"Welcome...to the new age of Canadian wireless."
With those dramatic words-as though we were witnessing man's first steps on the moon-Dave Dobbin, chief executive officer of Mobilicity, officially opened his new wireless provider's flagship retail store. It was an odd place for such a grand proclamation: a converted Mr. Sub restaurant just off Highway 401, in the suburban reaches of Scarborough, Ontario.
But this is the new normal for the $16-billion Canadian wireless sector. Ambitious new mobile carriers are popping up in any hole-in-the-wall retail space they can find-abandoned fast-food outlets, corner stores, laundromats. It's already happened in the Toronto area, and is now unfolding in major cities across the country.
Wind Mobile, backed by Egyptian giant Orascom Telecom, launched its service in Toronto and Calgary last December, and has been branching out to other large cities over the past few months. Mobilicity (formerly known as DAVE Wireless) followed in early May with its Toronto launch; it too will soon spread to other cities. Then came Public Mobile, which lists the Ontario Municipal Employees Retirement System, Peter Munk and U.S. private equity firms among its investors.
Mobilicity chairman John Bitove-best known as the head of Priszm LP, which owns more than 400 KFC, Taco Bell and Pizza Hut restaurants, and as the guy who launched XM Canada satellite radio-is expecting to do a brisk business slinging smart phones from Mobilicity's new store. It is the first of 37 across Toronto, all painted in the company's pink and green motif. "My real estate guy found it for me," Bitove says, as his guests dive into buckets of KFC. "It's perfect." Over Bitove's shoulder is a boarded-up drive-through window. Even that has marketing potential for a company desperate to make a splash. "Drive-thru bill payments!" Bitove exclaims. "We'll be the first in Canada."
Rankings of Canada's top 1000 public companies by profit View the full table
Presumably he's joking, but maybe not. The new crop of wireless carriers trying to chip away at Canada's mobile oligopoly-ruled since the dawn of cellphones themselves by Bell, Rogers and, later, Telus-are doing almost anything they can to get noticed. There are gimmicks galore: unlimited texting plans, cut-rate international long distance, no contracts, no credit checks. All of these offers are aimed squarely at wireless customers in search of discounted monthly plans, and new Canadians who might not yet own a mobile phone. And if the upstarts can snatch frustrated customers away from the Big Three, all the better.
The incumbents have had three years to prepare for this, ever since Industry Canada announced in 2007 that it would be auctioning off a new block of wireless spectrum licences. The message was clear: Three major mobile phone providers-which dominate 96 per cent of the market-does not make for vibrant competition. So keen was Ottawa to increase competition that it overruled the CRTC's interpretation of Canadian foreign ownership limits, allowing Wind Mobile chairman Anthony Lacavera to tap the deep pockets of Orascom.
To compete with the new cut-rate players, the Big Three have dressed up their own discount brands-Fido (which is owned by Rogers), Koodo (a newish offering from Telus) and Solo (Bell)-to look like fresh players themselves, with splashy ad campaigns and cheaper plans. The rates have been so low, in fact, that Lacavera accuses the so-called flanker brands of intentionally underpricing the market to grind down the upstarts. "That's not real pricing," he says. "That's not sustainable."
"If you're an incumbent," Lacavera adds, "you're watching the new guys duke it out with no market share today, and you're saying: 'Beautiful-let them fight each other. I think the incumbents love this."
But this is only the undercard. For Bell, Telus and Rogers, the main event is the imminent launch of wireless services operated by Vidéotron, the massive cable arm of Quebecor Media, in Quebec, and, in late 2011, Shaw Communications in the West. Those heavyweights are far more likely to make off with large numbers of customers than Mobilicity, Public or Wind, thanks to a combination of size, cash, access to video content and, most importantly, existing customers who subscribe to their cable and Internet services.
Rankings of Canada's 350 biggest private companies View the full table
The stakes are high. Getting into the wireless business is not cheap. Together, the newcomers have spent billions of dollars to buy spectrum licences, build their networks and ink deals with handset makers. That means there will be more courting of customers this summer than Canada has ever seen. Simply put, Canadian wireless customers should expect to start feeling a lot more loved.
It's no accident that Mobilicity chose Scarborough, on the eastern edge of Toronto, next to a Super Sushi House and across from a Chinese Hut, to make its debut. Mobilicity will employ a similar strategy as it expands into nine other markets across Canada, including Calgary, Edmonton and Vancouver, in the coming year. Dobbin knows the downtown core is mostly the domain of Rogers, Bell and Telus, which dominate the corporate accounts and have cornered the iPhone demographic-largely urban customers who choose sleekness of product over lowest price.
Mobilicity and its ilk are targeting a different crowd that includes new and second-generation Canadians. It's a niche that, according to Dobbin, has largely been ignored (though arguably the flanker brands have been pursuing these customers lately). "If you look at wireless markets around the world, there is this thing called micro-segmentation, which really hasn't happened in Canada yet," Dobbin says. "I would classify our approach as looking at different segments of the market in ways that others may not have."
So, Mobilicity is pushing $20 add-on plans for unlimited long-distance to select Asian countries, in the hopes that prospective customers will drop their home phones in favour of cheap wireless service for dialling overseas. Wind, having spent the past year using its connections with Orascom and Yak Communications, a long-distance reseller that Lacavera also runs, to leverage cheap airtime around the world, is also offering cut-rate international minutes. Public offers unlimited long-distance within Canada and the U.S.
The new guys are also aggressively touting unlimited local calling within their own networks. By catering to cost-conscious families and immigrant communities, they believe they can sell phones to people who don't yet own one-and a new market will be born.
It may not be that simple. Eager to paint a bullish picture, the upstarts claim that as many as 30 per cent of Canadians fall into this uptapped well of potential subscribers. The incumbents counter that a portion of those phoneless Canadians are unlikely to sign up for one-either because they've learned to live without mobile service or because they're simply not realistic customers. (Try selling a handset to a baby.) By some industry estimates, about 85 per cent of Canadians over the age of 15 are already toting handsets, with 8.5 million subscribers at Rogers, 6.9 million at Bell and 6.6 million at Telus (SaskTel and Manitoba Telecom Services have about half a million each in the Prairies).
The established phone companies plan to use their size as an advantage, subsidizing the cost of pricey handsets like iPhones and high-end BlackBerrys as long as customers commit to multiyear contracts. Bell Mobility president Wade Oosterman argues that customers actually prefer the contract model, as long as they don't have to pay full price for their phones-a notion both Lacavera and Bitove have made a point of criticizing. But Oosterman says it's simple math: "Handsets can cost you $400 each. If you're a family of four, that can be pretty steep," he says. "That's why we subsidize hardware-in return for your promise to stay with us for a while."
But not everyone is keen on locking into a contract in exchange for a discounted handset, since getting out of the deal early comes at a hefty price. So the big companies can only expect so much goodwill from that model. Instead, much of their effort will be spent attacking the newcomers where they are arguably weakest: on the strength and reach of their networks.
In less than a year, Wind has built a big chunk of what will be a $1-billion nationwide network. But when it switched on the system in Toronto this past winter, it was criticized for spotty coverage and dropped calls. Lacavera argues that it takes time to build a network-his bigger competitors have had decades to do so-and that Wind is fixing gaps as they're discovered. "We knew that it wasn't perfect at launch, and we know that it's a work in progress," he says. "Certainly Mobilicity and Public are going to have these issues as well. I just don't think that it's possible to turn on your network and have perfect coverage."
Mobilicity and Public have another vulnerable spot, in the form of roaming. Both are strictly regional players. Public spent $52-million buying spectrum from Windsor to Quebec City only, and its customers aren't yet able to roam. Mobilicity's $243-million got it 10 of Canada's 13 biggest urban markets. So, while calling is cheap inside those networks, subscribers will incur roaming charges if they venture outside that footprint-something the incumbents are eager to point out.
It might be easy to dismiss the new players, with their smaller networks and less flashy handsets. Staring down two mighty cable companies? Not so much.
The one thing about my business is, there really isn't one enemy," says Joe Natale, executive vice-president at Telus-which itself rose from regional player to national force a decade ago.
A word of advice for Natale: He should probably keep an eye on Calgary-based Shaw. The showdown between the Western rivals is already getting dirty, with price undercutting on TV and home phone services, and verbal jabs from the corner office-and Shaw hasn't even entered the market yet. (Likewise, Bell and Vidéotron are already duking it out in Quebec.) These battles are all about bundling. The theory goes: If a customer is already buying one product from you, you can probably persuade them to buy others by simply discounting the price and consolidating it all on one bill. It's the holy grail of telecom service providers.
Take Shaw, for instance. It dominates cable TV from Manitoba to the West Coast, and has managed to steal nearly one million home-phone customers, mostly from Telus, in recent years, by bundling wireline and cable services at a discount. Add in Internet access and the rates get cheaper still. It's a potent strategy: 42 per cent of Shaw's basic cable subscribers have already signed up for its home-phone service, which has been deeply discounted.
Telus has responded with Internet-based Telus TV, which gets cheaper when bundled with wireless and Internet.
This has all the makings of a price war.
"I know they're doing a big push," Shaw CEO Jim Shaw said of Telus during a call with analysts this spring. "But we are not the least competitive guys in the world."
The boisterous Shaw is rarely one for such understatement. It didn't take long for Telus's Darren Entwistle to fire back, telling analysts: "I would like to make it clear that we're not going to allow [Telus]to ignore the magnitude of price aggression [from Shaw]that we have been experiencing in the marketplace indefinitely. So the landscape is going to change."
The dollars are flying. Telus is spending $1.7-billion to expand its network for wireless and Internet. Shaw, which spent $190-million on spectrum licences, will be dropping nine figures on building a network across Western Canada in time for next year's launch. And for $2-billion in cash and assumed debt, it acquired all of CanWest Global Communications' broadcasting assets, which it hopes to tie into the wireless launch by streaming TV content to its phones.
Over in Quebec, Vidéotron is girding for battle as well. "Marketing costs and handset subsidization will be necessary in order to meet our service penetration objectives," Jean-François Pruneau, vice-president of finance at Quebecor Inc. recently told analysts. Translation: We'll be burning through a lot of cash in the first few quarters after launching, to quickly gain market share. Expect near-term profits to take a hit in the name of future wireless glory.
For Rogers, Bell and Telus, the strategy now is to hold on to existing customers while trying to grow the base. Stopping a customer from leaving (known as a save) and luring back former subscribers with incentives have become more important than ever. "The best customer to get is the one you already have," says Natale at Telus. "And all of us have been focused on what we are doing to keep our customers."
Consumers who want to play the market need only call their wireless provider and see if there are discounts to be had. It's a lot like shopping for a new car: The price on the windshield isn't necessarily the amount you'll eventually pay.
It's tough to predict how this era in Canada's mobile industry will play out. The last time we saw scrappy upstart mobile providers in Canada, they were snapped up in a wave of consolidation after buckling to competitive pressures. Most notable was Telus's $6.6-billion takeover of Clearnet Communications in 2000, followed by the $1.4-billion buyout of Microcell Communications and its Fido brand by Rogers in 2004. The Clearnet deal turned Telus into a national player, while the Fido acquisition bolstered Rogers in its fight against Bell.
Who will survive this time around? Convergence Consulting Group estimates the new entrants will probably lay claim to 22 per cent of the Canadian wireless market by 2014. But the prevailing belief in the industry is that, 10 years from now-or as few as five-at least one of the new players will have disappeared, having sold off its assets or been taken over. "I continue to believe that there's room for only one new entrant," says Lacavera.
Public Mobile, for instance, bought a less-expensive grade of spectrum known as the G-block. Unlike Mobilicity and Wind, it is not restricted from flipping its licences to an incumbent in the next five years-which means the no-frills carrier could become a takeout target if it builds a big enough list of customers.
If this turns into a war of attrition, Shaw and Vidéotron have the staying power to endure a lengthy fight-and should consolidation hit, they're logical buyers.
Lacavera figures that if the smaller players are to flourish, they need to present a united front. Otherwise, the fresh crop of mobile start-ups might wither. "I think it's important that the new entrants figure out how to work together," he says. "Everyone who is a new entrant should be looking at ways to partner, because the incumbents are sitting there just looking for ways to wipe us all out."