Every Monday, the Telus Corp. “marketing intelligence” team gathers with executives to review the latest news in the cellphone industry.
They look at new promotions and rate plan adjustments by their rivals, and will change Telus offerings wherever they feel they're losing the competitive edge.
“There were probably 30 price reductions on Monday in terms of rate plans, promotions and handset pricing,” said John Watson, Telus's president of consumer solutions. “That keeps us hopping.”
“The norm is that when you have strong, capable competitors, when they drop their prices, we tend to match pretty quickly,” Mr. Watson added.
To the fast-growing wireless industry, the Monday meetings at Telus are a clear sign of cutthroat competition and corporate nimbleness.
But to a large number of critics and consumers, the industry is more comfortable than cutthroat. Similar rate plans, relatively high prices for high-volume users and no independent competitors to rock the boat are just a few of the reasons why Canada lags much of the industrial world in wireless development.
Just over half the Canadian population had cellphone service in 2005 — the U.S. and Europe hit that level years earlier. The Canadian sector, however, is among the most profitable anywhere. On the key benchmark of average revenue per minute, Canadian carriers make 11 cents (U.S.), according to Merrill Lynch. In the U.S., it's 6 cents.
“The American pricing is extremely aggressive,” said Peter Barnes, president of the Canadian Wireless Telecommunications Association (CWTA). “I can't deny that. Particularly, in the last couple of years. They have their own market, they react to their own market.... It's a lot less expensive market to serve in.”
For investors, there's been little to quibble with. Bell Canada, Rogers Communications Inc. and Telus relied on wireless to juice earnings in the most recent quarter, helped by “disciplined” pricing strategies.
Rate plans can be strikingly similar, with prices often less than $1 apart from one monthly plan to another. When one carrier changes the definition of “evening” so that it starts at 9 p.m. instead of 6 p.m., others follow.
But as wireless becomes a dominant feature in Canadian life, many are looking to other countries and wondering if Canadian consumers are paying too much for too little.
The lack of reduced pricing for the “big bucket” plans of 1,000 minutes or more has been viewed skeptically by those who believe the big phone carriers don't want to cannibalize their land-line businesses.
Most notably, the U.S. market features more than 180 carriers. Canada has about 20, including six national brands controlled by three network operators.
“They go after each other with long, sharp knives,” analyst Roger Entner says of the U.S. market. “Consumers in Canada are worse off than consumers in the U.S. because the Canadian carriers don't have the same intensive desire to win,” adds the vice-president of wireless telecoms at research firm Ovum.
The U.S. is described by many as the most cutthroat wireless market in the world. Carriers keep adding more minutes for each plan, and don't charge extra for long-distance calls in the U.S.
Does pricing in Canada have to be so different from that in the U.S.? The carriers say yes.
They must build their networks across a similarly sized territory, but with only a 10th of the population to serve. And they insist there's better service quality in Canada, including fewer dropped calls. They also point out that revenue per minute has dropped 43 per cent since 2001, and rates are lower than in other countries such as Japan, France and Germany.
There have been other changes, too, such as plans that let family members share minutes, and unlimited calls on evenings and weekends.
Maybe Canadian prices should be even higher, ventures Wade Oosterman, president of Bell Mobility. “The fact we have some of the lowest rates in the world speaks to the incredible competitive nature of our industry here.
“I'd say it's brutally competitive.”
Nadir Mohamed, chief operating officer of Rogers' communications unit, questions why Canadian carriers should take their cue from carriers south of the border.
“The real question is, is the U.S. looking to rethink their pricing plans to be more like the Canadian or European market? It's clearly not something that approaches anything that would be the norm in the wireless business,” Mr. Mohamed said.
Still, Canadian carriers can't deny their rational pricing philosophy has paid off in generating big customer bills. But then again, they've also been paying off big bills themselves. Twenty years after launching cellphone service, they were still more than $4-billion (Canadian) in the hole in 2005, according to a report prepared for the CWTA by Wall Communications Inc.
“You have an industry that took its lumps for 25 years and is now making their margin,” Telus's Mr. Watson said.
Which helps explain why a carrier wouldn't want to cut prices or increase talk time and erode their wireless and land-line businesses. The Canadian experience has been that a cellphone is a nice extra, but doesn't replace the home phone.
“In Canada, wireless has been seen as a luxury,” SeaBoard analyst Brian Sharwood said. “In the U.S., it's been seen as a necessity.”
Yankee Group analyst Jeff Leiper believes high prices are slowing the adoption of wireless services in Canada.
“It's becoming reasonably clear the high prices for large-minute users are stifling penetration rates. When people look at how much voice calling they do, they realize the small buckets that are offered at prices that might be comparable to the U.S. are not sufficient,” Mr. Leiper said.
Canadian carriers have also found new ways to raise revenue. Bell, for example, has raised its monthly system access fee to $8.95, $2 more than other carriers. This money goes toward the maintenance of the wireless network. It has also introduced a $3.95 monthly system access fee for customers who do not have long-term contracts.
In 2002, most carriers switched from per-second to per-minute billing. And charges for long distance, international roaming, voice-mail and caller ID also increased between 2001 and 2006, according to the Wall Communications report. But it still concluded that pricing compared “very favourably” with other countries.
Investors clearly can't complain. Not only is Canada in the No. 3 spot for average revenue per user (ARPU) among 50 countries, just behind leader Japan and the United States. But as of the second quarter, ARPU in Canada had increased for 15 successive quarters, a feat none of the other 49 countries has matched, the Merrill Lynch report noted.
That's helped pad profit margins. Canadian carriers' earnings before interest, taxes, depreciation and amortization as a percentage of revenue, a measure known as EBITDA, was 43.9 per cent in the second quarter, according to Merrill Lynch. That's greater than in Germany, France, the United States and Japan. In the first quarter of 2001, Canadian carriers had EBITDA of 25.4 per cent.
Strong growth in the wireless industry is especially crucial for Bell and Telus because they rely on it to offset a shrinking land-line phone business.
For the first time, wireless leapfrogged the local phone market in 2005, generating $11-billion in revenue.
“It's been a good story for investors,” said Merrill Lynch analyst Glen Campbell.
“Capital efficiency has been excellent, pricing has been stable, penetration growth has been strong but not excessive.”
The same can't be said for a number of consumers who are clearly unhappy with their wireless bills. A survey of 1,510 consumers by Decima Research, conducted on behalf of the CWTA, found a third of respondents don't think they're getting their money's worth from cellphones.
Those who would most like to switch carriers with the launch of portable wireless numbers next year are subscribers paying more than $100 a month for 400 to 600 minutes, a Yankee Group survey found this summer.
Tomorrow: How new competitors could change the face of the wireless industry.
