Canada's largest wireless companies are wrestling with their first real decline in customers' monthly spending, and wondering if it is a sign of the times or a harbinger of the future.
The companies have spent billions to deploy networks and are stocked with fashionable smart phones. But even as Canadians snap up the latest handsets and sign three-year data contracts, operators are seeing average revenue from each customer fall.
Is the drop a result of the recession, or does it reflect the more competitive landscape that is about to see even more players enter the field?
Executives at BCE Inc. are betting on the former, but they say that even if market dynamics have fundamentally changed, the company has taken necessary steps to adapt.
BCE's Bell Canada said yesterday that it generated 4 per cent less money on average from its wireless customers in the last quarter, compared with a year earlier.
That follows similar news last week from rival Rogers Communications Inc. , which reported a drop of more than 2 per cent. Today, Telus Corp. is expected to post its own decline when it releases second-quarter statements.
The downward trend of what the industry calls ARPU - for average revenue per user - is significant for Bell, Rogers and Telus because they rely on wireless as their engine for growth. Although they all continue to add thousands of new customers each quarter, four new players plan to launch networks by next year.
"It has gotten trickier going forward and we have to manage for that," said George Cope, president and chief executive officer of BCE and Bell.
As part of its second-quarter financial report, the company said it signed 45,000 new wireless customers in the period, compared with 83,000 in the second quarter of 2008. In addition to the fewer new accounts, Bell said ARPU fell $2.22, to $52.05 a month. Both results fell short of analysts' expectations and crimped BCE's overall performance, with profit dipping 4 per cent and sales down 2 per cent.
"People are actually using the product less in the economy, from a voice perspective," Mr. Cope told analysts. "A decline in employment means a declining use in wireless and we are seeing that.
"What we are really trying to understand - I know every analyst is as well - is how much is economy, and how much is competitive dynamics?"
BCE executives agree that tougher competition, especially among their discount brands, is a factor. But they say it is being offset by customers' adoption of new data services, which generated 28 per cent more revenue in the quarter from a year earlier.
Most of the decline relates to the economy, and the company has laid the building blocks for greater growth when conditions improve, said Wade Oosterman, president of Bell Mobility and chief brand officer of Bell Canada.
A key step involves cutting costs, which BCE has done by eliminating several thousand jobs over the past year. Executives said it has also improved quality of service, eliminating many customer calls.
General and administrative expenses were down 11 per cent in the quarter, which helped bump gross margins up to 40 per cent.
Other steps include the recent purchase of the 50 per cent of Virgin Mobile Canada Bell didn't already own; the acquisition of electronics retailer The Source and its 750 stores nationwide; gaining access to a greater variety of smart phones, such as the Pre from Palm Inc.; and a more aggressive branding campaign.
In addition, the company is building a new national wireless network on the leading wireless standard of the day, called HSPA. Bell is sharing the development costs with Telus and both companies are expected to launch service on it by year-end.
"We are ready to hit the ball out of the park when the economy turns," Mr. Oosterman said in an interview.
BCE said results would pick up later this year, revising upward its forecast for sales and earnings. The company now expects growth of between 1 and 2 per cent, up from a flat forecast given in February. Share profit, excluding some costs, should range between $2.40 and $2.50, up from the $2.38 the Street expected.
BCE increased its annual common share dividend for the second time this year by 5 per cent to $1.62. The stock now yields 6.6 per cent based on Thursday's closing price.
The move reflects Mr. Cope's strategy of improving payouts to shareholders. Dvai Ghose, of Genuity Capital, expects BCE will do a $1-billion share buyback by year-end.
Bell TV turned in the best performance of the quarter, with video revenue rising 9 per cent to $389-million.
BCE INC. (BCE-T)
Close: $24.81, up 14¢
Q2 2009 2008
Profit $346 million $361 million
EPS 45 cents 45 cents
Revenue $4.3 billion $4.4 billion
SOURCE: Company reports
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