative surprises for investors, comes during a period of uncertainty that Rogers chief financial officer Bill Linton called "the new competitive reality" for the telecommunications industry.
Rogers, though, is feeling the harsh winds early, in part because it is has the largest number of wireless customers and has long boasted some of the strongest industry metrics on measures such as average revenue per user - so it has the furthest to fall. BCE Inc. and Telus Corp., which report earnings in November, launched a new network last year that allowed them to offer the same devices as Rogers, in particular Apple Inc.'s iPhone. But analysts expect those companies will soon feel the pressure as well.
"We've got new players that are standing out, building out, in different locations," said Nadir Mohamed, Rogers president and chief executive officer. "We've got the other larger players that are now on the same technology path as we are. And that's just the way it is."
For Rogers, the damage has manifested itself in two key areas. The company's industry-leading average revenue per user, essentially the monthly bill, is on the decline, and its "churn" rate, which measures how many customers are leaving, has actually begun to pick up.
Rob Bruce, president of Rogers' communications division, said the company was not surprised by the trends. As new competitors such as Wind Mobile and Quebecor Inc.'s Vidéotron Ltée unit gain momentum, "we expect those to continue." He also pointed to Shaw Communications Inc. and its plans to launch a wireless network in Western Canada next year.
"As much as Wind has been in the market, we haven't seen Rogers numbers reflect that new level of competition," said Jeff Fan, an analyst with Scotia Capital, who pointed to the negative changes in these two areas as particularly problematic. "These are the first signs that we've seen, and it's not likely to be a temporary phenomenon."
Although earnings landed with a thud on Tuesday, with the stock dropping 7.7 per cent, the company added a record 529,000 smart phone subscribers in the quarter, a sign that Rogers continues to focus on high-paying, wireless data customers. With more Canadians using cellphones than ever before, large providers have focused on upgrading existing customers to smart phones that are more lucrative to the company's bottom line.
However, this strategy translates into a huge short-term hit because of the subsidies Rogers pays - typically hundreds of dollars per device - to entice customers into choosing a wireless phone that comes with higher monthly bills. Analysts warned that the other two incumbent wireless providers face the same challenges.
"To think this won't hit Bell or Telus is ridiculous," said Dvai Ghose, an analyst with Canaccord Genuity. "This is an industry-wide phenomenon. Rogers' success, historically, means they'll be the first to take the brunt."
The cost for Rogers this quarter was intensified by the release of the hot-selling iPhone 4, the fact that many contracts from the iPhone's Canadian launch in 2008 are coming to an end, and the reality that Bell and Telus built a network that allowed them to shatter Rogers' iPhone monopoly and can now offer the device, Mr. Ghose said.