Verizon has Canada bracing for a wireless wind storm

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Verizon Communications Inc. is poised to become a disruptive force in Canada's $19-billion wireless market, should it ultimately proceed with a northern expansion plan.

The U.S. communications giant is weighing a three-pronged strategy to capitalize on relaxed foreign investment rules that allow international players to fully own small telecoms with a market share of 10 per cent or less. Verizon has submitted an initial $700-million offer to purchase Wind Mobile, has started talks with Mobilicity, and is considering whether to bid in a pivotal auction of wireless licences in January, sources say.

With an opening bid for Wind on the table, investor awareness that Verizon could easily consolidate struggling new entrant carriers, while positioning itself as a formidable competitor, battered Canadian telecom stocks.

Shares of Rogers Communications Inc., Canada's largest wireless carrier, fell by 9 per cent, while Telus Corp.'s shares lost 8 per cent, and those of BCE Inc. slid 4 per cent.

Although Verizon's deliberations are at an early stage, its size advantage is at the heart of its strategy.

Its nearly 99 million wireless subscribers increase its buying power for smartphones, which could allow it to potentially undercut the Big Three domestic carriers on the two-year plans that are set to become the norm in December.

Given Verizon's tendency to target higher-value mobile users, analysts say Rogers, Telus and Bell are at risk of losing customers, of having slimmer profit margins and lower average revenue per user – a key measure that gauges the average monthly consumer bill.

"We believe the entrance of Verizon into the Canadian wireless market would be a game changer for wireless economics and wireless valuations," Drew McReynolds, a telecom analyst with RBC Dominion Securities Inc., said in a research note. "Verizon has sufficient capital to consolidate the new entrants, participate in the 700 MHz auction (and future auctions) and strengthen existing networks including rolling out LTE [the newest-generation wireless network]. Advantages for Verizon would be scale, particularly on handsets, providing a price advantage in the market versus Canadian wireless incumbents. In addition, Verizon could realize roaming synergies and offer North American-wide plans."

But Verizon would also face challenges: The company would have to build its retail presence, and it would start off with fewer towers, meaning it will have a smaller coverage area.

Josh Blair, Telus's chief corporate officer, remains confident that his company's strategy, which focuses on customer service and multiproduct discounts, would stand the test of time. "We feel that we could easily adjust our competitive tactics," he said, adding "I don't think you are going to see any international carrier come in and go into rural Canada."

BCE issued a statement saying it is prepared to compete with anyone on a "level" playing field.

"Offering U.S. carriers access to more spectrum and at a lower price than Canadian companies completely skews the marketplace. We would never get the same advantages in the U.S. or anywhere else," spokesman Mark Langton said in an e-mail.

"Can you imagine Bell or any other Canadian carrier getting subsidized spectrum in New York, Chicago, or Los Angeles? This situation is an unintended consequence of the government's efforts to give new Canadian competitors a head start, and it's an issue the government needs to address as soon as possible."

Incumbents would be likely to react to the new player with cost cutting, including layoffs, and greater bundling, analyst Adam Shine of National Bank Financial wrote on Wednesday.

Big carriers could see their costs escalate for the 700 MHz auction. "Verizon has indicated to us that it would value the opportunity to acquire spectrum that is contiguous with its U.S. holdings," said Greg MacDonald, an analyst with Macquarie Capital Markets Canada Ltd., adding the price of premium spectrum could rise by $500-million for incumbents.