The Canadian telecom industry faces great challenges and opportunities in the year ahead, as the phone companies wrestle with falling revenue from legacy land-line services and see an explosion of demand for lucrative high-speed wireless services.
The transition has been under way for several years, but the next 12 months will see the major players make significant changes to how they run their businesses in the new environment.
Job losses among the biggest telecoms will continue as BCE Inc.'s Bell Canada, Telus Corp. and Rogers Communications Inc. struggle to reduce their costs in the face of more competition, less land-line revenue and rising expenses in wireless. Just last week, Rogers announced 900 managerial cuts. Bell earlier axed 2,300 managerial positions and Telus is estimated to have eliminated 6 per cent of its work force since 2008.
For Bell and Telus, these cuts come as their traditional bread-and-butter revenue continues to tumble. Bell says it lost 6 per cent of its land line accounts in the 12 months ended Sept. 30. In the third quarter it reported a year-over-year decline of 6 per cent in local phone charges and 9 per cent in long-distance charges.
Telus says it lost 4 per cent of its land line accounts over the same 12-month period. Local revenue dropped 6 per cent and long-distance revenue fell 15 per cent last quarter.
Most of the land line losses have gone to cable companies that entered the residential phone business several years ago, or to wireless substitution.
As Canada's biggest cable company, Rogers has been the greatest beneficiary of the incumbents' line losses. But it will be under greater pressure from Bell and Telus in the year ahead after the two telecoms teamed up to improve their national wireless operations.
This month they launched their jointly built next-generation wireless network. The $1.3-billion investment gives them broader reach and faster speeds in rural areas than Rogers, as well as access to the most popular handsets available, including Apple Inc.'s iPhone.
In addition to losing its exclusive hold on the iPhone, Rogers now faces the dilemma of having to either invest heavily to upgrade parts of its own national wireless network, or to forgo more customers to its rivals.
"Rogers could go from a position of competitive advantage to one of competitive disadvantage," notes Dvai Ghose, an analyst with Genuity Capital. "Rogers has to bear network upgrade costs by itself. Consequently, Bell and Telus should drive better returns on [their] wireless network investment."
All the wireless carriers are facing high upfront costs when they add customers today. The iPhone that the operators now sell for $200, for example, includes a $400 subsidy, according to Mr. Ghose. Although the companies recoup that cost early in the three-year subscriber contracts, the charge squeezes their profitability.
The flip side for Bell of suddenly gaining access to the iPhone and other leading handsets is a jump in equipment costs that could reach $200-million next year, says Jonathan Allen, an analyst with RBC Dominion Securities Inc. "Bell hopes to offset margin pressure in wireless with cost cutting across the whole organization."
Telecom executives say that the cost of smart phones will start to decline significantly as they become more ubiquitous, but until that happens the companies must find ways to manage their costs better.
Adding to that challenge is a wave of new competition coming in 2010 from newly licensed wireless operators. Quebec's cable king Vidéotron Télécom Ltée is expected to be a major force in the province when it launches its wireless network this year.
In major cities across the country, startup Data & Audio-Visual Enterprises Wireless Inc. (DAVE) plans to take on the established players with less expensive services and more transparent prices, as does newcomer Public Mobile Holdings Inc., which bought licences for the Ontario and Quebec markets.
The greatest unknown among the new entrants remains Globalive Wireless Management Corp., which had aimed to launch coast to coast but was recently blocked by the regulator for failing to meet foreign ownership and control requirements.
The Canadian Radio-television and Telecommunications Commission determined that Globalive's Egyptian partner, Orascom Telecom Holding SAE, holds the majority of the operation's equity and almost all the debt. That decision now faces a highly unusual ministerial review, which could produce a ruling in a matter of days or weeks.
"An overturn of the CRTC decision would set a precedent that allows foreign companies to circumvent control-in-fact foreign ownership legislation across multiple industries by way of a debt-financed transaction," Mr. Allen wrote in a report last week.
Regardless of whether Globalive gets off the ground, Rogers, Bell and Telus are expected to fight the new wireless entrants by matching their prices or contract terms on their own discount brands: Fido, Solo, Virgin and Koodo.
